Telcos Need to Ramp Up R&D to Stay Competitive

With venture capitalists still leery about telecommunications investments after the fallout from the dot-com crash, telcos should beef up their R&D if they want to stay competitive, Dave Burstein, a longtime telecommunications reporter, wrote on Aug. 26. Two percent of sales would be a good start, he suggests, which would mean $2.48 billion and $1.94 billion for AT&T (T) and Verizon (VZ), respectively. AT&T spent $892 million in 2008, down from $985 million in 2007. Verizon doesn't disclose its R&D spending, but analyst Chris King at Stifel Nicolaus estimates it's very little, as most of its vendors do the work.

In a time when technology moves faster than ever and so much innovation is built upon the very service the telcos provide, you'd think they'd step up their efforts at developing new ways to deliver better broadband through wires or wirelessly. Think about the history of Bell Labs, which pioneered inventions such as the transistor and the laser. Yet, the innovation is coming from startups and the equipment vendors, or even from companies such as Google (GOOG) and Microsoft (MSFT), which are trying to build a device to deliver broadband in part of the digital television spectrum.

Telecommunications equipment makers and the cable industry are pushing technologies that are enabling them to take advantage of the telcos' reluctance to spend, Burstein points out, and several news items back that up. Yesterday it emerged that AT&T and Verizon are fighting a patent lawsuit filed by TiVo which is trying to defend and license its digital video recorder time-shifting technologies. Do AT&T or Verizon have patents that will help them craft a cross-license with TiVo, or beat this suit? I doubt it, but they do have lots of lawyers.

A Deserved Commodity Status But those lawyers can only help the telecommunications providers fend off competition and innovation for so long. The carriers' empires are showing cracks. The most influential and game-changing wireless handset came from outside the carrier industry. Cable providers have been stealing voice and broadband customers for years (although telco TV seems to have helped carriers fight back in the last quarter). But even AT&T's IPTV service, U-Verse, was delayed with some promised features never materializing. This need for telcos to invest in R&D isn't a new complaint, by the way.

Without a desire to spend on new products and services, even if they may disrupt the core lines of business, the telecommunications providers deserve their commodity status. When optics breakthroughs are coming from companies like Infinera or at universities, and useful wireless technologies are built by startups or the equipment vendors, carriers are basically stuck putting a set of pre-selected ingredients together rather than making their own signature dish.

It's the difference between baking a box-mix cake and making your own. And if the equipment vendors offer the same mix to everyone, then the services aren't all that different. Maybe carriers can change the icing with small service tweaks, but it's hardly enough to disrupt the industry. If the only innovation carriers can bring is to pricing plans and the vision to lay fiber to homes, they're going to be stuck as mere utility providers. Because in this world, controlling the pipe is nice, but controlling innovation is where the real power lies.

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