Telcos say they want to seize the technology initiative from their suppliers, but R&D spending by some of the world's biggest operators has fallen in the last few years.

Iain Morris, International Editor

July 10, 2018

13 Min Read
Telcos Still in R&D Shadows as Spending Falls

Telcos are taking back control, as a Brexiteer might say. Upset that a few unelected equipment vendors in Europe and China dictate the rules of the technology game, they are voting for change. Groups like ONAP, the Telecom Infra Project and the recently formed Open RAN Alliance (ORAN Alliance) are proof the R&D balance of power is shifting back toward the operators.

"In the past all of the innovation was done by operators. Then it was given to the vendors. Now it is coming back a bit," said Bruno Jacobfeuerborn, the CEO of Deutsche Telekom's towers subsidiary and the German incumbent's former chief technology officer, during a conversation with Light Reading about the ORAN Alliance at this year's Mobile World Congress. (See Major Telcos Pool Efforts to Slash 5G RAN Costs.)

Except the numbers do not really support this analysis. An investigation by Light Reading shows that research and development expenses for US-based AT&T Inc. (NYSE: T) and five of Europe's biggest operators (see below) have fallen as a percentage of revenues in the last five years, and equaled less than 1% of sales last year (while Light Reading also examined Verizon and Vodafone, neither indicates R&D spending in its annual reports). In many cases, the actual level of spending has also dropped since 2013.

2013

2014

2015

2016

2017

AT&T

R&D expenses

1,488

1,730

1,693

1,649

1,503

As % of sales

1.2%

1.3%

1.2%

1.0%

0.9%

BT

R&D expenses

226

116

97

81

79

As % of sales

0.9%

0.5%

0.4%

0.3%

0.2%

Deutsche Telekom

R&D expenses

114

112

127

99

68

As % of sales

0.2%

0.2%

0.2%

0.1%

0.1%

Ericsson

R&D expenses

3,701

4,172

4,000

3,632

4,356

As % of sales

14.1%

15.9%

14.1%

14.2%

18.8%

Facebook

R&D expenses

1,415

2,666

4,816

5,919

7,754

As % of sales

18.0%

21.4%

26.9%

21.4%

19.1%

Google

R&D expenses

7,137

9,832

12,282

13,948

16,625

As % of sales

12.9%

14.9%

16.4%

15.5%

15.0%

Huawei

R&D expenses

4,632

6,168

9,001

11,536

13,544

As % of sales

12.8%

14.2%

15.1%

14.6%

14.9%

Nokia

R&D expenses

3,082

2,292

2,502

5,880

5,784

As % of sales

20.6%

16.6%

17.0%

21.1%

21.2%

Orange

R&D expenses

918

861

854

830

824

As % of sales

1.9%

1.9%

1.8%

1.7%

1.7%

Telecom Italia

R&D expenses

48

65

61

52

51

As % of sales

0.2%

0.3%

0.3%

0.2%

0.2%

Telefonica

R&D expenses

1,231

1,307

1,241

1,066

1,014

As % of sales

1.8%

2.2%

1.9%

1.7%

1.7%

Notes: Nokia's R&D spending jumped in 2016 following its takeover of Alcatel-Lucent that year.
(Source: Companies, Light Reading)

By contrast, Ericsson AB (Nasdaq: ERIC), Huawei Technologies Co. Ltd. and Nokia Corp. (NYSE: NOK), the world's three largest equipment vendors, have each increased R&D spending as a percentage of sales. In 2017, they collectively spent 16.7% of their sales on R&D, up from 14.8% in 2013. Telcos also come off badly when compared with the Internet giants, whose investments are obviously spread across a more diverse range of activities. Google (Nasdaq: GOOG) spent 15% of its revenues on R&D last year, up from 12.9% in 2013. R&D spending at Facebook edged up from 18% to 19.1% of revenues over the same period.

The telco figures may come as a surprise given much of the current rhetoric and observable trends. Complaints that vendors are not developing the products their customers need have grown louder in the last few years. Network functions virtualization has attracted interest partly as a way for telcos to sever their ties with the giant vendors and take a more active role in technology development. Telcos have been cultivating network startups as potential alternatives to the main kit vendors. Some of the largest profess to be developing technologies as vendors would normally do. During Light Reading's Big Communications Event in May, John Donovan, the CEO of AT&T Communications, said AT&T was becoming more like an "architect" and building the products it needs. (See AT&T's Donovan: Resistance to Change Is Futile , NFV Is Down but Not Out and Orange, VCs Commit $113M to Network Startups as 'Black Box' Frustration Mounts.)

All of this would seem to imply a bigger R&D commitment from telcos. Yet five operators in the study invested a smaller percentage of revenues in R&D expenses last year than in 2013, with Telecom Italia (TIM) investing the same amount (just 0.2%). Even AT&T has been on a downward trajectory. Its actual spending peaked in 2014 at $1.73 billion, or about 1.3% of revenues. Last year's figure was roughly $1.5 billion, or less than 1% of sales. Just as quitting the European Union seems unlikely to give the UK the control Brexiteers crave, so the latest telco rebellion does not look to be tipping the R&D scales in favor of the telcos.

Figure 1: Telco R&D Spending as % of Sales (Source: Operators, Light Reading) (Source: Operators, Light Reading)

Unless telcos morph into vendors, they will probably never invest a bigger chunk of revenues in R&D than Ericsson, Huawei or Nokia. But any neutral observer may have expected recent developments to fuel at least some increase in telcos' R&D spending. One possibility is that open source code has given telcos a relatively low-cost means of developing new technologies. AT&T, clearly, has thrown its considerable weight behind open source groups such as the Linux Foundation and plans to make heavier use of open source code in its networks. In some cases, telcos are also counting on startups for innovation. France's Orange (NYSE: FTE) or Germany's Deutsche Telekom AG (NYSE: DT) may feel there is more to gain from injecting a few million euros into a small software company than from coughing up tens or hundreds of millions for in-house R&D.

When operators talk about driving innovation, some chicanery might also be involved. With little immediate prospect of substantive revenue growth, many telcos may have less interest in shouldering a bigger R&D burden than in ratcheting up the pressure on their traditional suppliers. As a club that now features the world's largest service providers, the ORAN Alliance, whose goal is to spur the development of more open technologies in the radio access network, is almost impossible for the mainstream vendors to ignore. Nokia is already a member of the xRAN Forum, whose merger with China's C-RAN Alliance brought the ORAN Alliance into existence. Gabriel Brown, a principal analyst with Heavy Reading, expects Ericsson to join the ORAN Alliance in due course. (See Why Resistance to the Open RAN May Crumble.)

Next page: Dumb pipe or innovator?

Dumb pipe or innovator?
All that said, operators might struggle to persuade skeptics they are anything but "dumb pipes" with R&D spending in decline. R&D expenses recorded by Deutsche Telekom fell from €97 million ($114.1 million) in 2013 to just €57.7 million ($67.9 million) last year. At BT Group plc (NYSE: BT; London: BTA), they were down from £170 million ($226.3 million) to £59 million ($78.5 million) over the same period. Both operators also report "capitalized" software development costs in addition to R&D expenses. But even when these numbers are included, Deutsche Telekom's spending works out at just 0.4% of revenues last year. And while the same calculation leaves BT with the equivalent figure of 2.1%, the proportion is down from 2.9% in 2013.

2013

2014

2015

2016

2017

AT&T

R&D and related spending

1,488

1,730

1,693

1,649

1,503

As % of sales

1.2%

1.3%

1.2%

1.0%

0.9%

BT

R&D and related spending

712

676

628

689

677

As % of sales

2.9%

2.8%

2.5%

2.1%

2.1%

DT

R&D and related spending

246

222

246

251

345

As % of sales

0.3%

0.3%

0.3%

0.3%

0.4%

Orange

R&D and related spending

918

861

854

830

824

As % of sales

1.9%

1.9%

1.8%

1.7%

1.7%

Telecom Italia

R&D and related spending

1,150

1,315

2,024

2,345

2,056

As % of sales

4.2%

5.2%

8.7%

10.5%

8.8%

Telefonica

R&D and related spending

1,231

1,307

1,241

1,066

1,014

As % of sales

1.8%

2.2%

1.9%

1.7%

1.7%

(Source: Operators, Light Reading)

Orange and Spain's Telefónica stand out as relative heavyweights in Europe, with each investing about 1.7% of its revenues in R&D expenses last year. In both cases, however, spending has dipped very slightly as a percentage of sales. As for Telecom Italia, the other European incumbent that Light Reading examined, its R&D expenses have remained at around 0.2% or 0.3% of revenues in each of the last five years. Like BT and Deutsche Telekom, it also reports more substantial capitalized development costs linked to R&D activity, but these appear to include spending that most operators would file under capital expenditure.

For more NFV-related coverage and insights, check out our dedicated NFV content channel here on Light Reading.

Across the six operators examined, R&D expenses totaled about $3.5 billion last year, while overall spending linked to R&D was about $6.4 billion (including the Telecom Italia figures), or roughly 1.6% of revenues. This compares with R&D investments of about $23.7 billion by Ericsson, Huawei and Nokia last year. And all three vendors have increased spending as a percentage of revenues since 2013. Unless open source code and the software paradigm can change the entire game, the big vendors look set to remain the R&D kingpins for some time yet.

Figure 2: R&D Spending ($M) Source: Companies, Light Reading. Source: Companies, Light Reading.

— 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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