Re­port shows in­no­va­tion spend is in de­cline

Capacity - - Special Report: Pwc Innovation Report -


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.

Re­gional dif­fer­ences

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.

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