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Nokia/Siemens: The New Bully on the Block?

*UPDATED: The creation of Nokia Siemens Networks, a merger of the telecommunication equipment divisions of the wireless and wireline giants estimated to be worth $30 billion, is both a sign of a consolidating industry and a move toward a two-tiered market, analysts said.

"Birth has been given to a new child -– it didn't take nine months, it took three weeks," explained a Siemens executive at this morning's press conference, which was also Webcast from Berlin.

Although Nokia CEO Olli-Pekka Kallasvuo side stepped questions about any industry discussions leading up to the agreement, the announcement marked a "historical opportunity that came at the right point," according to Siemens CEO Klaus Klienfeld.

Convergence of wireless and wireline sectors topped the list of drivers behind the joint venture; 78 percent of revenue is expected to come from GSM-based  wireless services and the remainder from fixed network offerings, according to Simon Beresford-Wylie, who is slated to become the joint venture's new CEO.

The merger could strike fear into Ericcson, the number two industry company. Combined, Nokia-Siemens got 20 percent of the GSM contracts, while Ericsson received 14 percent during 2005, according to Sylvain Fabre, Gartner's European telecom analyst.

Despite its billing as a 50-50 merger, "it's a hidden takeover," Fabre said.

With a CEO coming out of Nokia and the headquarters based in Nokia's Finland, the 50-50 language was meant to soothe egos, Fabre observed.

A similar dance was seen during the Lucent/Alcatel merger negotiations. An expected agreement was nixed last year when Alcatel said the action wasn't a merger of equals.

In April, when the $13.4 billion agreement was announced, great pains were taken to emphasize that it was a "merger of equals."

Nokia Siemens Networks will be third behind Alcatel/Lucent and Ericsson/Marconi, the first and second-place telecom firms born from mergers.

What does today's merger give the two companies? For Nokia, Siemens provides a wireline product. With it, the new company can provide quadruple-play services that include voice, video, data and wireless. For Siemens, it's more basic.

"For them, it buys a future," said Fabre. "The big guys have become bigger," Fabre said.

Mergers are a chance for everyone to bulk up, agreed Nick Maynard, a Yankee Group analyst. The atmosphere has progressed where you either merge now or face being broken up or acquired by a second choice. Tier Two companies will be tens of billions of dollars, not 100s of billions, explained the analyst.

"We're likely to see some of these tier two companies, such as Motorola, Cisco or Nortel, merge in the next year," Maynard said.

The new company attempted to avoid the label as a tier one firm. During the announcement, the Nokia Siemens Networks CEO said the organization would be slightly smaller than competitors Alcatel and Ericsson. "And we like that," said Beresford-Wylie.

For customers of the networking providers, the changes could mean less choice, something infrastructure companies have long wanted.

Combinations such as the Nokia/Siemens joint venture will mean customers deal with just the top five vendors, said Fabre.

That means in an industry where there is too much supply and not enough demand, customers are still in the driving seat.

*Corrects prior version, which incorrectly quoted Gartner's stats regarding GSM contracts and market share.