Is telecom innovation at risk?

Matt Walkers/Ovum
11 Aug 2010

Venture capital support for telecom vendors has fallen steadily in the last few years, from $1.82 billion for the four quarters ended 3Q08 to just $1.18 billion in the 2Q09-1Q10 period. Simultaneously, hard-bargaining carriers and aggressive Chinese vendors threaten to force the major vendors to spend less on R&D to compete. The result could be slower introduction of new technologies, less differentiation in product areas and reduced potential for M&A activity.

Major vendors have traditionally been averse to spend big on developing new technologies, content instead to let nimble start-up vendors without legacy "baggage" do the pioneering, risky research.

With fewer such start-ups being funded, though, vendors will have to rely more heavily on standards bodies and other industry groups for innovation.

In the face of budget crunches and fewer high-potential start-ups, big systems vendors have a number of options for better using their scarce resources, including more aggressively moving R&D to new locations, trying to lock in exclusive relationships with small, new suppliers, and discontinuing product lines with limited potential markets.

In this latter case, it may push its customers to migrate to higher-volume, more mainstream products or technologies.

Signs of growth

The VC market, however, is showing signs of life. The climate for public offerings has improved in the last two quarters, with 32 telecom IPOs while the previous four quarters saw a total of only 20. Markets are still turbulent, and some filings are yielding less money or taking longer to consummate than planned. But the spate of IPOs suggests there is still room for small or specialist vendors to grow.

To support a business as a specialized vendor, though, companies will likely need at least $1 billion in annual revenue, an ability to forge partnerships with other vendors and to spend more of their cash on R&D than the major players.

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