Nokia’s recent move to acquire optical networking rival Infinera for $2.3 billion is set to move that hotly competitive market toward a more stratified operating position, which one analyst said is an ideal scenario for a space increasing reliant on scale.

The basics of the deal will see Nokia fork over cash and stock to purchase Infinera. Nokia management said it expects the new assets to deliver more than 10% earnings per share accretion by 2027, and more than $200 million in operating profit synergies by that same year. Nokia will take an approximate $216 million one-time integration charge tied to the deal.

It will also help boost Nokia’s market position by taking out one of its stronger rivals. The vendor said the deal will increase the scale of its optical networks business by 75%, “enabling it to accelerate its product roadmap timeline and breadth.”

Jimmy Yu, VP at Dell’Oro Group, noted that the deal solidifies Nokia as one of the optical networking market’s big three alongside Huawei and Ciena. He explained that those two plus the enhanced Nokia will control around 70% of the worldwide optical networking space, excluding China where Huawei holds a dominant position.

“This is a pretty significant acquisition in that sense,” Yu said.

That significance will be most prominent in North America, where Infinera garners around 60% of its sales. That includes a strong presence with webscale providers, which Nokia noted is “the fastest growing segment of the market.”

Yu noted the deal could also further Nokia’s ability to gain new optical networking business.

“I used to always get asked almost every year if Nokia is going to keep their optical business. They just kept thinking they're going to sell it off, and I kept saying it doesn't seem like they're going to sell it off, but it wasn't with 100% certainty, and that, in some ways, has also created some hesitation from people buying Nokia optical over the past six years or something because they kept wondering, are they going to keep it,” Yu said.

That potential reassurance was highlighted this week when Nokia announced a 50 Gb/s passive-optical networking (PON) trial with Google Fiber. That trial built on a 25G PON deal from late last year and past work between the two in the space.

Nokia boosts its optical networking presence Yu said that Nokia will also receive a boost from tighter vertical integration and scale based on expanding its digital signal processor (DSP) development team, which will gain access to Infinera’s work with silicon photonics and indium phosphide-based semiconductor materials. This could allow Nokia if it chooses to compete more directly with competitors like Cisco and its Acacia operations for data center components.

“After they combine, do they still maintain that plan?” Yu asked. “If so, then they can become a strong supplier, comparable to Acacia, but we'll have to see, because even Ciena has some of those [pluggable] plans, but not the DSP itself. But Infinera was willing to sell each of the main components separately, so it'll be a question if Nokia also wants to maintain that sort of vision.”

Yu said the deal also helps solidify what at one point was a highly competitive and cutthroat optical networking business.

Dell’Oro Group recently noted that the broader optical transport market dropped 13% year over year during the first quarter, which Yu attributed to “communication service providers becoming increasingly cautious about the macroeconomic conditions, causing them to delay projects into future quarters.” That Q1 dip is expected to feed into a full-year 2% drop in market revenues.

“I always said that we really need a few big vendors because you need volume to really be healthy in this market and have the profitability,” Yu said. “If you look at the mobile radio market or other healthy markets, you usually have three vendors and they're large scale. I've always said the optical market should have three big vendors.”

Yu did point to the importance of “smaller niche players, because they're always either going to be disruptive in the market, which keeps the bigger vendors on their toes, and they don't get too complacent. I think that's important.”

However, those players will now be faced with a more substantial rival.

“There's much they can do,” Yu said of those smaller players. “What Nokia is acquiring from Infinera is in-house component development and a strong and customer base in cloud. There's no one else that has that. There's no one that those smaller players could buy or get acquired by. There's not much they could do. They just have to kind of go along for the ride and maintain the business they have.”

A boost to U.S. optical networking manufacturing? The acquisition should also boost Nokia’s push to increase production of optical networking equipment in the United States tied to the recently implemented Broadband Equity, Access and Deployment (BEAD) program.

Nokia last year made a big splash when it announced plans to also start making optical networking components in the U.S. That announcement, which included the promise of hundreds of jobs, drew the presence of U.S. Vice President Kamala Harris.

Infinera shortly followed suit in touting its own efforts tied to the government program.

Rob Shore, SVP of marketing at Infinera, told SDxCentral in an interview that the federal government’s release of U.S.-based manufacturing requirements for equipment eligible for BEAD funding was a reason for the vendor to tout its compliance. This included compliance for Infinera’s ICE-X 800-gig coherent pluggables and compound semiconductor components.

“This is just a re-affirmation of the fact that we build our stuff in the United States, really kind of from the ground up, and purchasing our equipment to help build your infrastructure can help network operators achieve those levels of American-made products,” Shore said.

Shore explained that Infinera’s U.S. production includes an optical compound semiconductor fabrication facility in California and testing and packaging work in Pennsylvania. These components are used as part of telecom networking infrastructure that supports wide-area networking, broadband and 5G deployments.

Nokia noted in its acquisition announcement that the Infinera deal builds on its “commitment to investment in U.S.-based manufacturing and advanced testing and packaging capabilities.”