A few years ago, Nokia decided to unload NSN’s optical networks division to focus more on the wireless sector. Now, with the proposed acquisition of Alcatel-Lucent, it will be entering the fiber optic business once again, only this time taking on a comparatively gigantic piece of the pie. While there would be some potentially attractive aspects of the product line including for backhaul applications, it would not be completely surprising if Nokia were currently thinking about divesting the entire optical segment down the road because the market has only worsened since its sell-off to Marlin Equity Partners.
The expected spinoff of the submarine optics portion of the business makes the remaining product line even less desirable because as a general rule, the margins tend to be much higher with subsea because in cases of new construction, customers require a full turnkey job including cable installation and design. Growth rates also tend to be higher for underwater applications compared with landline because the former continuously has insufficient fiber to keep up with international demand for bandwidth.
On the negative side, whereas one operator completely owns an underground cable and can readily execute on a decision to upgrade, the division of possession on underwater fiber pairs among various partners results in a more complex process to provide an upgrade. In addition, although large end-users, such as Google and Microsoft, keep stepping up to the plate to make investments in submarine networks, funding for trans-oceanic networks is still not as readily available as was the case in the distant past.
A critical factor regarding the future optics business for Nokia is the large amount of interrelationship between the submarine and the long-haul terrestrial networking people at AlcaLu. Selling off the submarine division will surely make it difficult in terms of maintaining efficiencies in the core operation – providing just another incentive for divestment.
Of course, Nokia could continue AlcaLu’s apparent strategy of at times using its optical products as a loss leader to win wireless contracts. This tactic has evidently been a major factor in keeping AlcaLu’s optical margins dramatically low in recent times.
In any event, it is hard to envision Nokia being able to shed all of its optical assets quickly for political reasons. It is a big enough blow from a nationalistic point of view for France to give up control of such a strategic technology entity – and it is hard to imagine that the French government would have allowed such a transaction if it were not having its own cash flow problems. Otherwise, it would have readily subsidized AlcaLu in order to prevent the layoff of workers – instead of getting a guarantee from Nokia on no loss of jobs.
During this psychological transition, at least for a while, Nokia will probably feel compelled to make R&D investments (including in the optical space) in France beyond what was promised to the president and to the economy minister to help calm down apprehensions. (Also, the supplier needs to demonstrate to customers that have bought both wireless and optical gear from AlcaLu that development will not cease to occur on the latter.)
The fact that Nokia is European makes the slow changeover more palpable to the French government. By the same token, the companies most likely to be purchasing candidates of AlcaLu’s fiber optic networking equipment business appear to be in the United States – and that could open up a can of worms. On the other hand, General Electric’s recent purchase of Alstom’s power division demonstrates that such a scenario is hardly impossible.
As an aside, with the Alcatel and Lucent merger, a separate division was created to interact with the US federal government on national security matters. There may be a question as to the effects of a Nokia buyout on this current arrangement.
[written by Mark Lutkowitz]