Is There Room for Innovation in Telecom?

By | February 23, 2018

MWC 2018 telecom InnovationStartups lead innovation in the technology world. But is there room for startups in the telecom world? And, what is the future of innovation in this industry? Innovation is one of the themes of this year’s Mobile World Congress which is starting next week, so will the ecosystem address this question?

Is telecom a utility play?

Services providers play a major role in setting the tempo of the industry: they own the end customer. For years, service providers squeezed vendors on price forming large purchasing consortia and bargaining down to the penny. Profit margins, which continue to shrink for everyone, are getting close to levels seen in utilities.

Startups seeking to sell into carrier have to pass many challenges, spend tons of money and wait years for acceptance and a purchase order. VCs don’t have patience for such processes; they backed off from many types of investment in this sector long ago.

Providing financial guarantees, assuming liabilities, keeping large inventories are common part of any service provider contract. Small innovators struggle to meet the steep requirements. Operators who don’t want to take risks dealing with small vendors, prefer to stick with their large vendors.

I had first hand experience in this with my startups. We had to partner with a ‘big brother’ – a large system integrator – to sell to the service providers. Service providers encourage that as a mean to lower the barriers of entry, but this does not make it easier for a startup to sell into a carrier.

The smart grid is the first major renovation of the electricity grid since the time of Edison and Tesla: will it be similar in telecom?

Hostile landscape?

Market dynamics consolidated the supply chain to a few large companies. Three major telecom network vendors – Huawei, Ericsson and Nokia – control over 75% of the market. You can add Cisco to the mix for the core network and a few outside vendors looking to improve on their strong local market standing such as ZTE and Samsung to round the market. Many of these companies are themselves struggling financially as LTE deployments naturally slow down.

Consolidation is also rampant at the component and subsystem level. Qualcomm, NXP, and Freescale are now one company. On the device side, Samsung and Apple control the majority of the global smartphone market.

The service provider space itself is not immune to consolidation. However, regulators have been more vigilant in preventing it. It is further validation of the critical role service providers play in this game.

Industry hubris?

It is ironic that a company like Facebook recently took action to stimulate investment in the telecom sector. Through TIP, Facebook rallied a few service providers and venture capitalist to help startups through their TIP Ecosystem Accelerator Centres (TEAC). Irrespective of the success of this program, it is led by a player from outside the industry! Did no one think of this from within?

This question is specifically targeted at the service providers. As the vendor space dwindles to a few viable entities, service providers have most at stake to stimulate innovation. Service providers did make previous attempts at incubating and investing in technology startups through their own corporate VC arms among other approaches, but they largely failed at this [See A foothold in Silicon Valley].

Today, it seems most service providers are happy to contract out to the few remaining vendors their network solutions, deployments, upgrades and services. Contrast that to how the Internet players deal with their infrastructure!

I maybe too harsh on the service providers as they see pressure of their own – from the OTTs, for example, who have global scale that dwarfs the national or regional scale on the network operators. Other industry players have their fair share of responsibility to assume.

What to watch for!

Telecom is not very friendly to startups these days, but there could be some bright spots. Networking and hardware is taking a hit, but there are elements related to software that are promising. From our side at Xona Partners, we have been thinking at how we can stimulate innovation and investments into networking and telecom services, and actively exploring different avenues to change. For example, open source could provide one such avenue. We have also been watching how new initiatives to open the network are shaping up (e.g. xRAN and Open RAN, among others).

Next week at MWC, we will be visiting many innovative and entrepreneurial companies, such as these housed at 4YFN, the many country pavilions, the Congress Square and the App Planet to look at new innovations. With the PR machine of the major vendors blasting at full throttle, it is difficult for the small innovators to get heard. But we find it interesting to experience first hand what they are up to and how they are faring out. This is where the future of telecom could lie!