Financial Watch : The Billing R&D Dilemma; Capital Spending May Be on the Rebound

The 2003 Billing World Conference & Exhibition, held this June in Miami Beach, Fla., gave the industry an opportunity to shine. But it also put some perspective on just how the space has been faring lately.

Although a slew of product announcements, contracts and partnerships came out of the show—signaling evidence of a healthier market—there are indications that the billing space still faces some challenges.

The Billing R&D Catch-22

According to an industry report published after Billing World 2003 by Janney Montgomery Scott, a dichotomy has developed with vendor product development and the services being offered by providers. According to the report, the result has been vendors developing products that are currently not needed or wanted.

“The disconnect can be seen as an inevitable catch-22,” says Vincent F. Damasco, vice president of equity research at Janney Montgomery Scott. “The vendors are trying to remain cutting edge, but carriers are reluctant to spend money on the deployment of unproven technologies. While most vendors perform market research to incorporate with their systems development, we argue that planning and design should be conducted in conjunction, if not alongside, a carrier’s services road map.”

He adds that by doing so, vendors could deliver the systems necessary to support a carrier’s service rollout while obtaining speed-to-market.

Damasco says that although vendors will argue that their products are needed by carriers, some offerings are simply ahead of the curve and have yet to gain meaningful adoption in the market. Some examples he cites include content settlement and EBPP. Content settlement may be picking up steam—especially outside the U.S.—but meaningful investment in such solutions is years away, according to Damasco.

Such underutilized product offerings are jeopardizing the millions of dollars vendors spend on research and development, Damasco says. The top three billing vendors—Amdocs, Convergys and CSG Systems—have collectively spent more than $800 million in R&D over the past three years. Damasco says that this amount of spending has been necessary from both a competitive differentiation and systems enhancement perspective, even if the end result has been products that lacked service provider support.

To turn this around, Damasco says vendors and service providers need to form closer working relationships in the planning and design of products and services and even co-develop product offerings. “We believe development alliances will enable vendors to diversify the risk of development while bringing carrier-proven technology to market,” he says.

In the past, service providers have been reluctant to play the role of guinea pig and commit the necessary resources to internally test products. Damasco says he expects this to change as providers look to increase their competitive advantage and be first to market with new products.

A co-development agreement strategy that involves service providers sharing in the future revenue of products and services developed through royalty-based agreements may be the impetus providers need to get more involved in product development, Damasco says. “Solutions could then be resold by the vendor to other customers,” he says. “As part of the agreement, the vendor would remit a percentage of the sale to its carrier partner. Arguably, given the likely decline in license revenue resulting from such agreements, the larger, more established vendors are better capitalized and positioned to operate under such programs.”

He adds that co-development should shorten sales cycles for new customers that require extensive proof of concept before purchase.

Carrier Capital Spending

According to Infonetics Research, capital spending among U.S. RBOCs only will reach about $23.3 billion in 2003, which is a 9 percent drop from 2002. And in Europe, carrier spending overall is expected to be $41.1 billion, which is down 16 percent from 2002.

Damasco says that overall, service providers will need to maintain or gradually increase their capital spending in the near future in order to remain innovative and competitive.

“Given that billing represents nearly 70 percent of total OSS spending—with service assurance and fulfillment representing the balance—sales growth for the larger billing vendors may lag an actual increase in CapEx spending,” he says. “Although the billing vendors will undoubtedly benefit from an increase in spending, such benefits may take longer to be realized compared to the smaller, nimbler assurance and fulfillment vendors.”

Damasco adds that a high amount of debt outstanding in the telecom and cable industries means that capital spending will likely remain focused on improving operating efficiencies in order to increase profitability.



Note: The information in this article should not be used as the primary basis for investment decisions. The information is based on sources BillingWorld & OSS Today believes to be reliable. The statements expressed are not necessarily those of Billing World & OSS Today.