Total Telecom Congress 2021 LONDON, UK Johan Wibergh, Vodafone's Swedish chief technology officer, is a hard man to miss at a physical event. Towering well above six feet, the hairless dome of his head visible atop square-framed spectacles, he brings an assessment of the telecom industry's plight that is equally striking. "An elephant in the room dancing around," is how he depicts the quintessential US tech giant, and prospective telco partner, at this morning's Total Telecom Congress in central London. "We need to make sure we don't get squashed."
Data points thrown out at the event explain Wibergh's fear and some measure of despondency about the industry's long-term prospects. Last year, the entire connectivity and communications market generated about $1.53 trillion in sales, according to Angel Dobardziev, a senior director at IDC Consulting. By 2025, that will have crept up to just $1.61 trillion, barely the rate of inflation, he says. "When it comes to this market, the compound annual growth rate is pretty close to flat."
The other scary number tossed to attendees is 70 billion ($81 billion), the amount GAFA (Google, Amazon, Facebook and Apple) invests annually in research and development, according to Michael Trabbia, Wibergh's counterpart at Orange. "It is useless to be in head-on competition with the very big guys," he says on stage. "We are clearly in co-opetition mode."
Just a decade ago, biggish tech was part-irritant to operators then switching on their 4G networks. It brought the applications that justified telco investment in data services, but it started to undermine the voice and messaging business that had made telcos rich. Internet firms were castigated as "over-the-top" players. Arguments about net neutrality whether operators should be able to charge these companies for network usage were already circulating.
Ten years on, those Internet players have morphed into the world's most valuable companies. They have transformed the global economy even as they have trampled destructively through it. If not quite an existential threat to telecom, they will probably consign operators to a utility-like role of dumb-pipe provider a fate that Vodafone, among others, is still determined to avoid.
Any value creation in telecom ended about 11 years ago, in Wibergh's view. That is probably generous in the case of Vodafone, whose share price peaked in February 2000 at 423.37 pence sterling on the London Stock Exchange. At the time of this writing, it was worth less than 113, valuing the UK-headquartered operator at about ฃ31 billion ($43 billion). Apple's current market capitalization is about $2.5 trillion.
Going hard on software
Wibergh's revival plan is largely about a pivot to software, the force that is "eating the world," as the adage goes, and that is "probably going to eat the telco," in the words of Trabbia. Over the next few years, it will mean adding about 7,000 software engineers to a Vodafone workforce that currently employs about 9,000 of them. Relatively few will be external hires. Retraining figures prominently in the scheme.
This could feasibly help Vodafone to cut spending with IT suppliers and avoid being tied to one public cloud, two objectives of the plan. With ownership of the intellectual property behind some network and IT systems, it could slash licensing fees and boost profitability. But the software transformation assuming Vodafone can pull it off successfully will probably not be enough to kickstart growth at Wibergh's firm. Even he sounds doubtful. "Who knows?" was his initial response when asked the question during a panel session today.
Competing for software expertise will be hard with a telco budget. Wibergh hopes that replacing national silos with a single tech organization for the whole of Europe will create scale. "There are 30,000 people in technology in one organization in Europe," he says. The rationale is that products and internal systems can be developed for a big regional market rather than individual countries, driving down unit costs. The drawback is the relatively limited amount that Vodafone can realistically fling at any international development plan.
A breakdown of the numbers shows that Vodafone Group spent about 8 billion ($9.3 billion) on capital expenditure last year. Around 30 billion ($34.8 billion) went on cost of sales, and almost 9 billion ($10.4 billion) on selling, general and administrative fees. With an operating profit of about 5.1 billion ($5.9 billion) on revenues of almost 44 billion ($51 billion), Vodafone does not have much wiggle room. Contrast that with Alphabet, Google's parent company, which pumped nearly $28 billion last year into research and development alone. It also made an operating profit of $41 billion on sales of almost $183 billion. Valued at about $1.86 trillion, it is worth 43 times as much as Vodafone.
Orange's Trabbia describes the gulf more succinctly. "Very often we feel that we are maybe inferior to the big guys with their market caps at enormous amounts," he said on a panel that also featured Wibergh as well as Keri Gilder, the CEO of UK-based Colt Technology Services. "One could buy our three companies with its pocket money. But they need us, and we should not be ashamed of the value we bring to the table."
His premise largely seems to be that Colt, Orange, Vodafone et al have an edge simply because they are now less scary than the US tech giants. "There is fear everywhere about how dominant they can be and what is the impact of their services," he said. "People are in bubbles with people who think like them and there is an addiction issue."
Impossible to compete
All that is probably true, and yet it will not derail the Internet companies without regulatory intervention. Despite the negative publicity that surrounds it, Facebook has just posted a $1.2 billion year-on-year increase in net profit for the September-ending quarter, to about $9 billion. Annually, it now plans to invest $10 billion alone in the metaverse, an escape hatch into a virtual-reality world of cryptocurrency, games and social interaction. "Investments at this scale make it almost impossible for anyone outside of Google, Apple, Amazon, etc. to compete," said Richard Windsor, an analyst with Radio Free Mobile, in a blog.
Telcos talk a good game about their own research efforts, but the hard data is depressing. Take open RAN, for instance. Among other things, that telco initiative is supposedly about seizing control of network development from the vendor community. But the founder members outside Asia spend a pathetically small amount on research and development, and it dropped last year.
AT&T cut R&D spending from $1.28 billion to $1.21 billion over that period, while Orange's investment fell from 672 million ($779 million) to 643 million ($745 million). Germany's Deutsche Telekom spent as little as 33.1 million ($38.4 million), down from 45.4 million ($52.6 million) in 2019, although it insists that investments in "internally generated intangible assets to be capitalized were also up year-on-year at 448.4 million [$519.6 million] compared with 344.2 million [$398.8 million] for the previous year."
Chief technology officers probably have a better idea than chief executives do of the software challenge that faces telecom, and they hardly sound convinced. Without government action against big tech, on the scale of the 1911 breakup of Standard Oil, the prognosis for the sector is not encouraging.
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Iain Morris, International Editor, Light Reading