Size is power in the mobile networks business, but it's only one of the reasons Nokia is acquiring Alcatel-Lucent.
Nokia estimates the company that will emerge from the planned buyout will be the second-largest vendor of carrier infrastructure by revenue, a bit smaller than Ericsson and slightly larger than Huawei Technologies. In a price-competitive industry where technology is constantly evolving, that matters, analysts say. But size alone isn't reason enough to justify the €15.6 billion (US$16.5 billion) deal.
As consumers watch more videos and use more apps on mobile devices, vendors are developing new technologies on multiple fronts to make sure networks can keep up with the demand. Putting up more conventional cells doesn't cut it anymore, so they're turning to exotic approaches like millimeter-wave beams and LTE networks that can use the same frequencies as Wi-Fi. Vendors are already jockeying for influence over 5G, the next generation of wireless specifications expected by 2020.
That kind of R&D requires a lot of smart people and higher revenue to fund their work, both of which Nokia stands to gain by buying Alcatel-Lucent and its legendary Bell Labs research division. The combined company would also have a valuable patent collection made up of complementary Nokia and Alcatel-Lucent technologies, analysts say.
The two companies are up against big rivals in innovation. Ericsson is already a giant in mobile R&D, and Huawei looks set to be a game-changer there, said analyst Peter Jarich of Current Analysis.
Visiting Huawei's headquarters in Shenzhen, China, reveals a huge number of young engineers at work on a wide range of problems, Jarich said. Huawei's lower cost to hire engineering talent in China is a big differentiator -- larger than its ability to do cheap manufacturing, he said.
Downward pricing pressure from Huawei and other Chinese manufacturers has helped to make economies of scale more crucial in the networking business, analysts say. It's one reason mobile equipment companies have been buying each other for a few years now. The consolidation has been brutal, as Rayno Report analyst Scott Raynovich wrote in a pessimistic blog post about the deal on Wednesday.
There are other reasons, too: As the carrier business itself consolidates, equipment makers have fewer potential buyers and the largest remaining carriers, giant service providers like AT&T, Telefonica and Deutsche Telekom, have more leverage to cut the prices they have to pay. And carriers care about potential suppliers' market share when they're deciding among suppliers in a changing industry, Tolaga Research analyst Phil Marshall said.
But size isn't everything, and it may even cause problems for the new, larger Nokia.
"You wouldn't do it just to get big, because you're inheriting a lot of headaches," Marshall said. Among the potential problems: deciding what to do with overlapping product lines, though those are relatively few, and dealing with potential layoffs in several countries with different regulations.
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