Report shows innovation spend is in decline
AS INDUSTRY REVENUES PLUMMET, SPEND ON R&D HAS SUFFERED. JAMES PEARCE LOOKS AT A NEW PWC REPORT THAT RANKS TELECOMS AS THE LOWEST SPENDING INDUSTRY
At a time of diminishing margins across voice and text, and more demand for data and capacity across networks, telecoms firms are moving investment away from research and development, according to a report from Pricewaterhousecoopers (PWC).
The 2016 Global Innovation 1000 Study from Strategy&, Pwc’s strategy division, found total research and development (R&D) spend in the telecoms industry this year has been $10.8 billion. That’s a 12.2% decline on 2015.
This would be less worrying for the industry had 2015 not seen a substantial decline (10%) the previous year too, and it comes at a difficult point for the industry.
Overall revenues are falling, from $836.7 billion in 2015 to $719.3 billion. Naturally, this means the net spend on new products and services through R&D comes down as well. In fact, Pwc’s report showed R&D intensity – the amount spent on research compared with revenue – had remained flat at 1.5%.
Spending on R&D by telcos has risen over the last decade. The figures show a rise from just over $5.2 billion spend in 2006 to more than double this year. At that time, the share of revenue being dedicated to R&D was 1.4%. This peaked in 2012 when spending on R&D topped $15 billion, 1.7% of overall revenues.
This doesn’t look too bad, until we compare it with other industries. Telecoms has always languished near the bottom of spend on innovation. In 2006, it was joint bottom with “other” industries in terms of spending, and second bottom for percentage of revenue spent, after the chemicals and energy segment.
So why is this important? Investing in research in the right areas can prove a substantial boost to revenues, according to PWC. Companies which allocated 25% or more of their R&D budgets to software, for example, reported their revenues were growing faster than those of key competitors allocating a smaller portion.
A real threat to telcos comes from software firms, with the likes of Facebook, Google and Microsoft all making in-roads into traditional telco markets. The last two of these made the top 10 in terms of R&D spend (Google’s parent Alphabet was fourth, and Microsoft came sixth), while companies from the computing/ electronics and software/internet sectors held nine of the top 20 spots. To put this in perspective, Nokia and Siemens were the last two firms which could be labelled telcos to break in to the top 20, and neither since 2013.
This is vital, because it is the software vendors that are harming carrier revenues, through OTT services such as Whatsapp. Though there are opportunities to work with these companies, there is also a risk that telecoms will get left behind.
Barry Jaruzelski, who co-authored the report, defended the industry, saying most innovation in telecoms came from other sectors such as electronics and IT.
“Telecom firms are service providers, most of the innovation spending is by their suppliers,” he said. “A lot of the challenges they face are coming from outside their sector encroaching on their business. True innovation is not directly related to R&D spending but how you employ that money.”
It is easy to knock the sector, but some regions are noticeably outstripping others. European telcos spend the most on R&D – just over £5 billion a year – with Deutsche Telekom named third biggest spender at $1.2 billion. However, this is just 1.5% of its overall revenues – less than Europe’s average of 1.8%.
China, despite being the biggest market in terms of customer numbers, came bottom, with less than $1 billion spent on research and development. That’s below 1% of the revenue generated.
The leading carriers in terms of R&D intensity are Telecom Italia and Telstra, with 3.6% of revenue spent on innovations. The Italian operator is a rarity, too, as it saw R&D intensity increase from 3.4% in 2015.
NTT leads on R&D spend, splashing out $1.8 billion on innovations last year. But this was down from the $1.9 billion spent in 2015, even as the Japanese carrier saw revenue grow by almost £4 billion.
The figures should serve as a stark wake-up call for the telecoms industry. At a time when overall revenues are stagnating, carriers need to find new ways to innovate, or face more pressure from other sectors. Tightening the purse strings now could harm them even further in the long-term.