The Innovation Game: Should The Industry Beware of Telecommunications Acquisitions

August 26th, 2016 by · Leave a Comment

This Industry Viewpoint was contributed by Venky Balasubramanian co-founder of Plivo

While leaders in the traditional telecommunications industry were once highly innovative, they are putting on the brakes.  After years of developing hardware, telecommunications companies are finding they’re behind the times. The hardware doesn’t communicate well with new software technologies, and companies are needing to move into the API space to make their hardware more easily accessible. But instead of making this move themselves, they’re buying up smaller API companies to do it for them. So why aren’t telecommunications leaders innovating themselves? And what’s going to happen to the industry?

Telecommunications acquisitions

Traditionally, the telecommunications industry has innovated by investing in new hardware solutions. This included developing landline phones, answering machines, routers and mobile phones, and also more complex hardware: things like analogue switches, transmission lines and communications satellites. Cisco’s list of hardware systems details data center products, telephony products, and even a system called IRIS, which stands for Cisco Internet Routing in Space.

Getting hardware to talk to new software systems is tough. They’re coded in different languages. So, to not get left behind, the companies started to move toward the cloud, and toward connecting their telecommunications hardware to the web through API platforms.

Some telecommunications giants have innovated themselves in order to bridge the gap between hardware and web technologies - back in 2012, AT&T detailed its API platform to provide APIs, tools, and support for developers. And this year, Avaya launched Zang, a cloud-based platform and communications applications as a service that offers tools, applications and APIs, enabling developers to build apps for enterprises.

Although some are innovating, most aren’t. Instead, the majority of telecommunications companies are acquiring smaller companies in the API space to do it for them. Notable acquisitions include Vonage and Nexmo, in which Vonage bought Nexmo for $230 million USD in May. As Nexmo is considered the second largest communications platform as a service (CPaaS) company in regards to revenue and is known for its APIs for messaging, voice, and chat, Vonage hopes to become a bigger contender in the cloud communications market through the acquisition.

Cisco also acquired Tropo, which provides cloud-based API platform, in May 2015 to advance into the CPaaS market. Even more, Cisco has partnered with Apple to integrate Cisco API technologies into the upcoming iOS 10 release.

Other notable moves in the telecommunication industry include Rebtel’s $12 USD million spin out to cloud-based API platform Sinch, and cloud communications platform Twilio’s S-1 filing in May this year.

The dangers of acquisitions

When strong disrupters come into the space and change something for the better, the larger companies feel threatened and start to acquire them. They want to gain back the market share the smaller disrupter has taken. Really, the larger companies are minimizing their own risks - they buy up the small, innovative companies so not to be surpassed by them or others who may want them.

In Cisco and Tropo’s case, the acquisition was made for various reasons. Since Tropo has relationships with thousands of developers, adding these relationships with Cisco’s DevNet developer program will create an unmatchable network other CPaaS providers wouldn’t be able to reach. Cisco will also be able to use Tropo to rapidly bring new services to its existing cloud products, such as Cisco Spark and Cisco WebEx, and integrate its advanced security knowledge into the Tropo platform, making it one of the safest CPaaS for users.

But when acquisitions happen in any industry, there’s a lot of uncertainty about how it will really turn out. The larger company may acquire a smaller one and run it in parallel to their own, or smaller companies could lose their independent decision making powers. Worse for the acquired companies, larger companies may be able to do whatever they like with the technology. They may internalize it, or just completely throw it away to devour competition.

It’s a well known fact that Apple’s strategy includes ‘acqui-hires’, in which the giant buys companies solely to access talent - then, Apple puts their newfound talent to work on Apple’s own initiatives. Recently in June, Snapchat quietly acquired Seene, a startup that lets users make their own 3D selfies. Perhaps it was for Co-founder Sam Hare, who has a PhD in computer vision. Or, as the same TechCrunch article linked above suggests, to internalize the technology and add a new 3D selfie lense to Snapchat.

So sometimes, danger lies when too many acquisitions in an industry happen. Innovation slows down. Either the technology gets completely thrown out by larger companies, or if the acquired companies are still able to operate independently, larger bureaucracies cause new ideas to develop at a slower pace and innovation becomes stagnant.

The positive side of acquisitions

As the software marketplace develops and as the Internet of Things (IoT) becomes more prominent in industry and consumer spaces, telecommunications companies are going to need their devices to communicate with a whole range of different platforms, tools, and hardwares.

When startups pop up to provide solutions and begin to threaten larger companies, it legitimizes their position in the marketplace. These innovations, if they truly are valuable, will have an effect on the industry if the companies have been acquired or not. The recent acquisitions of API platform companies (and Twilio’s IPO filing, too) really put the industry in a good position, proving that cloud-based APIs are desired and needed in telecommunications. And even if larger telecommunications companies aren’t innovating, the space will move forward regardless thanks to the efforts of the startups, entrepreneurs, and disruptors in the space.

Venky Balasubramanian is the co-founder of Plivo, a leading cloud communications platform supporting billions of text messages a year from next gen mobile apps.

Categories: Industry Viewpoint · Mergers and Acquisitions

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