Monday, June 19, 2006

Why the wired and the wireless converge

Dan Milmo and Richard Wray
Monday June 19, 2006
The Guardian

Convergence is the buzzword in the media, telecommunications and technology industries. Six years ago bringing traditional media - print, TV, fixed-line telephony - together with the new digital world of the internet and mobility was a concept that held much promise but delivered little in the way of actual products. The promise drove share prices to unsustainable heights but the failure to deliver actual services and real revenues triggered the inevitable crash.

Now convergence is becoming a reality. Music downloads are becoming a mass-market phenomenon thanks to hardware such as the iPod; mobile phone owners scroll through Google on their increasingly sophisticated handsets, which tap into more powerful mobile networks that can even show TV, and the mobile phone companies themselves are looking to provide broadband internet access both at home and on the move.

Corporate activity has followed, from Orange merging with Wanadoo and BSkyB acquiring Easynet to NTL buying Virgin Mobile.

The Nokia and Siemens deal is at the less glamorous end of the convergence trend, out of sight of people surfing at airport departure lounges or Vodafone subscribers catching up on the latest Premiership action on their handsets. It is all about infrastructure. None the less, today's deal appears to be a classic case of convergence: a maker of wireless networks joining up with a fixed-line equivalent.

Any provider of a wireless broadband network, such as wi-fi hotspots in Starbucks outlets around Britain, needs to tap into the fixed-line network that carries the ultimate high-speed internet connection. The growth of networks that combine wireless and fixed-line networks - such as wi-fi and its long-distance cousin Wimax - is one line of business that the combined entity is hoping to tap into.

"It's about having a broader range of products in order to serve a converged market," says Frederic Huet of Greenwich Consulting.

One telecoms equipment supplier, Cisco, is making a determined push into the convergence market by targeting wi-fi. It has also held on-off talks with Nokia about building networks for IPTV, which delivers TV programmes via broadband.

Dan Bieler, research director at Ovum, adds that convergence is undoubtedly a driving force behind the deal but that is nothing new for a technology sector that saw the acquisition of Marconi's networks business by Ericsson last year: "It fits into the overall picture of convergence but most things do these days. Convergence is the biggest theme in the telecoms space. Everything is coming together somehow."

The rather more prosaic reason for the Nokia/Siemens tie-up - and the one dominating market analysts' coverage of the deal - is the financial benefit to both companies.

Firstly, the need for both companies to save money is fierce in a world where new Chinese upstarts such as Huawei are able to produce kit at a fraction of the price of European competitors. In fact, the cost-saving rationale behind the deal is just as strong as the need to tap into demand for converged broadband networks. Siemens, which has already off-loaded its mobile phone business, needs to secure the future of a business that is struggling. Both companies will be able to benefit from significant up-front cost savings.

Secondly there is the potential for cross-selling across the converged business's customer base, generating new revenues. Nokia, for instance, wants a stronger presence in the Middle East, Africa and Latin America as well as more depth of product within Europe.

"There is obvious rationale for this joint venture, as fixed-mobile convergence and the need for scale in networks are two places where Nokia has been weak," said Richard Windsor, an analyst at Nomura.

As with the first abortive wave of convergence back in the dotcom boom, however, the real test of this deal will be whether consumers - in the case of Nokia and Siemens, major communications industry clients - buy the idea that bringing everything together is actually a benefit to them.

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