Telecom Carriers Discuss Innovation Needs With Silicon Valley Entrepreneurs

Everyone is aware of the carriers' dilemma: To meet the exponential growth in data traffic, mobile carriers must spend ever more money to finance the build out of their wireless networks (both access and backhaul). Yet this spending and plant upgrade must be done while carrier data revenues are growing much more slowly (estimated at only 3% annually) than the increased data traffic they must support. Tiered pricing, new business models with revenue sharing (e.g. eReader downloads over 3G networks), new apps and services (e.g LBS, health monitoring, etc) have all been suggested But with their often stodgy corporate cultures and bureaucracies, can carriers innovate on their own and execute promptly? If not, they are in danger of being marginalized and dis-intermediated, becoming bit pipe providers who don't share in the profits of the mobile app and M2M bonanza. And the same pressures exist for wire-line and fiber facilities based carriers. Is collaboration and investment in start-ups a better solution for telcos to grow revenues and fund network expansion? Several analysts think so.

Telecom Analyst Mohit Agrawal has suggested that "carriers collaborate with all players in the ecosystem to remain relevant and get their fair share of new revenue streams and profits." Mohit recommends that carriers invest in start ups offering new services on mobile networks in order to collaborate on compelling new services with future growth. A few carriers have already started to invest in the new venture, e.g. Eventful, a location-based calendar service, announced a $10 million round that included money from Telefónica. Pelago, which is developing a mobile social network called Whrrl, raised $15 million, with some of it coming from Deutsche Telekom’s venture capital arm, T-Ventures. In such a carrier- start- up or partnership, Mohit envisions carriers that offer mobile app types of services as aggregators that facilitate access to Internet content rather than creating it.

Derek Kerton, Principal Analyst of the Kerton Group, is a firm believer in start-ups working with carriers. At the Sep 16th Telecom Council Carrier Connections Summit.

Derek stated that entrepreneurs and start-ups now have excellent opportunities to work with both small and large carriers. In his opening keynote on Carrier Innovation, Derek said that "carriers have field offices in Silicon Valley to facilitate partnering, technology transfer, internal evangelism, and strategic investment. For Silicon Valley companies seeking to build relationships with carriers, there is no better place to start than the local representatives, who can become your internal champions, and can route you through to the right groups back at their head office." One of his suggestions for telecom targeted start-ups takes a page from the "Green" movement: "think globally and act locally. At least to start…" The telcos have "missed a couple of boats, learned a lesson, and don't want to miss another" so are now much more receptive to working with entrepreneurial companies that can help them innovate.

Carriers like Swiss Telecom and KT have started new partnership programs, created new facilities and test beds to encourage partnerships with start-up companies with promising new technologies. Indeed, at this Telecom Council Carrier Connections meeting many telcos described their innovation programs. These included: Sprint, NTT DoCoMo, AT&T, BT, SingTel, Swisscom, SK Telecom, Bouygues Telecom. Telecom Council Director Stephanie Owyoung, said: “Of the 10 carriers represented in the Carrier Connections agenda, every one of them is growing their innovation scouting activities this year. Between partnership and direct-to-market options, I expect 2011 to be a big year for telecom entrepreneurs.”

Mr. Kerton believes the smaller carriers are more nimble (meaning they can move services to market quicker), but the larger carriers offer a larger revenue opportunity for the right application or mix of services. The larger carriers have "their own set way of doing things," he said. Moreover, many new technologies that start-ups might bring to the telco are currently being developed in a large carrier's lab. This is particularly true if the new technology or software impacts a carrier's network infrastructure (access, inter-office, or core) and management systems. So start-ups might find themselves competing with their potential carrier customer's home grown, lab developed technologies. Kerton says, "That's a tough fight to win."

Derek writes that "Working with carriers is getting easier, but it still takes time. The carrier innovation funnels (in Silicon Valley) might start by looking at 500 start-ups a year. They whittle that down to around 40 companies that they (the telcos) are willing to champion and present to their home office business units. In the end, only 3-7 of those companies end up making partnerships with the telco in any given year. The similarities to Venture Capital funnel statistics are obvious, he says. Some of those 500 companies are ones that had already presented to the carrier in prior years, but had become more mature or changed their pitch. Also, the 500 companies are widely variable in quality. Some of them have just concept ideas of a founder or chief architect, while others are 50-person companies with existing customers and carrier-grade operations. Obviously, the latter group has much better odds."

The face-time a start-up might get with a carrier depends on the type of product or service offered. If it's in the mobile app space, the telco is likely to meet with 500 or so companies at a time (think developer conference). This is because the new revenue opportunities per partner are very lean for low cost mobile apps. But if a start-up has a new technology that improves or augments a telco's core network, reduces their costs, or disrupts existing business, then a one-on-one meeting and engagement is possible, according to Kerton.

Continuing, Kerton said, "Although a carrier deal can be very lucrative, and can immediately boost distribution for any company, start-ups should enter the process with the right expectations. Carriers have created amazing programs in the past 5 years, both for developer and apps (Developer Programs, DevCons, web tools, SDKs), and for deeper partnerships (labs, test beds, outreach offices). For mobile app developers, this means very fast distribution of content, but for companies that seek deeper relationships, deal making with carriers still moves slowly by Silicon Valley standards."

The Silicon Valley based Telecom Council is certainly driving carrier connections with start-ups. Regular telecom ecosystem meetings put various stakeholders in the room to discuss timely trends. Their Service Provider Investment Forum (SPIF) selects "start up of the year" nominees from more than 100 startups each year. More than 20 global carriers with over 2 billion total subscribers vote for winners in eight categories focused on innovation, engineering excellence, disruptive technologies, communication solutions, fixed and mobile opportunities, and contributions to the future of telecom. The Telecom Council will introduce the nominees to journalists and selected bloggers attending the fourth-annual edition of ShowStoppers @ Mobile World Congress, 13 Feb. 2011, in Barcelona. SPIFFY winners will be announced later in February 2011. Start up winners of the 2010 SPIFFY awards included: Lithium Technologies, Cooliris, Funambol, Micro Power, Edgewater Networks, Gogobeans and 4Home. In addition, Verizon was cited as the "Most Supportive Carrier" last year.

So there does appear to be light at the end of the tunnel for start-ups with promising new technologies and applications aimed at various types of telcos. And that could totally revitalize the very worn out telco business model of selling more bandwidth, getting more mobile subscribers or increasing ARPU. We will be tracking this trend and reporting on what we observe in the weeks and months ahead.

0 thoughts on “Telecom Carriers Discuss Innovation Needs With Silicon Valley Entrepreneurs

  1. Thanks for a very enlightening and informative article!
     I was of the opinion that start-ups couldn't effectively work with telcos because of the very long lead times for deployement of their product or service.  Has that changed?  Will the telcos move quicker now that they are faced with missing out on so many new and exciting uses of their networks?

  2. Typically 18-24 months between the 1st engagement between supplier and telco to the initial deployment of the supplier's equipment in the network.  Probably longer for network management software, which has to be integrated with the carrier's own network management platform (almost always home grown).

    Will carriers move quicker now?  The article referenced in the 1st comment above doesn't think carriers are scared enough to innovate more quickly than they  have.  But with all their innovation initiatives that might change.

    It’s clear developers have to go through an awful lot of trials and tribulations before prominent carriers seriously evaluate their new product or service. Rob Hull, BT’s VP of consumer networks said, “a fast no (to a new vendor) is often a valuable thing.”

  3. More innovation in China then in U.S. or Europe?

    The UN based World Intellectual Property Organization (WIPO) stated  that patent applications in China jumped 18.2 percent in 2008 and another 8.5 percent in 2009. Over the same period, ZTE, China's second-largest telecom equipment maker, boosted R&D spending 44.8 percent.

    In the U.S., patent filings fell 11.7 percent in 2008 and 2009, while companies like General Motors, Hewlett Packard and Microsoft slashed their R&D budget by more than 20 percent from 2008 to 2009. In Europe and Japan new patent filings dropped 7.9 and 10.8 percent, respectively, in 2009.

    "China is moving up the value chain and rapidly increasing exports based on domestic innovation, so inevitably it is filing an ever-growing number of patent applications," WIPO's Chief told a news conference as the agency announced its latest findings.

    Meanwhile, Chinese powerhouse Huawei takes great pride in its investment in research and development. The company has about 100,000 employees, 46 percent of which are engaged in R&D. In the U.S. market, Huawei invests almost 20 percent of its revenue in R&D every year. Globally it invests 10 percent of its revenues annually in R&D and its 20 innovation centers.  This week the company opened up its headquarters in Shenzhen to reporters to tour its campus, see technology demonstrations, visit its testing lab and view its network operations center.

    Read more: An R&D haven: touring Huawei's Shenzhen headquarters – FierceWireless

  4. Thanks for the superb article with even better comments. 
    One point you didn't mention is that telecom start-ups have to compete with very large equipment companies, e.g. Ericsson, Alcatel-Lucent, NSN, (Huawei and ZTE outside the U.S.); not to mention smaller players like Ciena, ADC Telecom, ADTRAN, etc that are well established.  Wouldn't the start-ups be better off making deals with the telecom equipment makers to jointly engage with the carriers?  That way they'd have more credibly as they'd be pre-approved by the more well known telecom equipment vendor.  What do others think about this scenario?

  5. I have the same comment as above.  It would appear easier for a start up to make a joint sales call with a credible equipment company that has scale, rather then approach a telco on its own.  Don't think carriers are receptive to unknown quantities, especially with their five 9's mindset.

  6. RE the question directly above:
    That's a common scenario. Even when startups succeed in winning over a telco, the telco doesn't prefer to rely on a tiny vendor for an important service. They often say, "We want your technology, but work with our key vendor, xxx." (AlcaLu, Ericsson, Cisco…) The key vendor often takes a good cut of the profits. That's the downside, the upside is that key vendor can help the startup get much wider distribution to telcos around the world. If the key vendor takes an active role in selling the product, they are the best channel the startup could want. If they don't, they are a waste of resources, but still take a cut!
    Some startups, in consideration of the distribution advantage, go first to these key vendors, which is counter-intuitive since they are usually competitors. I think this is not the best approach. Better to get pulled in by the carrier than go to your competing giant and ask it to work with you.
    Last note: the first carrier is always the hardest. If you're good, after that, you'll have a real-world proven case study. The resistance from other carriers will be 25% of what it was before.
    Derek Kerton

  7. Thanks Derek!  I assume that besides credibility, a start up teaming with an established telecom equipment vendor gets a built in sales and distribution channel that can be used to sell gear or software to many carriers.

    Appreciate the work you're doing to help start ups connect with telcos


    Best,  alan Weissberger



  8. Innovation at AT&T from employees–   Rachel King of Business Week writes, "

    AT&T, the largest U.S. telephone company, uses software sold by Spigit Inc. to let employees generate ideas and bet on which ones will succeed. AT&T now has about 40,000 employees that have signed up for its internal network called The Innovation Pipeline. AT&T was among 164 companies that attended an Aug. 19 customer conference sponsored by Spigit in Half Moon Bay, Calif. "We wanted to democratize how we innovate at AT&T and take it out of the labs," AT&T innovation leader Patrick Asher said at the conference.

    The company spends several million dollars a year on collective intelligence, Asher said. It has sought feedback in such areas as customer service and how to deploy Long-Term Evolution, a next-generation wireless technology, more rapidly. Each quarter, AT&T senior executives fund a handful of what they consider the best ideas.  

    To keep employees coming back, AT&T senior executives offer financial incentives, including a drawing to win $500, Asher said at the conference. The company also doles out virtual currency that can be used to bet on which ideas are most likely to succeed. Participation in The Innovation Pipeline surged to 17,862 in October 2009 from 4,082 in July of that year.

    Another hurdle lies in keeping staffers from betting on the success of ideas—say, giving everyone a raise—that, while appealing to the rank and file, are unlikely to win management backing. At AT&T, employees lose virtual currency when they bet on ideas that don't prevail.

    Martin also recommends being up-front and responding to every idea, including telling employees which ideas simply won't work. "They'd sooner hear that than nothing," he says."

    My take is that most telecom innovation needs to come from within the company, rather than from start-ups.  This is how it used to be, but these days there is almost no research done at telcos.  So well funded start-ups do have an opportunity, particularly in software to improve efficiencies or save costs

  9. Is Telecom Innovation Dying?
    Ovum principal analyst Matt Walker released a provocative report entitled, “Is telecom innovation at risk?” In it he argued that the lack of venture funding for network-equipment startups is endangering new advances in telecom infrastructure, because most game-changing innovation springs from the small startup level, not from the major, established vendors.
    “Although telecoms vendors continue to spend in the range of 13–14 percent of their revenues (on average) on R&D, VC funding of telecoms vendor start-ups has fallen steadily in the last few years,” Walker stated. Despite the fact that telecom-related patent filings continue to rise, “We worry that current trends in venture capital and vendor R&D threaten innovation.”
    Walker was writing specifically about “the telecom vendors that design, build and hopefully improve the guts of the telecom networks,” he told VON/xchange in an e-mail, because “they are still the central players in this story.” Nevertheless, his findings raise a broader question: Where will the next generation of innovation in telecom come from?
    That question was underlined by the lackluster performance of the IPO earlier this month by BroadSoft, which is one of the most innovative players in the next-generation, IP communications vendor space. If Wall Street doesn’t like companies like BroadSoft, and if, as Liz Kerton, president of the Telecom Council of Silicon Valley, has pointed out, Silicon Valley VCs are loath to invest in any startup with the word “carrier” in its business plan, who’s going to fuel the next wave of communications innovation?

    The most obvious answer is “third-party developers.” The success of the iPhone App Store – and the many would-be developer marketplaces that have tried to follow in that success – has demonstrated that making cutting-edge platforms open to outside developers will fuel a level of innovation that vendors and operators cannot duplicate on their own.

  10. Is telecom innovation at risk?
    Matt Walkers/Ovum  |   August 11, 2010
    Telecom Asia

    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. But these green shoots don’t change the fact that the traditional pillars of the industry are going through tough times.

    And Chinese vendors have a strong incentive to exploit others’ weaknesses. They are eager to earn their stripes as innovators and may be able to do so faster while western VCs and vendors are distracted.
    They may consider creating venture funds of their own, similar to Intel, Microsoft, Motorola and Google. They can also open R&D facilities in locations hit by the cutbacks (and bankruptcies) of their western competitors. Huawei announced in April it would build an R&D center in Canada, presumably to tap some of the former Nortel engineers now scrambling for work.

    At the same time, emerging markets like China are becoming the key growth drivers of the telecom sector. Such markets are often focused on doing things more cheaply. They are interested in new distribution models, cost sharing of areas like the mobile RAN, leveraging open standards when possible, and open versus closed or walled gardens.
    Service providers in developing markets are interested in heft, scale, learning across markets, benefiting from users’ creativity, and collaboration with vendors and systems integrators. They lean toward products that are small, inexpensive, robust, tested, proven and environmentally hardened.

  11. That internal social networking took, Spigit, is an interesting way for a big company to crowdsource and make their research investment more efficient.  Creating an effective two-way communications path between workers and management has always been a sticking point in creating efficiencies.  

    I also echo Derek's comments regarding the use of large existing vendors to sell to the bigger (or even smaller) telecommunication companies. Even if a start-up has a perfect fit with the big company, their interests and the start-ups may not be totally aligned.  The start-up will still need to have some sort of sales strategy, as they won't be able to rely on the bigger company. 

  12. Thanks for a great article and cogent comments, but I don't believe that established telco's are willing to take risks associated with innovation.  Despite "missing many boats," they are afraid to fail and have too many checks and balances for quick decision making

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