DT, Orange prove Europe remains hostage to US, Chinese tech

Two of Europe's biggest operators are desperate to wean Europeans off US and Chinese technology, but they are uncomfortably reliant on it themselves.

Iain Morris, International Editor

December 17, 2018

14 Min Read
DT, Orange prove Europe remains hostage to US, Chinese tech

Timotheus Höttges, Deutsche Telekom's energetic, spidery-limbed boss, wants Europeans to get angry about US and Chinese tech dominance, and worried that US and Chinese companies hold the keys to their data.

Making a guest appearance at an Orange (NYSE: FTE) event in Paris on December 12, he struck an indignant tone before an audience of like-minded industry executives. "Today, only 4% of the world's data is stored in Europe on European companies' clouds," he said alongside Stephane Richard, his counterpart at Orange. "Meanwhile, the global tech guys have access to all this data, and the more they get the better their services get. We have to do something about that." (See Djingo Unchained: Orange, DT Take AI Fight to US Tech Giants.)

Figure 1: Baldly Going Where No Telco Has Gone Before Orange's Stephane Richard (left on stage) and Deutsche Telekom's Timotheus Hottges (right) unveil their new smart speakers at Orange's annual Hello show in Paris this month. Orange's Stephane Richard (left on stage) and Deutsche Telekom's Timotheus Höttges (right) unveil their new smart speakers at Orange's annual Hello show in Paris this month.

This may seem like an auspicious time for European indignation. Edward Snowden and revelations about the Facebook Cambridge Analytica affair have shown that US authorities and tech giants cannot be trusted on European soil. The introduction this year of the US CLOUD Act (CLOUD standing for Clarifying Lawful Overseas Use of Data) has heightened concern that US authorities can barge into any US company's data center, anywhere on the planet, in the interests of national security (although the reality is far more nuanced). (See Facebook: The Sick Man of Silicon Valley.)

In the meantime, China's Huawei Technologies Co. Ltd. risks becoming 5G vendor non grata in Europe after the most turbulent few months in its history. Unlike the US National Security Agency and Facebook, it has never been shown to have spied on European citizens or abused customer data. But the mere possibility is enough for US authorities -- with their own nervousness about Chinese tech dominance -- to complain about it to Europeans. A desperate Vincent Peng, the president of Huawei's business in Western Europe, told the Financial Times (subscription required) that Huawei would do "anything" to restore confidence. Unfortunately, it cannot stop being Chinese. (See Orange Rules Out Huawei for 5G in France and How the West Can Hurt Huawei.)

Caught in the crossfire of this tech battle between the US and China, Europe sometimes appears like fodder for either. Its heavily regulated telecom markets are too crowded, say critics, and they already lag international rivals in the race to build economically vital 5G networks. Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK), its most successful tech companies, are more than a century old and under threat from baby-faced software developers. European indifference is no help, either: Just 51% of companies in Germany believe in the potential of artificial intelligence, according to Höttges, compared with 91% in China and 97% in the US.

To Höttges and Richard, Europe is a colossal underachiever, weighed down by apathy and regulation like Superman with kryptonite in his boots. It produces many of the world's best engineers and features some of its most prestigious universities, said Richard. Technology startups from the region have produced some of the world's most groundbreaking innovations. Think of Luxembourg's Skype, now a part of the Microsoft Corp. (Nasdaq: MSFT) empire, or the UK's DeepMind, a pioneer in artificial intelligence that Google (Nasdaq: GOOG) bought in 2014.

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But the takeover of these two companies by US Big Tech points to the most uncomfortable truth about Europe: Its sheer dependence on the US and China. That laid bare a few absurdities at Orange's event in Paris this month. Even as they were castigating the "global tech guys," and championing their own digital assistant as a European alternative, Höttges and Richard were announcing a partnership with Amazon.com Inc. (Nasdaq: AMZN). Customers who buy one of the forthcoming smart speakers from Orange or Deutsche Telekom AG (NYSE: DT) will be able to choose between the telcos' digital assistant and Amazon's Alexa. Amazon's interest in featuring an Alexa rival on its own hardware remains unclear.

When it comes to the telcos' strategy, blocking access to the Internet giants would be counterproductive, and smack of the "walled garden" approach that proved such a disastrous failure after the dotcom boom. Yet analysts are skeptical that European nationalism or privacy fears will prompt consumers to pick Djingo, Orange's name for its digital assistant, over Alexa. Despite widespread coverage of the Cambridge Analytica scandal, and reports that Russia used Facebook to influence the outcome of the 2016 US presidential election, there has been no European exodus from the US social network.

Next page: Stumbling in a digital wilderness

Stumbling in a digital wilderness
Any Europeans who left in search of a regional alternative would be stumbling around in a digital wilderness. Höttges hit on the crux of the problem when he said the tech giants grow stronger as they continue to amass data. As a relatively nascent business, the market for digital assistants may seem less impregnable. But the tech giants can link their digital assistants to a formidable range of other data-fed services. An Amazon Prime customer, paying an annual subscription for all sorts of physical and online goodies, can use Alexa to shop, play music and control household appliances. For a European telco trying to compete, the main upsell is connectivity. Djingo might help Orange to flog additional telecom services and be more attractive than traditional rivals. But it seems likely to be a poor substitute for Alexa.

A data shortage is not the only problem. European telcos lack any serious heft when it comes to research and development. Orange claims to have spent about €700 million ($793 million) in "research and innovation" in 2017, while Deutsche Telekom stumped up as little as €57.7 million ($65 million), according to its annual report. Facebook's commitment was a gargantuan $7.75 billion. Even if the artificial intelligence that underpins Djingo were superior to Alexa or Google Assistant, any advantage might fast disappear as the tech giants flexed their R&D muscle in response. (See Telcos Still in R&D Shadows as Spending Falls.)

2013

2014

2015

2016

2017

2018

AT&T

R&D expenses

1,488

1,730

1,693

1,649

1,503

As % of sales

1.20%

1.30%

1.20%

1.00%

0.90%

BT

R&D expenses

226

116

97

81

79

As % of sales

0.90%

0.50%

0.40%

0.30%

0.20%

Deutsche Telekom

R&D expenses

114

112

127

99

68

As % of sales

0.20%

0.20%

0.20%

0.10%

0.10%

Ericsson

R&D expenses

3,701

4,172

4,000

3,632

4,356

As % of sales

14.10%

15.90%

14.10%

14.20%

18.80%

Facebook

R&D expenses

1,415

2,666

4,816

5,919

7,754

As % of sales

18.00%

21.40%

26.90%

21.40%

19.10%

Google

R&D expenses

7,137

9,832

12,282

13,948

16,625

As % of sales

12.90%

14.90%

16.40%

15.50%

15.00%

Huawei

R&D expenses

4,632

6,168

9,001

11,536

13,544

As % of sales

12.80%

14.20%

15.10%

14.60%

14.90%

Nokia

R&D expenses

3,082

2,292

2,502

5,880

5,784

As % of sales

20.60%

16.60%

17.00%

21.10%

21.20%

Orange

R&D expenses

918

861

854

830

824

As % of sales

1.90%

1.90%

1.80%

1.70%

1.70%

Telecom Italia

R&D expenses

48

65

61

52

51

As % of sales

0.20%

0.30%

0.30%

0.20%

0.20%

Telefonica

R&D expenses

1,231

1,307

1,241

1,066

1,014

As % of sales

1.80%

2.20%

1.90%

1.70%

1.70%

Dependence on Chinese tech is an even bigger geopolitical worry. Huawei has become a go-to vendor for telcos throughout Europe, dislodging Ericsson in 2015 as the world's biggest supplier to communications service providers globally. Agitating at Orange's event, Höttges seemed bothered mainly about Internet companies rather than telecom vendors. But of all Europe's major telcos, Deutsche Telekom is perhaps the most heavily reliant on Huawei. It built a 4G network with the support of the Chinese vendor, and has been testing Huawei's 5G gear, too. Most strikingly of all, Deutsche Telekom's public cloud service has been developed using Huawei technology.

This puts Höttges in an extremely awkward position as he grumbles that so little data is stored on European companies' clouds. Ever since it launched its public cloud offer, Deutsche Telekom has insisted that entrusting data to a German firm compliant with Germany's strict privacy rules is safer than using a company from outside Europe. But what if that German firm's cloud partner is a Chinese technology giant that -- rightly or wrongly -- has aroused security concerns around the planet? (See Eurobites: 'German Cloud' in Demand, Says DT.)

Status

Country

Details

Known Huawei customers

Other major telcos affected by restrictions

Govt restrictions

USA

US House of Representatives warned major service providers off using Chinese vendors in 2012, arguing "the risks associated with Huawei's and ZTE's provision of equipment to US critical infrastructure could undermine core US national-security interests." US temporarily banned component sales to ZTE earlier this year

None among Tier 1 telcos, but Sprint acquired Huawei gear with its Clearwire takeover and still had this in its network in 2016, as revealed by Light Reading

AT&T, T-Mobile US, Verizon

Govt restrictions

Australia

Both Huawei and ZTE are barred from the 5G market and cannot sell products to NBN Co, Australia's national wholesale network

Vodafone Hutchison Australia

Telstra, Optus

Govt restrictions

New Zealand

The government has warned Spark off using Huawei's 5G equipment and by implication would not tolerate 5G deals between Chinese equipment vendors and other telcos

Spark

Vodafone New Zealand, 2degrees

Govt and operator restrictions

Japan

Starting in April 2019, Japan's government will ban its ministries and defense forces from buying and deploying IT and telecoms equipment from Chinese companies, citing cybersecurity concerns; SoftBank is reportedly replacing Huawei as a 4G supplier

SoftBank

NTT DoCoMo, KDDI, Rakuten

Govt warning; operator restrictions

UK

Security watchdogs have this year flagged vulnerabilities in Huawei's equipment; telecom incumbent BT is stripping Huawei out of its mobile core and optical networks and says it will not buy any of Huawei's mobile edge computing products

BT, Three UK

O2, Vodafone UK

Govt restrictions

Taiwan

Ban on equipment developed by either Huawei or ZTE has been in place for the last five years and was recently renewed, according to press reports

None

Chunghwa Telecom, Taiwan Mobile, Far EasTone and Taiwan Star

Operator restrictions

France

Orange tells Bloomberg it will not use Huawei as a 5G kit supplier; Orange subsequently confirms to Light Reading that comments were made "in the context of France"

Altice, Bouygues Telecom

Orange, Iliad

Stripping Huawei out of its networks and data centers would be much tougher than building a walled garden around Djingo. Any government ban on Chinese vendors would drive up costs and impede the rollout of next-generation 5G networks, Deutsche Telekom has acknowledged. In Canada, where operators Telus Corp. (NYSE: TU; Toronto: T) and BCE Inc. (Bell Canada) (NYSE/Toronto: BCE) are under US pressure to sever ties with Huawei, changing vendors would add $1 billion in expenses, according to press reports. Nevertheless, the German operator has said it "takes the global discussion about the security of network equipment from Chinese vendors very seriously" and is "reassessing" its procurement strategy. (See Eurobites: Deutsche Telekom Joins Caravan of Concern Over Huawei and Where Huawei Fears to Tread.)

Can Europe ever develop a vibrant technology sector to challenge the US and China? Even with a huge regulatory and cultural shift, it might be too late. While laudable, the development by Deutsche Telekom and Orange of a home-grown digital assistant seems like tinkering with an existing formula, and it is clearly overshadowed by moves such as the establishment of a $100 billion technology investment fund by Japan's SoftBank. One thing is for certain: Grumbling about the US and China will serve only to raise difficult questions for Europeans tied to their technologies.

— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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