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.
But looking at Alcatel-Lucent in particular, Nokia considered the deal worth it, Marshall said. For one thing, Nokia wants the company's big customers in the U.S., where Nokia hasn't had a big network presence. Alcatel-Lucent sells gear to both Verizon and AT&T.
The other prize it sees in the purchase is Alcatel-Lucent's extensive IP (Internet Protocol) routing portfolio, Marshall said. It may be a valuable asset in the future of wireless.
"The mobile network is becoming increasingly fixed," he said. As carriers roll out more and smaller cells to give users more capacity, they need bigger wired networks to connect those nodes. Huawei is a big player in those IP networks as well as in mobile, and Ericsson acquired an IP routing business with RedBack Networks several years ago.
Getting bigger might help Nokia compete in the long run, but it may not be worth the disruption, Jarich at Current Analysis said. From now until the deal closes, which isn't expected until the first half of next year, customers won't know quite how the various divisions and product lines will shake out, he said. Competitors will be merciless in taking advantage of that uncertainty.
The transition will follow years of disruptions at the two companies making the deal. Alcatel and Lucent's merger in 2006 was a long struggle with numerous executive changes and painful cuts. Nokia formed a joint venture with Siemens for wired and wireless networks in 2007, and the resulting Nokia Siemens Networks then cut thousands of jobs in the following years.
In the aftermath of those difficult combinations, both Nokia and Alcatel-Lucent sharpened their focus in recent years. Nokia sold off its wired broadband and optical businesses to concentrate on mobile broadband. Both improved their results by specializing, so the idea of forming a bigger, broader company flies in the face of that lesson, Jarich said.
"How do you balance the argument that you managed to do OK by focusing with the argument that you need scale" he said.
Coming on the heels of so much disruption at both companies, the latest move might end up turning off customers.
"This stuff gets a little tiring," Jarich said.
Stephen Lawson covers mobile, storage and networking technologies for The IDG News Service. Follow Stephen on Twitter at @sdlawsonmedia. Stephen's e-mail address is stephen_lawson@idg.com