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VC funding cuts stifle telecom innovation

Dwindling VC funding and pressure on vendors likely to hit innovation, according to report

Falling VC investment will stifle innovation in the telecom sector, according to Ovum.
Falling VC investment will stifle innovation in the telecom sector, according to Ovum.

Declining venture capital investment in the telecom sector threatens to stifle innovation in key areas of the industry, according to a report from research firm Ovum.

VC support for telecoms vendor start ups has fallen steadily in the past few years to just $1.18 billion between the second quarters of 2009 and 2010, down from $1.82 billion for the four quarters ended 3Q08.

While Ovum admitted that telecom patent filings continued to rise last year, it believes that a decline in VC funding could lead to slower introduction of new technologies and an aversion to introduce proprietary technology, even when it is shown to be superior to existing technology.

Furthermore, problems stemming from the decline in VC  funding are likely to be exacerbated by trends in the global vendor market, with fears that aggressive pricing from Chinese vendors Huawei and ZTE could lead their Western counterparts, such as Ericsson and Nokia Siemens Networks, to cut back on research and development spending.

"Because of recent market consolidation and cost pressures brought on by hard-bargaining carriers and aggressive Chinese vendors, many big Western vendors are cutting back staff and closing facilities," said Matt Walker, a principal analyst at Ovum.

"This may lead to lower R&D/revenues ratios in the future. More important is the trend we have already observed in venture capital, which typically funds the 'game-changing' ideas that big vendors often ignore."

Annual investment as a share of revenues for a group of the 10 large telecoms vendors was between 13% and 14%, on average, during the last three years, according Ovum's research.  

But the Chinese vendors, Huawei and ZTE, were below average at around 9% to 10%, while Juniper, Nokia Siemens Networks, and Ericsson were well above average.

Furthermore, as a percentage of the ten big vendors' internal R&D expense, vendor VC funding has fallen from 5.6% in 3Q08 to just over 4% in 1Q10.

"We believe this poses a substantial risk to carriers in the level of innovation they will be able to internalise by working with, acquiring, or even copying successful start-ups," Walker added.

Walker added that their Chinese vendors could also seek to exploit any R&D cuts made by Western vendors. "They [Chinese vendors] are eager to earn their stripes as innovators and may be able to do so faster while western VCs and vendors are distracted," he said.

"They may consider creating venture funds of their own, along the lines of what many large tech players have done, such as Intel, Microsoft, Motorola, and Google.

"Short of this, they can also open new R&D facilities in locations hit by the cutbacks and bankruptcies of their western competitors."

There were already signs of this happening, with Huawei having announced in April 2010 that it would build a new R&D center in Kanata, near Ottawa, Canada, Walker said.  

The Chinese vendor would have no shortage of potential recruits in the area, with skilled engineers who formerly worked for Nortel "now scrambling for work", according to Walker.