Telco R&D Centers in Israel Scorecard

Guest post by Levi Shapiro*

Despite being an expensive country to operate R&D, Israel has attracted R&D Centers by most major telecom groups, including AT&T, Deutsche Telekom, Orange, SingTel, Telefonica, and Sprint  / Softbank.  Next month, one of the leading European operators is expected to announce a dedicated, Israel-focused venture capital fund. While there is no one-size-fits-all approach to innovation clusters, some telcos are getting a better ROI from Israel than others.

AT&T: The largest wireless carrier in the US (107 million subscribers) acquired Israeli networking start-up Interwise in 2007. This group was eventually upgraded from a division in the Networking business unit to AT&T’s only R&D Center outside of the US. Headcount has now grown by 5 times to over 500 employees. Dotan Naveh, Head of R&D at the AT&T Center of Excellence, talks about the key success factor:

“People…In the US, the best talents work for Google, Apple or start-ups. Because we offer large-scale projects, AT&T Israel can hire and retain the best technical talent. Our turnover rate is below 5%”

Separately (and in collaboration with local vendor Amdocs, AT&T operates the Foundry, one of three global Innovation Centers. The purpose is to accelerate the approval process and time-to-market for deploying startup technologies. Some success stories include Sunday Sky, Traffilog and Intucell (acquired by Cisco for $450 million). Streamlined processes helped reduce the time from review to deployment from 18 to 5 months. Many point to a high-level champion within AT&T, in this case John Donovan, Senior EVP Technology and Network Operations, as a key success factor. “We are getting a financial return that is roughly 10 times our investment”, says Donovan. Grade: A  

SingTel: Serving 468 million subscribers across Asia Pacific, SingTel wants to be at the center of your Digital Life. Earlier this year, SingTel launched its Israeli Innovation Center, modeled after AT&T Foundry. The Singaporean carrier is a prolific venture investor, with multiple investments by the Israel office of SingTel’s Innov8 Fund. Like AT&T, success in Israel can be correlated to a senior internal champion- Allen Lew, CEO of SingTel Digital.

“We have been extremely satisfied with the wealth of talent in Israel. We experienced this through our recently acquired global mobile advertising company Amobee (http://www.amobee.com), which has R&D in Israel, as well as our venture capital investments in Israeli companies in the mobile Internet business. This new development center is to scout for new growth engines for SingTel.”

Grade: B+ 

Deutsche Telekom: Deutsche Telekom maintains an R&D Lab and three full time business development staff to partner with local startups and vendors. This is reinforced with at least two annual visits to Israel by Rene Obermann (http://www.telekom.com/company/board-of-management/57126), CEO of Deutsche Telekom, typically accompanied by an entourage of senior DT executives. In the last two years, the company has made three venture investments limited venture investments, VibeSec (www.vibesec.com), Intuitive (www.intuitiveui.com) and MyThings (www.mythings.com). Most importantly, it operates an R&D lab at Ben Gurion University (http://in.bgu.ac.il/en/Pages/default.aspx) with 8 full-time researchers and roughly 60 participating graduate students. One of the key research priorities for the lab is cyber security. Ben Gurion University has a liberal approach toward intellectual property (IP), allowing greater Deutsche Telekom greater flexibility for commercializing research. Last year, DT inked multiple business development deals with Gryphonet (www.gryphonet.com), Checkmarx (www.checkmarx.com), Exent (www.exent.com), Celltick (www.celltick.com), Office Core (www.officecore.com), Perfecto Mobile (www.perfectomobile.com), Servision (www.servision.net), Ono Apps (www.onoapps.com), Actionitem (http://www.action-item.co.il) and Screemo (www.screemo.com). Screemo also received an investment from hub:raum (https://www.hubraum.com), DT’s digital venture arm. Grade: B (after years of inaction, DT is only beginning to be a presence with the local startup community)

Orange: Orange operates wireless carriers in 32 countries across Europe, the Middle East and Africa, with more than 231 million customers. Israel is not one of those countries. Instead, Orange leverages the Israeli talent pool via acquisitions, investments and scouting. For example, Orange acquired Orca Interactive in 2008, making the local IPTV and OTT middleware vendor its global R&D hub for this sector. Like Deutsche Telekom, Orange operates an R&D lab at Ben Gurion University, where it is able to retain ownership of the IP. The company maintains a local scouting presence and sponsors events to encourage awareness with the developer community. According to Nathalie Boulanger, Head of Open Innovation at Orange, “this is not about cost savings. We want to be much quicker with time to market. We want to transform much more”. Grade: B- (limited business development collaborations and no clear strategy for investment and partnership with local startups)

Telefonica: With brands such as Movistar, O2 and Vivo, Telefonica has over 300 million customers across 25 countries in Europe and Latin America. In 2010, the company acquired Israeli VoIP provider JaJah for $207 million. These 110 staff are now the global R&D Center for Telefonica’s IP telephony business. The lab is tasked with technology evaluation, prototyping, software development and disseminating results across external forums. In practical terms, the ambitious plans of Telefonica Digital in Israel have been hampered by the downturn in Spain, the glaring lack of a senior champion within Telefonica and four (4) corporate re-orgs in a three year period. The results have been mixed. While there has been one venture investment in Everything.me (everything.me) and an announcement last July for collaboration with the Israeli Office of the Chief Scientist, there are few tangible examples of successful developer outreach or collaboration. Grade: C

Sprint / Softbank: Sprint, the #3 US wireless carrier, is staking its future on LTE (4th generation, high speed mobile broadband) and unlimited data plans. In collaboration with the Israel Mobile & Media Association (IMA) http://imaworld.org, Sprint is supporting an LTE acceleration lab in Tel Aviv and currently has more than 50 products in various stages of evaluation. Sprint CTO Stephen Bye visited Tel Aviv for the launch of the partnership and noted:

“this Sprint-sponsored LTE acceleration lab will allow startups and developers in Israel valuable access to dramatically speed up their time to market. We are committed to an open developer environment, creating opportunities for innovative services, products and technologies to be developed and launched on the Sprint LTE network.”

Since then, Sprint was acquired by Softbank, Japan’s fastest growing wireless operator and the largest internet group in Japan. Softbank Capital (http://www.softbank.com/newweb), the venture investment arm of the Softbank Group, has made investments in Israeli companies from the New York office. This structure may benefit the venture team but it severely inhibits Softbank’s ability to develop extensive local partnerships. Likewise, Vodafone Ventures (http://www.vodafone.com/content/xone/index/ventures.html) (five venture investments in Israel) and BT (http://home.bt.com) (local scout) manage their activities remotely.

Wireless operators in mature markets like the US, EU, Japan and Korea face disruption from deregulation (new entrants competing on price) and near-free OTT services (Skype, Facebook, WhatsApp, etc).  To maintain high margins, and therefore survive, carriers will need to differentiate on technological innovation. Companies like Vodafone (market cap: $178 billion USD), Verizon (market cap: $145 billion USD), Softbank  (market cap: $145 billion USD), NTT DoCoMo (market cap: $66 billion USD), Rogers (market cap: $24 billion USD), SK Telecom (market cap: $16 billion USD), Bougyes (market cap: $15 billion USD) and others can benefit from Israeli government programs that offset up to 85% of capital expenditures to open an R&D Center in Israel. Like DT, Orange and Telefonica, local R&D should be 100% owned by the multi-national and is most scalable when a representative from headquarters operates the R&D Center. In any case, ignoring the world #2 startup ecosystem (http://tctechcrunch2011.files.wordpress.com/2012/11/startup-ecosystem-ranking-2012.jpg) makes technological differentiation much more difficult.

Speaking for Orange but equally relevant for other carriers, Nathalie Boulanger of Orange makes the case for a robust presence in Israel: “We invest 1.9% of revenue in innovation but we are quite aware that open innovation will bring us to many more developers”. More and more telcos are saying Shalom to Israel.

Levi Shapiro is a Partner in the JIMMI Fund (www.jimmifund.com), working with global tech companies to invest in Israeli start-ups. Concurrently, Mr. Shapiro provides strategic advisory to global technology, media and telecom companies as a Senior Partner at TMT Strategic Advisors. Mr. Shapiro is also an Adjunct Professor in the Media Innovation Lab (http://milab.idc.ac.il) at IDC Herzliya, teaching Digital Media Entrepreneurship, Mobile Marketing and other entrepreneurial courses.

Levi Shapiro
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Levi Shapiro

Managing Partner at JIMMI Fund
Levi Shapiro is the Managing Partner at the JIMMI Fund, a corporate venture investment fund, and concurrently Partner at TMT Strategic Advisors. He is also the organizer of Marketing & Ad:Tech Israel (www.adtechsummit.com), Israel's largest conference for digital advertising.

During a 20 year career inmedia and technology, including 7 years in Asia, Levi launched new business units(IBM), new products (Toyota) and new startups (TwoMinute Television, Snack Mobile, etc).

He teaches Entrepreneurship and Mobile Marketing as an Adjunct Professor at IDC Herzliya, serves as Mentor in Residence for The Hive accelerator and writes a bi-weekly column about digital media and technology in the Jerusalem Post called "Unleavened Media ".

Mr. Shapiro is a graduate of Tulane (BA), Cornell (Asian Studies) and MIT (MBA)
Levi Shapiro
Follow Levi

Levi Shapiro

Levi Shapiro is the Managing Partner at the JIMMI Fund, a corporate venture investment fund, and concurrently Partner at TMT Strategic Advisors. He is also the organizer of Marketing & Ad:Tech Israel (www.adtechsummit.com), Israel’s largest conference for digital advertising.

During a 20 year career in media and technology, including 7 years in Asia, Levi launched new business units(IBM), new products (Toyota) and new startups (TwoMinute Television, Snack Mobile, etc).

He teaches Entrepreneurship and Mobile Marketing as an Adjunct Professor at IDC Herzliya, serves as Mentor in Residence for The Hive accelerator and writes a bi-weekly column about digital media and technology in the Jerusalem Post called “Unleavened Media “.

Mr. Shapiro is a graduate of Tulane (BA), Cornell (Asian Studies) and MIT (MBA)

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