AT&T Inc. (T) and Verizon Communications Inc., the two biggest U.S. telephone companies, are taking a page from Silicon Valley’s handbook as they try to ward off new wireless competitors.
The two companies are cozying up to startups in California, Israel, Europe and India, seeking to cultivate mobile hardware and software for their networks. AT&T met with 508 startups in “speed-dating” sessions last year to pick new suppliers, and Verizon has stepped up investments in promising new companies by about 50 percent over the past two years.
AT&T, once one of the world’s most advanced technology companies, relied for decades on its legendary Bell Laboratories for breakthrough research. Now it and Verizon are following the lead of companies like Intel Corp. (INTC), Novartis AG and Pfizer Inc. (PFE), which often depend on startups for innovation. The carriers have gotten more aggressive about backing entrepreneurs over the past three years, as their revenue from phone calls declines and spending on network expansion crimps profit margins.
“They have to re-imagine and reinvent their businesses,” said Bob Ackerman, the founder of Allegis Capital, which has worked with 35 corporate startup investors. “They are coming to the realization that they need to look outside their organizations for inspiration.”
For startups, funding from carriers can be a lifeline during a time when other sources of funding are shrinking. While venture capitalists are still pouring money into software and other areas, spending on telecommunications hardware declined 19 percent last year, to $677.9 million, according to PricewaterhouseCoopers LLP.
In addition to getting funding from carriers, small companies making hardware, software and broadband Internet services are gaining access to phone companies’ capital budgets, which reached $314 billion globally last year, according to research firm Ovum.
Until recently, overseas carriers such as Telefonica SA and Deutsche Telekom AG (DTE) were best known for reaching out to startups. That’s changing, said John Donovan, senior executive vice president at Dallas-based AT&T.
“We are probably the most active company in the venture community,” he said in an interview. “We are the unsung hero in mobile broadband.”
The carrier’s executives are holding monthly calls with venture capitalists from Sequoia Capital, Kleiner Perkins Caufield & Byers, Andreessen Horowitz and Khosla Ventures. Those firms and other investors suggest startups for AT&T to meet -- in what Donovan calls “speed-dating” sessions. Each company gets 20 minutes to make its case. The startups then either get business with AT&T on the spot, or an explanation of why they didn’t. The number of startups AT&T met with more than tripled last year, from 150 in 2010, Donovan said.
“There’s nothing like it in the world,” Donovan said. “We meet a company we like, we are ready to start the following Monday.”
The program speeds up the time it takes for a startup to get a contract by two-thirds, he said. After last year’s meetings, AT&T has begun collaborating with companies such as Apigee Corp., a maker of software tools, and SundaySky, a provider of video technology. It’s working on 40 projects, and 11 of them are already being deployed commercially or will be soon, Donovan said.
This year, AT&T has already heard 91 pitches and started working with startups on three new projects, Donovan said.
Verizon (VZ), meanwhile, increased its direct investing into startups by 40 percent in 2010 and an additional 15 percent in 2011. The amount may rise again this year, said Daniel Keoppel, executive director of strategic investments at Verizon in Basking Ridge, New Jersey. The company expects to make three to four new investments in the next month, and a dozen investments this year, he said. Keoppel declined to say how much money is involved or the total number of startups.
“Over the past couple of years, we’ve been extremely active,” he said. “We started to develop a decent track record of making good investments. We got strong support from senior leadership.”
In 2009, Verizon funded Entropic Communications Inc. (ENTR), a chipmaker that became a key supplier for Verizon’s FiOS broadband networks and is now a public company. Another investment, Networks in Motion, eventually created one of Verizon’s most popular apps, VZ Navigator. It was acquired by TeleCommunication Systems Inc. for $170 million. Microsoft Corp. (MSFT) purchased another Verizon investment, VideoSurf Inc., a video search engine, last year.
Verizon’s backing has helped these companies thrive, Keoppel said. That, in turn, made them more lucrative venture investments, he said.
“We’ve had some very quick exits, partly because of the endorsement effect of the company,” Keoppel said.
The startups also can increase revenue quickly by becoming Verizon suppliers.
“That’s super-powerful for our business,” said Scott Kveton, chief executive officer of the Verizon-backed startup Urban Airship Inc., which makes mobile marketing software for the carrier. “We are getting to engage with Verizon on a variety of potential devices.”
In addition to investing in Urban Airship, Verizon is currently backing Payfone Inc., a mobile payments provider, and Zoove Corp., which lets users get customized phone numbers. Of the variety of companies in its startup portfolio, two or three could eventually go public, Keoppel said.
No Lock on Innovation
“Everyone is looking for growth,” he said. “Nobody -- including the carriers, Apple and Google -- have a lock on innovation. We are out there looking for investment to help drive revenue.”
AT&T and Verizon need a way to turn around their declining profit margins, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. Even with their status as a near-duopoly in providing U.S. mobile-phone service, the companies are losing ground, he said.
“At this moment of riotous growth in all things wireless, the U.S. telecom operators are actually shrinking in real terms,” he said in a report.
The carriers face mounting competition from cable companies such as Comcast Corp. And there are new entrants to the market. That includes FreedomPop, which will start offering a free wireless broadband service later this year.
To tap into more entrepreneurial areas, carriers have to change the way they do business, said Allegis Capital’s Ackerman. In the past they have focused on pressuring vendors to cut costs, rather than spurring innovation, he said. Carriers also take longer to make decisions than startups.
“They operate at different velocities,” Ackerman said. “This is something they are trying to overcome.”
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