Service Provider R&D Spending is Low, for Reasons

Many will note that connectivity provider research and development spending is low, compared to spending by major app providers, for example. There are lots of reasons for that state of affairs.

In the U.S. market, for example, technology development in the monopoly era was conducted not by the operating units but by Western Electric, which after the Bell System breakup was separated out as part of AT&T, then privatized as Lucent, before sale to Alcatel and then to Nokia.

In the competitive era, most of the research and development has been done by industry suppliers, in part because that always was the way most such activity happened. That might be seen in R&D budgets for industry suppliers, as opposed to service providers.

Telco Research and Development Spending, $ Million
		2013	2014	2015	2016	2017
AT&T	R&D	1,488	1,730	1,693	1,649	1,503
	As % of sales	1.2%	1.3%	1.2%	1.0%	0.9%
BT	R&D	226	116	97	81	79
	As % of sales	0.9%	0.5%	0.4%	0.3%	0.2%
Deutsche Telekom	R&D	114	112	127	99	68
Orange	R&D	918	861	854	830	824
	As % of sales	1.9%	1.9%	1.8%	1.7%	1.7%
Telecom Italia	R&D	48	65	61	52	51
	As % of sales	0.2%	0.3%	0.3%	0.2%	0.2%
Telefónica	R&D	1,231	1,307	1,241	1,066	1,014
	As % of sales	1.8%	2.2%	1.9%	1.7%	1.7%
Ericsson	R&D	3,701	4,172	4,000	3,632	4,356
	As % of sales	14.1%	15.9%	14.1%	14.2%	18.8%
Huawei	R&D	4,632	6,168	9,001	11,536	13,544
	As % of sales	12.8%	14.2%	15.1%	14.6%	14.9%
Nokia	R&D	3,082	2,292	2,502	5,880	5,784
	As % of sales	20.6%	16.6%	17.0%	21.1%	21.2%
source: Light Reading

More recently, R&D investments have become less directly correlated with spending, however. One is the trend towards use of open source, which tends to mean development is less correlated with actual spending. Network functions virtualization also means that less capital has to be invested in hardware to achieve the benefits of software advances.

But some might note that connectivity providers simply have less profit from operations to invest in research or development. In a perfect world, with much-higher profits, service providers might have the ability to invest more. As a practical matter, they cannot.

The Big Difference Between Consumer and Business Adoption of New Products

SIP trunking is among communications markets that never has grown the way I would have predicted, namely with a rather-clear inflection point, as has been the case with consumer innovations such as the internet itself, PCs, mobility and smartphones.

In retrospect, I suspect that is a difference in adoption rates of connectivity products in business segments, compared to consumer markets. Simply, business adoption of products more often is linear; consumer product adoption non-linear.

With the caveat that most products and services do not become mass market successes, consumer adoption of most popular products is exponential and non-linear, with an S-curve adoption pattern.

source: Forbes  

source: Visual Capitalist

Few business products ever seem to have that sort of exponential growth.

source: Maximize Market Research

source: IDC

source: Grandview Research

source: IDC

source: Thorn Technologies, Statista  

The point is that business products might well not have a clear inflection point, or an S-shaped adoption curve, even if consumer products almost always do have such adoption curves.

5G Does Not Change Traditional "Capacity Versus Coverage" Issues

One way of making sense of claims about 5G performance is to recall that the traditional trade off between coverage and capacity will continue to hold, even as huge new blocks of millimeter wave spectrum are released for use.

Ultimately, all the noise about strategy and assets and advantage aside, our knowledge about existing use of mobile and other devices should provide a clue to network and spectrum choices.

Many note that perhaps 80 percent of data is consumed by mobile users who are stationary, in their homes, offices or other non-moving locations. That, in part, explains the high use of Wi-Fi by smartphone customers.

The obvious implication for 5G networks is that although coverage (with lower capacity) works for outdoor and mobile use, the places where millimeter wave spectrum really adds value are locations where users are stationary (and might otherwise use Wi-Fi).

So we might as well understand, early on, that peak 5G speeds (gigabit) will tend to be found only in urban and other high-density areas where people live and work. Though 5G will supply faster speeds in mobile scenarios, speeds are unlikely to reach those possible in fixed locations, simply because the physics does not support it.

Though it is easy to debate the merits of using spectrum below 6 GHz, or in the higher-frequency millimeter bands (24 GHz, 28 GHz, 39 GHz for example), the traditional trade offs between coverage versus capacity will still have to be made.

The only difference is that the range of frequencies will shift. Where 2 GHz once was seen as “high frequency” with better capacity performance, while 800 Mhz was better for coverage, now any spectrum below 6 GHz is seen as the “coverage” suppliers, while millimeter wave spectrum is seen as the capacity bands.

source: GSM History

Ultimately, we are likely to see all service providers rely on sub-6 GHz for coverage, even if that means sacrificing capacity (speed). To supply the gigabit per second speeds 5G makes possible will require the millimeter bands, but with coverage limitations.

To be sure, millimeter saves also offer greater spectral efficiency than lower-frequency signals. Simply, the higher the frequency, the higher the potential bandwidth.

How Big an Opportunity for New Content Aggregators?

A survey of consumers in the United States, United Kingdom and Brazil suggests they are receptive to any content provider that could supply most of the programming they want, and might be willing to spend more money to get such a service.

The good news is that there might be an opening in the market for an aggregator that could do so. The bad news is that it likely is impossible for any provider to do so. Content rights are so fragmented it is extremely doubtful any single provider could aggregate most of it.

On the other hand, the survey, by Vanson Bourne, and sponsored by Amdocs, also suggests there could be new opportunity for any supplier able to do a better job of bundling available content.

Perhaps the biggest unknown is whether consumers actually are willing to spend significantly more than they do at present to get “all” or “most” of their desired content. Most consumers likely would be unwilling to spend what it would take to aggregate “all” desired programming, under any circumstances.

The practical challenges is to assemble a package that is “good enough,” not “best,” as consumers will pay for “good enough,” and highly unlikely to pay for a service that provided nearly all desired content.

source: Amdocs

Even consumers who buy four or more discrete video services say there still is desired content they cannot watch.

Respondents suggested that, to view all of the content they want to watch on a regular basis, they would need to pay almost 50 percent more (about $30 a month) than they're currently spending, meaning a total of $126.59 per month or over $1,500 per year.

That probably should not be taken to mean they would spend that much; rather that this is what they would have to spend, at the moment, to get all of their preferred content.

The results might suggest to some that consumers are willing to spend significantly more than they presently do on video entertainment, even if cord cutting trends suggest consumers want to pay less than they already do, even if there are content limitations.

Others might suggest there is some additional demand, especially for providers that can package more of the desired content into a single service.

The study--not surprisingly--found that 68 percent of U.S. viewers aren't satisfied with the range of TV and video content they currently have, despite spending an average of $85.71 per month on TV, movie and video subscription services per household.

It also is worth noting that 58 percent of respondents with access to a subscription service say they also do not pay for at least one of those services.  

Some 70 percent of U.S. respondents stated that they would be prepared to pay for a single provider that could package all of their preferred content into a dedicated service bundle. Whether that is possible is the issue.

Some 69 percent of consumers said that they would be happy to switch content providers if such a single package were available.

The typical household spending about $72 a month on video subscriptions, the study suggests.

U.S. Household Spending on Communications is Quite Low

When assessing impact, it helps to focus on the few inputs that tend to drive most of the output. That is true for carbon footprint or household spending. The greatest portion of household spending in most countries comes in three categories: housing, food and transportation.

There are some outliers. Transportation is unusually high in Mexico. Healthcare spending is unusually high in the United States and food spending is above average in Russia.

Still, generally speaking, households can only make significant changes in those three areas, as those three areas might represent 65 percent of total spending.

source: Visual Capitalist

All household communications added together rarely represent more than a couple of percent of total spending. The point is that no matter how much a consumer seeks deals in that area, it does not affect total spending very much.

Entertainment spending--which includes what people spend on their pets--is probably twice to three times as high as communications spending, depending on the size of the household.

source: Bureau of Labor Statistics

The other obvious implication is that communications really does not cost too much. Prices are not “too high” when total communications spending represents such a low percentage of total spending.

In fact, communications spending is a small enough category that the U.S. government does not break it out when reporting household spending.