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Government intervention

Broad smiles or an anxious rictus?

(Photo by Chesnot/Getty Images)

On 15th April, Nokia announced its intention to acquire Alcatel-Lucent in an all-share deal.  Nokia’s Risto Siilasmaa and CEO Rajeev Suri were seen exchanging a warm hand shake with Alcatel-Lucent’s Philippe Camus and CEO Michel Combes, all four gentlemen displaying beaming smiles as the news of their forthcoming merger hit the news wires and sent shock-waves across what is already an extremely consolidated industry.

That news was not completely unexpected: Nokia, and more particularly Alcatel-Lucent, have gone through some very painful and convoluted restructuring exercises these past few years, and are only now feeling the first early signs of some recovery.  Still, each has areas of weakness which the combination of both groups could potentially resolve.  Furthermore, wireless communication is an area that requires astronomical R&D budgets. As consumers begin to embrace 4G communication, the world’s leading providers are already putting the finishing touches to the future 5G, announced for the early 2020’s, and teaming up to finance those developments and rolling them out across the globe makes eminent sense. The business case for this merger is plain to see on paper, but whether the expected benefits will materialise during the implementation remains to be seen: several formidable challenges lie ahead.  None of them impossible, but each one of them pretty tough!

Nokia’s “open Sesame” to the USA may open doors for other players

Whereas Alcatel-Lucent has for years enjoyed strong market presence and excellent relationships with major telecommunications operators, Nokia has struggled to get anywhere in that area, allowing another Nordic company, Ericsson, to share that large and lucrative market with Alcatel-Lucent.  It is fair to say that Alcatel-Lucent’s saving grace in the USA is the fact that the world’s largest provider of wireless systems happens to be China’s Huawei, which is de facto barred from penetrating the United States’ market amid fears of industrial and political spying from a company that has close ties with the Chinese government.

By tying up with Alcatel-Lucent, Nokia will clearly be able to shoehorn itself into the lucrative American market, but whereas there were three non-Chinese suppliers of telecom equipment on that market, Nokia, Alcatel-Lucent and Ericsson, the merger will bring this down to two.  Who will the third provider be that is required for any fair tendering process?  As Huawei is likely to continue being denied access, the Nokia-ALU merger might create unforeseen potential for Samsung, thus far confined to the Asian market, to leap onto the American stage.

Once bitten, twice shy?  Not for Alcatel-Lucent!

Alcatel-Lucent, like most of the major telecommunication equipment providers, is today the result of a number of acquisitions and business integrations.  Alcatel and Lucent’s merger in 2006 triggered the merger of Nokia Networks with Germany’s Siemens.  As an after-shock five years later, Ericsson acquired Nortel’s wireless networking business, prompting Nokia to buy out Motorola’s infrastructure division…

Any M&A integration brings its own share of difficulties and struggles, but Alcatel-Lucent have suffered more than most; by comparison to the vision which was depicted back in 2006, the Alcatel-Lucent merger will be remembered in history as a failure.  Being viewed as a strategic asset by French Governments will have been both a blessing (too big and strategically important to be allowed to fail) and a curse (government intervention which would rather apply a dressing onto the wounds to hide them rather than approve a remedy that would cure the causes).  Almost ten years later, the cultural split between the former French iconic company and its American “spouse” is still prevalent.  Bringing in some “new blood” and an external perspective under the Nokia umbrella may provide a fantastic opportunity to lay a new base for the company’s culture and ways of working, away from the polarised Franco-American divide;  this would enable the combined group’s global ambition and cement the alliance to become a true powerhouse with unrivalled R&D capability.

Alternatively, the French government may continue to block any attempts to shape the Nokia-Alcatel-Lucent alliance as a world leader, by resisting any changes that might have the slightest detrimental impact on French jobs, pursuing the more self-centred goals of their re-election agenda. The weight of bureaucracy combined with restrictive labour-law practices might slow down the transformation of the business, and the new group could altogether miss the opportunity it is striving to capture in such a rapidly evolving market.

Finding ways to win in a particularly challenging sector

For over a decade, the internet and mobile communication sectors have been subjected to a pressure that is uncommon in other services: end users, be they consumers or corporations, expect the performance of their telecommunications and internet services to double in performance every 2-3 years, but without accepting to pay a single cent for that improvement.  Indeed, billions of consumers seem to consider access to the internet to be a natural right, in the same way as we can enjoy sunlight and air to breathe.

“Free” internet is a reality for numerous users, and we see huge resistance against attempts to introduce differentiated tariffs for heavy users compared to average users in the light of data streaming sites that require a very broad and steady flow of data to the end-users.

The frantic race to provide ever faster data transmission speeds without any price increases to users has evidently put tremendous pressure on the providers of the equipment required to provide those exponential service improvements.  This, coupled with the fact that revenues from data transmission did not follow the projections the telecom providers had forecasted a decade ago, means that the key source for potential margin improvement is to reduce the cost of the underlying infrastructure.

This is guaranteed to make life difficult for many years to come for the few telecom infrastructure providers left in this world, but combining that sharp commercial and cost cutting focus with the demands of a global M&A integration and transformation of business culture will indeed be a mammoth task.  Not impossible, but quite daunting nonetheless.

We must just hope that the authorities in Finland, and more particularly in France, do not prove to be the final straw on the camel’s back.  If Nokia-Alcatel-Lucent fail, we won’t be left with much of a choice on this planet.

 

 

 

Consumers’ interests acknowledged

For almost a year, ever since announcing their intention to merge and become the world’s largest airline (admittedly they never promised to become the best), United Airlines and US Airways have behaved as though this was a fait accompli.  But the Justice Department saw things another way, forcing the two airlines to abandon their dream.

american-us-website

I shall remember for a long time the frustration I felt on June 11th in Washington DC’s Dulles Airport when, arriving from London on a delayed United Airlines flight, a number of stranded passengers were waiting in line with me, surrounded by banners hailing the advent of the world’s largest airlines, when late at night United Airlines only had one single person at ground staff to attempt to rebook those passengers that had missed their connections and who, like me, were offered no alternative other than to sleep on the airport’s benches.

United Airlines could not, for whatever reason, re-book me on an early flight on the next morning on US Airways, their future merger partner, and sent me to the other end of the terminal to negotiate a flight ticket there, but there was nobody at their desk.

Shaking hands over a deal that shall not be

And so maybe it is time to hold airlines to account and request that the service they provide to their customers resembles in some way the claims made in their advertising campaigns.  Clearly, the pressure on airlines to contain their costs is harsh, but reducing the competition between airlines on key routes would allow service levels to drop to unacceptable levels.  It was bad enough on the return transatlantic flight (delayed by four hours) to have to wait 50 minutes after take-off in business class before even being offered a beverage (most passengers including myself had fallen asleep well before any dinner was served).  The very kind and apologetic flight attendant was apologizing for the fact that there were only two of them to attend to a full business flight cabin…

Lack of competition in the airline industry can already be felt within some of the alliances, and the impact on fares for routes that are operated by several operators all belonging to one same alliance is already clear to see. Merging companies would only reinforce what is already an oligarchy when it comes to setting air fares.

The only measure that can effectively counteract a continuing fall in customer service standards is to maintain a healthy level of competition.  A big thank you to the Justice Department for having understood this and threatened legal action against United and US Airlines if they went ahead with their merger plan, in order to preserve what they called true market-driven competition.

Greater clarity regarding the merging of major airline operators

United and US-Airways, now turning their back on each other
United and US-Airways, now turning their back on each other

For many years, there was clear opposition against the merging of major airlines, but by 2006 it became clear that something had to change in the airline industry after some of the major players had collapsed.  This prompted the authorities and justice experimented a little in that field, allowing Continental to merge with United, Northwest to joint Delta, and US Airways to merge with American West.  But now, two of the above mentioned airlines turn up again for a second round of mergers and this has clearly prompted new thinking.  Breaking away from a trend which had been taken for granted, the Justice Department is now saying “enough is enough”.

Back to the drawing board

United Airlines have lost almost $ 1 billion since the merger deal was proposed last year.  US Airways is seeking ways to remain competitive in an increasingly competitive industry.  Further mergers between any of the top-top players are unlikely to be given the green light in the foreseeable future; so this means that the further consolidation of the industry will need to focus on sweeping up some of the small or medium sized players, and this is clearly the focus US Airways will be taking.

Loss-making United Airlines had probably best concentrate on fixing it’s own structure, costs and offering rather than add a further layer of complexity to the business by grafting on some other airlines onto its already ineffective business.  With little left to save on costs, it is surprising that no major airline in the United States has attempted to differentiate itself on service.  From my recent experiences with United Airlines, it would not take much to make flying with them a more pleasant experience than it is at the moment.  Probably not very costly to implement, and with a guaranteed noticeable impact for their customers.  This could be a good place to start.