Communications service providers (CSPs) have a desire to become more like high-flying technology companies (techco, in industry parlance), but spending like a tech company won’t be the answer. That’s because CSPs will likely lag behind hyperscalers on research and development (R&D) permanently, due to different aims and goals for their investments, according to a new market study from TM Forum. The TM Forum is an industry organization comprised of over 850 global companies that participate in the communications services business.
In a summary of the report, titled, ‘Telco to techco: capex and opex implications,’ the authors looked into whether CSPs aspiring to be techcos should invest more in R&D. TM Forum’s chief analyst Mark Newman and principal analyst Dean Ramsay compare and contrast the R&D investments that telecom operator CSPs like AT&T, BT, Deutsche Telekom, and Telefonica have made against the ones that hyperscalers like Amazon, Alphabet, Microsoft, Apple, and Meta have made.
A survey from TM Forum conducted as part of the report showed that 34 percent of CSP respondents said it was “essential” to invest a significant proportion of revenues in R&D. However, the analysts conclude that CSPs will never catch up to hyperscalers on R&D.
The finding: hyperscalers overwhelm the telecom operators, with a cumulative total of nearly $1 trillion on R&D made in the last decade, according to Matt Walker, chief analyst at MTN Consulting. That figure is 70 times the R&D spending that the four telecom operators have made. The R&D per revenue gap is also enormous, with Amazon spending 23 percent versus 3.4 percent for BT.
Examining the R&D spending equation
To answer the distinction in R&D spending, the TM Forum report probes the purposes of a hyperscaler and a telecom operator. Newman and Ramsay notice that with the revenue of operators plateauing globally, they would only raise R&D funding if, “significant cost savings in the business that could be channeled into R&D” were identified.
Telecom operators have minimized R&D spending because, over the past 20 years, they have largely outsourced their technology roadmaps and development to technology vendors and systems integrators, TM Forum says. Now as they try to transition into techcos, they look to reverse this trend to differentiate their technology from the competition.
Meanwhile, hyperscalers invest in R&D across various sectors of their business like data centers, broad network investments (network automation, traffic analysis, streaming platforms), and new product areas like internet of things operating systems, satellites, and autonomous driving. This offers hyperscalers the ability to design and construct their own facilities, network elements and platforms (such as servers and data center chips), rather than from third parties.
This gives the impression that hyperscaler R&D strategies are closer to telecoms network and information technology (IT) vendors than telecom operators, but hyperscalers do not sell their technology to other service providers, unlike network and IT vendors, the authors note. Rather, hyperscalers use their own technology to create new services or offer existing services on a more cost-efficient basis.
R&D strategies: If you can’t beat them, join them?
The telecom network vendors profiled in the report — Ericsson, Huawei and Nokia — spend a similar portion of their total revenues on R&D as the hyperscalers, but their revenues remain largely flat in absolute terms, the report notes. The network vendors are said to be “over-the-top” vendors that deliver their services over telecoms networks and using the computing infrastructure provided by hyperscalers, which gears their R&D spending towards improving software and services to customers.
So if the companies CSPs have relied on for technology innovation are also unable to match hyperscaler R&D and indeed using cloud services from these ostensibly competing entities, what are the implications for CSP strategy?
To realize their techco aspirations, one strategy is to hire lots of software engineers. But when competing against hyperscaler companies who are also increasing salary and stock compensation, this may not be a realistic strategy. Increased costs would need to be funded by cutting costs elsewhere, as the report notes.
What is most likely to happen is a continuation of what the market has already seen: lots of partnering with the hyperscalers. Microsoft Azure and AT&T, AWS and Verizon, Bell Canada and Google Cloud are but a few examples of existing partnerships. Apart from the benefit of joint go-to-market strategies, the CSPs will gain exposure to the tools and expertise available to the tech companies.
From this vantage point, boosting software development with in-house talent becomes somewhat more realistic. The report suggests that savings on integration, product licensing and the potential for selling their technology to other parties could provide a basis for becoming a techco within the R&D budget constraints that CSPs face.
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