Telcos spend pathetically little on R&D, and it's often shrinking

Telecom executives on the technical side often betray nervousness that telcos have lost control of their destiny. The products and services sold by nearly all operators are largely based on the expertise and inventiveness of just a few big kit vendors. The world's Internet giants now exert similar influence. Analytics, artificial intelligence and cloud platforms used in the telco industry increasingly come from AWS, Google and Microsoft.

From a customer perspective, one telco is practically indistinguishable from another. It is why operators are reduced to competing on price or by squaring up on download speeds – a number meaningless to the average consumer who just wants to watch Stranger Things without being haunted by a frozen, "buffering" image of demidogs snacking on Bob Newby.

It also explains why some telcos are talking up open RAN or the software overhaul of their businesses. Europe's biggest operators believe they can play a part in steering the future development of radio access network technology. Vodafone has set up a research facility in Malaga dedicated to exploring semiconductor options for open RAN. Both it and BT also have plans to hire thousands of software engineers, partly to insource technology development.

Figure 1: R&D spending ($M) (Source: Companies)

Yet data analyzed by Light Reading shows that some of the West's biggest operators still spend a pathetically small amount on research and development (R&D). As the main kit vendors and some of the biggest Internet players ratchet up their investments, the gap between these companies and the telcos has yawned.

Even using the most generous assessment of what operators spend, total investments in R&D across six big telco groups came to $5.49 billion last year, only 0.6% more than the figure for 2013. Over the same period, combined spending by Ericsson, Huawei and Nokia rose 185%, to more than $29.5 billion (with Huawei accounting for the bulk of the increase). Meanwhile, Facebook, Google and Microsoft pumped a collective $80.7 billion into R&D last year, up from less than $19 billion in 2013.

Pitiful amounts

Any comparison may strike some observers as unfair. Unlike Huawei or Google, no operator purports to be an R&D powerhouse. Moreover, as a percentage of their revenues, telcos invest roughly the same amount in capital expenditure as their big suppliers do in R&D. A major commitment to R&D would chew deeply into profits at a time when operators are not in the best financial condition.

But there seems to be a disconnect between the pitiful level of telco spending on R&D and the industry's desire to be more than just a "dumb pipe" – selling gigabytes on networks designed by others. How can telcos expect to be taken seriously on talk of innovation when their annual spending in this area has remained flat for nearly a decade?

Spending has even dropped in absolute terms and/or as a percentage of sales at some of the companies that profess to be genuinely committed to R&D. An egregious example is Orange. Last year, the French operator described R&D as "health insurance" in an "uncertain world" riven by geopolitics, environmental worries and a recent pandemic. Orange is one of only a few big operators maintaining "strong investments in applied research," said Nicolas Demassieux, the senior vice president of Orange Labs Research. But Orange's R&D spending has plummeted since 2013.

Annual reports show the company pumped nearly $800 million (using today's exchange rates) into R&D that year, a figure equal to 1.9% of its revenues. By 2017, annual spending had dropped a tenth, to roughly $714 million. And by last year it had slumped a further 11%, to just $632 million. Worse, that decline has happened over a period of sales growth for Orange, with group revenues up from about $41.8 billion in 2013 to $43.4 billion in 2022. This means spending as a percentage of revenues has fallen to less than 1.5%.

The rationale for investing in R&D, according to Demassieux, was partly about building an arsenal of technology patents that would offer some protection against trolls and other aggressors. That all makes cuts to R&D spending sound risky. Orange believes some of its 5G patents today fall under the "standard-essential" category, providing defense against companies either suing it or chasing royalty payments. Garnering similar influence in 6G may be tough if the R&D budget has been squeezed.

R&D cutbacks

Annual spending has also fallen at other European telcos in the last decade. The UK's BT, which records both R&D expenses and capitalized development costs, reported total investments of almost $900 million in 2013, equal to 4% of its revenues. Last year's costs had sunk to about $730 million, or 2.9% of sales. Spain's Telefónica has cut spending from about $1.07 billion in 2013 to $852 million last year (although its investments as a percentage of sales have risen over this period).

The R&D gulf between operators and a few big suppliers (including some Internet firms) will not look healthy to many observers. For one thing, it hints at growing telco reliance on technologies developed by a small number of companies – the very thing telcos say they are determined to avoid. While open RAN has produced a few alternatives, the big R&D spenders in that community are the same public-cloud and semiconductor giants that already seemed to enjoy too much control.

Some recent telco moves are worth monitoring closely, including the activities of Vodafone. The phrase "research and development" turns up only once in the UK-headquartered operator's last annual report (in reference to its Malaga facility). Nor is there any indication of how much Vodafone spends on R&D annually (explaining its omission from the data gathered for this story). But Vodafone is betting that a major investment in software talent will help to spur revenue growth and slash dependency on external suppliers. The industry will be watching.

Related posts:

— Iain Morris, International Editor, Light Reading