(Bloomberg ) "No more dumb pipes" has been European phone companies' mantra for years as they pursued digital projects such as payment systems and Internet application stores to rival Google Inc. (GOOG) Many of these ventures are now taking a backseat to more basic tasks.
After years of declining revenue from phone calls, Telefonica SA (TEF), Vodafone Group Plc (VOD) and Deutsche Telekom AG (DTE) have been hunting for new data sources ranging from cars to refrigerators to fill their networks, while trying to pry loose content providers' grip running high-margin programs over their infrastructure.
At the annual Mobile World Congress in Barcelona this week, carriers are still trying to show they're as much into software development as managing telephone networks. Yet as the networks themselves come under assault from cable providers and as cash for side projects gets harder to come by during the debt crisis, the real battle is to keep customers using their infrastructure in the first place.
"The various innovations haven't yet really made much of a difference to the top line," said Heinrich Ey, who helps manage more than 250 billion euros ($327 billion) at Allianz Global Investors in Frankfurt. "The need to come up with funds for network upgrades and the headwind on the revenue and cash flow doesn't leave much room to excel with new products and solutions."
Europe's telecommunications stocks were the worst performers last year, with the Stoxx 600 Telecommunications Index down 11 percent. The index is down 2.2 percent this year.
Telefonica fell 3 percent to 9.60 euros at 1:09 p.m. in Madrid. Vodafone slipped 0.9 percent to 162.70 pence in London, and Deutsche Telekom fell 1.3 percent to 8.17 euros on the Frankfurt exchange.
Deutsche Telekom cut its dividend last year to help finance network upgrades and has put the digital classifieds unit Scout24 Holding GmbH, home to the Bonn-based company's best- known digital brand, up for sale or an initial public offering. Chief Executive Officer Rene Obermann, one of the most vociferous proponents of non-infrastructure services, said in December he'll leave at the end of 2013 to go back into the "engine room" at a smaller company.
"If you're willing to devote the resources and work for years, eventually you may end up being competitive" in building own over-the-top solutions, Obermann told a conference in Barcelona today, referring to content and services offered on top of phone networks. "It's a long process."
Thomas Kiessling, Obermann's chief product and innovation officer, said yesterday Deutsche Telekom is increasingly focusing on partnerships with developers of content which makes the bandwidth it delivers more valuable.
In an example of partnership, Telefonica's digital division and Sprint Nextel Corp.'s Pinsight Media+ agreed last week to collaborate to help brands reach 370 million mobile customers in U.S., Europe, Latin America. The deal entails personalized direct messaging, display ads, location-based offers and in-app advertising.
Spain's biggest telephone company's digital division will generate annual sales of about 5 billion euros by 2015, Alierta said in July in London. "Investors are slowly becoming more aware of the importance of the digital assets," Alierta said in an interview in Barcelona.
Still, Telefonica has't managed to convince investors and analysts of any potential impact the digital strategy would have on earnings, said Andres Bolumburu, a Madrid-based analyst at Banco de Sabadell, calling the company's target "a bit of a long shot."
It's rare that phone operators manage to develop programs that really challenge "over-the-top" services, said Gyanee Dewnarain, an analyst at Gartner Inc. in London. Still, they may be successful if they differentiate themselves from their counterparts rather than copy them, she said.
SK Telecom Co. (017670), South Korea's largest wireless operator, set up an application sales platform that's more profitable than Apple Inc. (AAPL)'s App Store or Google Play by tailoring it to the local market and providing developers a faster approval process and more protection from copycats, Dewnarain said.
"You should not try to diversify by keeping it within the core business; that's never going to work," she said. "You have some people from the dinosaur era who just don't get software."
Digital strategies also pose risks when it comes to managing innovation while seeking profit from the assets. After disagreements on the Telefonica digital board and fears of strangling the entrepreneurial spirit of some startups, some directors and managers, including the co-founder and CEO of its media unit Terra Fernando Madeira, decided to leave the company last summer, according to a person familiar with the matter.
As competing with software providers gets tougher, phone companies are working with over-the-top firms that give them a larger reach and the carriers a share of the revenue. TeliaSonera AB (TLSN) and Royal KPN NV (KPN) are among operators that have signed deals with music-streaming service Spotify Ltd., waiving restrictions on how much data users may transfer each month.
Such partnerships, and innovations especially in so-called near-field communications or machine-to-machine products, have shown progress over the last decade. This week's convention is a chance to show them to the world, said Rafael Achaerandio, a research and consulting director at IDC in Madrid.
MWC "is a great store window to show off all digital strategies on a red carpet," Achaerandio said. "However, many of those don't live up to the expectations and have no impact on earnings. That's still the biggest challenge."
Sales from new technologies such as NFC or M2M will account for just 5 percent to 10 percent of telecommunications companies' total revenue, according to Andreas Mark, who helps manage about 191 billion euros at Union Investment in Frankfurt. That means they need to focus on their core business of supplying the best network, he said.
"It appears like they're returning to the basics --to position themselves as a quality provider of infrastructure," said Jochen Reichert, an analyst at Warburg Research in Hamburg.