Home - Key Questions - Fixed Networks: Section 1 - Question 4

Section 1: Questions regarding the incumbent telecoms companies and the new facilities-based operators

Question 4: Will the new telecoms operators need to develop in-house R&D capabilities to survive in the longer term?

One of the key structural features of the new telecoms industry is the presence of specialist technology suppliers who are able to provide new operators with the latest technologies thus easing their entry into the industry. This has allowed the new operators to avoid undertaking their own R&D. Even the most successful examples of these companies – such as MCI WorldCom, Qwest, Level 3, Global Crossing, COLT and Energis – report virtually no R&D in their annual reports. But this raises a puzzle.

If these operators do not see the necessity of doing in-house R&D, why is it that the incumbents spend substantial sums on their own R&D?

The 'big five' incumbents – AT&T, BT, Deutsche Telekom, France Telecom, and NTT – on average spend around 2.5 per cent of their revenue on R&D, with NTT and France Telecom spending almost 4 per cent. All operators, whether incumbent or new, depend heavily on the specialist technology suppliers such as Nortel, Lucent, Ericsson and Cisco. On average the top five such suppliers spend around 11 per cent of their revenue on R&D.

So why have the incumbents and new operators made such different strategic choices in the area of R&D? Will convergence eventually take place, and if so on which option, or will a divergence of R&D behaviour remain possible under conditions of market selection?

Two contradictory stories can be told in answer to these questions. The first story holds that the market, supplied by specialist technology suppliers, is capable of providing whatever technologies are required by new companies to operate competitively. There is therefore no need for in-house R&D. However, according to the second story, internal R&D is necessary particularly in areas where a new operator wants to get a competitive edge. The problem with specialist suppliers, though, is that they are willing to sell their technologies to anyone. Additional reasons for doing in-house R&D include having advanced warning of new technologies and understanding their likely implications, as well as providing early training for staff in the new technological competencies.

Whichever story turns out to be correct, one of the more interesting, if puzzling, features of the new telecoms industry is the co-existence of competitors who are pursuing such different R&D strategies. Time will tell which of the groups is right or whether it is possible that both of them may be right.

If you wish to express your views on questions such as these go to the Workshop (Area 1). To compare your visions with those of others go to Vision Check.