Nokia 2015 Annual Report Download - page 42

40 NOKIA IN 2015
Pricing and price erosion
The pricing environment intensied during
the rst quarter of 2015 and remained
approximately at the same level throughout
2015, impacting Nokia Networks’ net sales
and protability.
Product mix
The protability of our Networks business is
also aected by product mix including the
share of software in the sales mix. Products
and services have varying protability proles.
For instance, our Mobile Networks business
group oers a combination of hardware,
software and services. Hardware, and
especially software products, generally
havehigher gross margins, but also require
signicant R&D investments, whereas the
service oerings are typically labor-intensive,
while carrying low R&D investment, and have
relatively low gross margins compared to
thehardware and software products of
MobileNetworks.
Seasonality and cyclical nature of projects
Our Networks business’ sales are aected
byseasonality in the network operators’
spending cycles, with generally higher sales in
the fourth quarter, as compared to the rst
quarter of the following year. In addition to
normal industry seasonality, there are normal
peaks and troughs in the deployment of large
infrastructure projects. The timing of these
projects depends on new radio spectrum
allocation, network upgrade cycles and the
availability of new consumer devices and
services, which in turn aects our Networks’
business sales. As an example, during the
lastcouple of years some of the major LTE
roll-outs have been largely completed. The
next major technology cycle is expected
tobegin in 2017 when utilization of 5G
technology is expected to begin, with the
initial commercial deployments currently
expected from 2018 onwards.
Business specic trends
Networks business
We are a leading vendor in the converged
networks infrastructure market, providing
abroad range of dierent products, from
thehardware components of networks used
by network operators and increasingly by
enterprise customers, to software solutions
supporting the ecient interaction of
networks, as well as services to plan, optimize,
implement, run and upgrade networks.
TheNetworks business is conducted through
four business groups: Mobile Networks,
FixedNetworks, IP/Optical Networks and
Applications & Analytics. These business
groups provide an end-to-end portfolio
of hardware, software and services to
enable usto deliver the next generation
of leading networks solutions and services
to our customers. We aim for all four
business groups to be innovation leaders,
drawing onour frontline R&D capabilities
to deliver leading products and services for
our customers, and ultimately ensure the
company’s long-term value creation. For
moreinformation on the Networks business
refer to “Business overview—Nokia in 2016—
Networks business in 2016” above.
Industry trends
The networks industry has witnessed some
important trends in recent years, aecting
also our Networks business. First, the increase
in the use of mobile data services and the
resulting exponential increase in data trac
has led to an increased need for high
performance, quality and reliability in
networks. The continuing data trac increase
has, however, not been directly reected in
operators’ revenue. As a result, there is an
increased need for eciency for both
operators and network infrastructure and
services vendors.
Second, we are witnessing more operator
consolidation driven by operators’ needs to
provide a wider scope of services, especially
through the convergence of disparate network
technologies across mobile, xed, and IP and
optical networks. In order to improve networks
in terms of coverage, capacity and quality,
network operators continue their transition
toall-IP architectures, with an emphasis on
fast access to their networks through copper,
ber, LTE and new digital services delivery.
Weare also seeing similar trends with cable
operators, who are investing to deploy
high-speed networks. Both the xed-mobile
convergence and the transition to all-IP
architectures were major rationales behind
the acquisition of Alcatel Lucent with its IP and
optical networks and xed-access businesses.
Third, in addition to the attempts to reduce
their costs, the operators may need to
increase their agility through the adoption
ofthe emerging Telco Cloud and network
virtualization technologies. Web scale players,
such as Amazon and Google, and large
enterprises are driving the development of
huge data centers, providing seamless IP
interconnection and digital services delivery
on a large scale. IP routing is at the heart of
the telecommunications equipment and
related services industry’s transformation,
impacting xed and mobile broadband as well
as Cloud services.
Principal industry trends
aecting operations