Why Nokia Wants Elenion

Nokia (NYSE: NOK) announced this week a plan to acquire Elenion Technologies LLC, an optical component startup based in New York City, in a bid to accelerate its mobile edge strategy. The deal should close this quarter. Terms were undisclosed.

The addition of Elenion could energize Nokia’s traction in the emerging market for multi-access edge computing (MEC) technologies, which will be vital to link service provider and enterprise networks to cloud services as 5G mobility materializes.

Vertical Integration Targeted

Like a growing list of other IT suppliers, Nokia sees vertical integration of components as essential to market success. It’s a strategy demonstrated by Cisco (Nasdaq: CSCO) in its purchase of optical component supplier Acacia for $2.6 billion last July, as well as in that vendor’s introduction of its own Silicon One chip architecture late last year.

Cisco still faces questions about its roadmap with chips. But if Nokia’s strategy is more focused, it could find this acquisition a substantial benefit to future business, streamlining time to market and shielding the supply chain from trade issues.

Mobile Edge Compute Bet

Nokia has already established itself as a player in the mobile edge market, as it boasts over 120 private wireless networks for a diverse range of enterprise customers worldwide, including ones in manufacturing, energy, smart city apps, and transportation.

Nokia also has demonstrated ongoing traction with carriers, such as India’s mobile service provider Bharti Airtel. And the company’s hold on the carrier market is further strengthened by the software-defined wide-area networking (SD-WAN) platform offered by its Nuage Networks venture.

Still, Nokia has suffered from fears about its ability to compete against rivals Ericsson and Huawei in the emerging 5G space. And Nokia CEO Rajeev Suri acknowledged the challenge in the vendor’s earnings report earlier this month:

“But as we discussed last quarter, we are facing challenges with high radio product costs in the early stages of 5G. Our teams in Mobile Networks, procurement, and others are working hard to optimize those costs by addressing every possible part of product bill of materials, including semiconductors, where a transition to system-on-chip is critical. We are making the right progress, but it will take time for those results to show in our financial performance.”

The Elenion buy could help Nokia significantly. Elenion’s optical components are designed specifically for the kind of high-performance gear required for the rapidly growing roster of applications in the Internet of Things (IoT) and industrial Internet of Things (IIoT) the emerging networks are set to boost.

The optical angle is essential here, because Elenion makes coherent optical chipsets capable of better detection of light signals and therefore greater bandwidth capabilities, which are key to mobile edge gear.

And Elenion not only has this kind of optical silicon, it also has perfected what Nokia’s press release calls ”a design toolset which enables a greatly simplified, low cost, scalable manufacturing process.”

Probably a Good Deal

Nokia probably isn’t spending a lot of money on buying Elenion. According to a note from market analyst Simon Leopold of Raymond James, it’s likely Nokia’s outlay for Elenion was “immaterial,” and he views the buy with cautious optimism:

“Despite the immateriality of the Elenion acquisition to Nokia’s financials, we view the merits of having the option of developing these solutions in-house, and integrating them across Nokia’s large portfolio. Although we are unsure about the level of scale needed to drive this business profitably, we highlight competitor Ciena’s acquisition of TeraXion’s Indium Phosphide and Silicon Photonics technologies as a success story.”

Ciena paid roughly $32 million to acquire TeraXion early in 2016. According to Raymond James analysts, that buy was “a foundation” for helping Ciena grow its products to a scale commensurate with market demand for optical systems.

Learning from the Past

Better chips, better manufacturing, and all in house — it’s a plan that could help solve what some observers have viewed as the need for Nokia to work faster on its own coherent optical components. Those problems emerged in part from choices made from Nokia’s purchase of Alcatel-Lucent in 2016, problems that continued to haunt the vendor up to now.

If Nokia has learned from the past, and it seems to have done that, this particular small buy could turn into a big gem.

As of midmorning February 20, Nokia shares were trading at 4.1750-0.0250 (-0.60%).