- Infinera will help Nokia address increasing AI traffic growth from data centers
- The market is shifting from Nokia's traditional base in mobile access networks and fixed networks
- Big Internet content providers are another potential market for the combined companies
With its $2.3 billion Infinera acquisition, struggling Nokia is seeking to make a strategic shift from its traditional telco customer base into the lucrative hypercloud market, particularly artificial intelligence.
Nokia's growth had previously been driven by growing traffic from mobile access networks and fixed networks. But demand has shifted to data centers, which require optical networking to support AI workloads, said Federico Guillén, president of network infrastructure at Nokia, on a call with journalists and analysts early Friday to discuss the deal, which was announced Thursday.
The optical market has been “soft” since late 2023 and will likely remain that way for the remainder of 2024, Guillén said. However, Nokia expects to see a return to growth starting next year.
“The fundamental need to invest in optical transport remains strong and is driven by the demands that AI and cloud will place on the network in the coming years,” Guillén said.
But Nokia's new market will be tough to crack, Leonard Lee, executive analyst at neXt Curve, told Fierce Network. Nokia's strategic transition will see the company increasingly competing with enterprise IT networking players, that have a "much deeper footprint and experience in the data center and in AI supercomputing," Lee said. But if "frenzied" growth continues for data center networking and interconnect, that could create opportunity for Nokia and Infinera.
What Infinera brings to the table
Infinera sells tens of thousands of transponders for optical solutions and semiconductors in longhaul and subsea connections, said Infinera CEO David Heard on today’s call. But metro networking increases that opportunity to hundreds of thousands. And the AI opportunity is still greater.
“When you go inside the data center, the growth with AI is real, is tremendous and it goes into the millions,” Heard said.
Increasing AI traffic will allow Nokia and Infinera to sell both optical systems and transponders to interconnect data centers, Heard said. And Nokia will also be able to leverage Infinera’s indium phosphide and silicon photonics to reduce GPU power consumption inside the data center.
Infinera will give Nokia a deeper presence with a “very important” customer base – internet content providers (ICPs), which own and operate large data centers of their own, Dell’Oro analyst Jimmy Yu said.
ICP direct purchases of wavelength-division multiplexing (WDM) equipment rose 20% in 2023, while the overall ICP market for data center equipment grew just 2%, Yu said. Infinera had 22% of the ICP market with direct sales.
“Infinera has stated that direct plus indirect sales to ICPs represented about 50% of the company’s 2023 revenue,” Yu said. “In this time period, Nokia’s optical systems share of the ICP market was much smaller.”
He said currently all ICP purchases are for interconnecting data centers. However, Infinera has been working on developing components that can be used in a pluggable optic within data centers.
“It is too early to determine if this component will be adopted, but it does create a new opportunity for Nokia, through this acquisition, to play a bigger role in AI networking inside data centers in the future when higher port speeds are needed,” Yu concluded.
The acquisition comes as Nokia is facing a financial bloodbath. Nokia saw a 20% year-over-year decline in net sales in the first quarter of 2024, reporting €4.67 billion ($4.95 billion) compared to €5.86 billion ($6.24 billion) in the same quarter a year ago. The purchase of Infinera will increase the scale of Nokia's Optical Networks business by 75%, “creating a business that can sustainably challenge the competition,” Nokia said. Some of its biggest competitors are Ciena, Fujitsu and Cisco in the Western world and Huawei and ZTE in other geographies.