The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco

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Как операторам справится со стремительно меняющимся рынком и усиливающимся влиянием OTT игроков?

В отчете: составляющие успешной экосистемы; асиметричная конкуренция с OTT; во что обойдется ожидание развития событий; методы планирования работы в условиях неопределенности; API как канал дистрибуции; API как способ построения экосистемы вокруг традиционных операторских сервисов;

/Подготовлено Vision Mobile совместно с Ericsson/

Published in: Business

The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco

  1. 1. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco VisionMobile.com/Strategy © VisionMobile 2012. Some rights reserved. 1
  2. 2. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco Disclaimer About VisionMobile VisionMobile believes the statements contained in this VisionMobile is an ecosystems analyst firm working with top publication to be based upon information that we telecom operators, handset makers and infrastructure consider reliable, but we do not represent that it is companies. We are best known for Developer Economics, accurate or complete, and it should not be relied upon the de-facto knowledge hub of the app economy, and Mobile as such. Opinions expressed are current opinions as of Innovation Economics, the strategy workshops helping telco the date appearing on this publication only, and the executives to define winning innovation strategies. information, including the opinions contained herein, Our mantra: Distilling market noise into market sense. are subject to change without notice. VisionMobile Ltd. Use of this publication by any third party for whatever 90 Long Acre, Covent Garden, purpose should not and does not absolve such third London WC2E 9RZ party from using due diligence in verifying the +44 845 003 8742 publication’s contents. VisionMobile disclaims all implied warranties, including, without limitation, www.visionmobile.com/blog warranties of merchantability or fitness for a Follow us: @visionmobile particular purpose. VisionMobile, its affiliates and representatives shall have no liability for any direct, About Ericsson incidental, special, or consequential damages or lost profits, if any, suffered by any third party as a result of Ericsson is a world-leading provider of telecommunications decisions made, or not made, or actions taken, or not equipment and services to mobile and fixed network taken, based on this publication. operators. Over 1,000 networks in more than 180 countries use our network equipment, and more than 40 percent of the worlds mobile traffic passes through Ericsson networks. Behind this report We are one of the few companies worldwide that can offer Project lead: Michael Vakulenko end-to-end solutions for all major mobile communication Senior analyst: Stijn Schuermans standards. Our networks, telecom services and multimedia solutions make it easier for people, across the world, to Marketing: Matos Kapetanakis communicate. Editorial: Andreas Constantinou And as communication changes the way we live and work, Ericsson is playing a key role in this evolution. Using innovation to empower people, business and society, we are working towards the Networked Society, in which everything Also by VisionMobile that can benefit from a connection will have one. Mobile Innovation Economics Workshop Our vision is to be the prime driver in an all-communicating world. A strategy workshop introducing the new economic For more information see: http://www.ericsson.com thinking necessary for successful innovation by telcos. Find out more visionmobile.com/strategy License Licensed under Creative Commons Attribution 3.0 license. Any reuse or remixing of the work should be attributed to the VisionMobile “The Telco Innovation Toolbox: Economic models for managing disruption and reinventing the telco” paper. Copyright © VisionMobile 2012 © VisionMobile 2012. Some rights reserved. 2
  3. 3. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco Contents A new basis of competition ......................................................................................................... 5! The superiority of ecosystem economics .................................................................................... 7! Ecosystem engineering .............................................................................................................. 10! The modular telco ...................................................................................................................... 13! Asymmetric business models .................................................................................................... 16! The true value of innovation and the cost of doing nothing ..................................................... 19! Dealing with uncertainty: Discovery-driven planning ............................................................. 21! Ecosystem as a new distribution channel .................................................................................24! Keys to successful telco API strategies ......................................................................................26! Freeing voice from telephony ....................................................................................................29! Turning openness into a competitive advantage ...................................................................... 31! Conclusions................................................................................................................................ 33! © VisionMobile 2012. Some rights reserved. 3
  4. 4. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco Key Messages Telcos are being disrupted because the basis of Traditional financial tools are designed for competition in mobile has fundamentally stable market environments, but fail changed. It has changed from “reliability and predictably when applied to innovation scale of networks” to “choice and flexibility of under conditions of uncertainty and services”, representing transition from “mobile rapid change, which characterizes today’s telephony” to “mobile computing”. The change telecom market. The reason for failure is that in the basis of competition is fundamental and traditional financial tools systematically irreversible. undervalue innovation by disregarding the costs of doing nothing. OTTs do not compete for telco service revenues; instead, they compete to control key links High levels of uncertainty require radically in the digital value chain, with business different planning methods. Discovery-driven models that span consumer electronics, online planning acknowledges that in uncertain market advertising, software licensing, e-commerce and conditions, very little is known and much is more. Thus, competition is asymmetrical, assumed. Instead of treating blue-sky because unlike carriers, OTTs do not bear the assumptions as facts, this planning tool burden of providing mobile Internet service. systematically converts assumptions into knowledge. As iOS and Android have reached critical mass, and established well-entrenched market Ecosystems are a new distribution positions, operators need to look for ways to channel similar to “value added resellers”. In build unique user value atop the the case of telcos, ecosystem partners are the platforms rather than competing with OTT resellers that will push telco services to new players. users, new usage models and new market niches. Telcos need to move their innovation focus To be successful in API initiatives, telcos need to from technologies (be it HTML5, NFC, IMS, consider developers as value-added resellers, VoLTE, M2M or RCS-e) to ecosystems. That and therefore design their API propositions for requires a much better understanding of how win-win outcomes. In other words, the ecosystems are engineered, and how ecosystems business models of telco APIs need to be absorb and amplify innovation. aligned with the business models of developers. Most telecom operators evolved as “all-in-one” businesses optimised to compete based on the Notwithstanding the buzz around new OTT reliability and scalability of a small set of core services, telcos are still considered the primary services (voice, SMS, data access). To adapt to providers of voice services. That puts them in an the market shift, telco needs to be seen as an excellent position to transform telephony entity comprised of three distinct into a thriving ecosystem of services business layers: Access, Connectivity and designed for the new basis of Distribution. competition: choice and flexibility. For example, using telephony APIs to lock enterprises into voice/data plans. © VisionMobile 2012. Some rights reserved. 4
  5. 5. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco INTRODUCTION A new basis of competition There are no silver-bullet solutions to telco disruption. Rather than focusing on quick fixes, this paper introduces a new way to think about telco innovation, with the aim of helping operators to make the right choices in their innovation investments. Let’s start with the basic question: What is the continued investments in building wireless nature of the telecom transformation? Is it just capacity. Investments in networks are still about new competitors that need to be fended necessary, but they alone are no longer sufficient off? Or are there more fundamental forces at for profitable growth. What’s next? play? We think the latter. Harvard Business School professor Clayton Telcos are being disrupted because the basis of Christensen recently said: “I think, as a general competition in mobile has fundamentally rule, most of us are in markets that are booming. changed. It has changed from “reliability and They are not in decline. Even the newspaper scale of networks” to “choice and flexibility of business is in a growth industry. It’s not in services” driven by the transition from “mobile decline. It’s just their way of thinking about the telephony” to “mobile computing”. The change industry that is in decline.”2 in the basis of competition is fundamental and irreversible1. Enabled by smartphone platforms Telecom industry too can greatly benefit from and free from go-to-market bottlenecks imposed looking at familiar challenges from a new by telcos, hundreds of thousands of app perspective. Telecom is a booming industry with developers are now able to compete for user ever-growing demand for mobile data and rising attention and wallet share. numbers of subscribers. But the basis of competition in mobile has changed putting Today, universal coverage, no dropped calls, pressure on legacy telecom business models. voice quality and high-speed data connectivity Wireless networks alone can no longer are almost taken for granted in most mature guarantee profitable growth for telecom markets. For more and more users, the operators. availability of apps is becoming a primary consideration when selecting the handset. Competing head-on with asymmetric business Signing up for a telco plan is increasingly viewed models of OTT players won’t help either. as a necessary cost for services that only need to Instead, seizing the full potential of this booming be good enough to support the device. It’s like industry means leveraging mobile digital picking the car of our liking, knowing that once ecosystems to create meaningful in a while we will have to pay at the gas station. differentiation and lock-in to telco services, as well as incremental revenues. This brings us to the conundrum the telecom This requires an understanding of ecosystem industry is facing today. Providing economics, development of new organisational undifferentiated voice, text and data services to capabilities and resetting the KPIs for “digital” smartphone users leads to a competition on initiatives. price and diminishing margins. At the same time, staying in business requires that telcos keep up with ever-growing demand for data and 2 http://www.niemanlab.org/2012/10/clay-christensen-on- 1Analysis is based on value-chain evolution theory by Harvard the-news-industry-we-didnt-quite-understand-how-quickly- Business School Professor Clayton Christensen things-fall-off-the-cliff/ © VisionMobile 2012. Some rights reserved. 5
  6. 6. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco The economic and strategy tools introduced here We describe ecosystem economics in the context will guide telcos in their choices on what of telco business in chapters 1 to 4, discuss the innovation initiatives they should pursue impact of traditional financial tools and the need and how to execute on their choices in for new innovation processes and KPI in fundamentally new market conditions. chapters 5 and 6, and finally suggest how to leverage ecosystems to the benefit of the telco business in chapters 7 to 10. © VisionMobile 2012. Some rights reserved. 6
  7. 7. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco CHAPTER ONE The superiority of ecosystem economics What gives ecosystems their superior growth economics, and what can telcos do about it? Telcos used to be the center of gravity in the as such need to be viewed as partners, not as a mobile value chain, but no longer. In the new source of direct profit. basis of competition, ecosystems like Apple iOS or Google Android have become the focal point For example, Apple runs a very successful for service creation and distribution, ironically consumer electronics business. About 80% of with help from telcos in the form of device Apple’s profits in Q3 2012 derived from products subsidies. In the space of five years, ecosystems running its iOS operating system. Flexibility and have mushroomed to take control of what took choice underpin the iOS value proposition -- telcos nearly 30 years to build. “There is an app for that,” in the words of Apple advertising. Today, the company lists more than What gives ecosystems their superior growth 700,000 apps in the Apple App Store. economics, and what can telcos do about it? Apple, Google, Facebook, Amazon and many Given that the app economy has become a multi- other Internet players are in the center of value billion dollar business, it is tempting to believe networks connecting the core business of the that apps are now a lucrative multi-billion dollar platform owner (e.g., hardware sales for Apple) content business for Apple. In reality, the with an array of complements, such as company runs the App Store at just above break- developers, media, brands and telcos. As such, even, according to Apple CFO Peter they are carefully designed to drive the core Oppenheimer and CEO Tim Cook. business of the ecosystem owner. Complements The App Store revenue share is an elegant are products that are consumed with and add solution to recover the high costs of running a value to the core product of the ecosystem thriving developer ecosystem. Given 30% owner. Ecosystem economics describe how the revenue and the fact that Apple has paid core product (e.g., iDevices or Google ads) developers $5.5B dollars, these costs amount to becomes more and more valuable, as the over $2.3B over the lifetime of the Apple App numbers of developers and users around it grow. Store3. Ecosystem economics are driven by network App Store revenues are used by Apple to effects and lock-in. iPhone apps attract Apple subsidise testing and hosting of hundreds users, who in turn attract more developers, who thousands of free apps and billions of free app make more apps, which attract even more users, downloads -- Over 80% of app downloads are and so on. This network effect between free4 (including Facebook, Instagram, and many developers and users drives the explosive growth other apps). In other words, the App Store is not of the iOS platform. Lock-in creates natural designed to generate profits from content sales, “walled gardens,” as users develop habits around but rather is a key enabler for the app economy apps, while developers are locked-in by high that produces critically important complements switching costs created by their investments into the platform. Ecosystem economics are often misperceived as simple two-sided business models, where the 3 As of July 2012 telco needs to profit not only from users, but also from developers. This couldnt be further from 4 http://tabtimes.com/news/ittech-stats- the truth. Developers, much like any research/2012/09/11/gartner-says-9-10-downloaded-apps- are-free-insists-app complement, drive sales of the core product, and © VisionMobile 2012. Some rights reserved. 7
  8. 8. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco driving the profits of the wildly successful the customer “ownership” and creating strong iPhone and iPad devices. user lock-in that surpasses that of operator brands. Ecosystems are much better at The Google Android ecosystem is built on very delivering choice and flexibility, the new basis of similar principles. It treats developers as competition. This is due to their global scale and partners who create vitally important vast developer reach. Despite these adverse complements. Google’s core business is online effects to the telco business, there is little telcos ads, and the Android ecosystem is optimised to can do to roll back the clock. The ecosystem drive eyeballs to Google properties and deepen genie is out of the bottle. its consumer intelligence. As opposed to Apple, Google prioritises user reach over user As iOS and Android have reached critical mass, experience, and makes Android freely available and established well-entrenched market to the broadest range of handsets. positions, operators need to look for ways to build unique user value atop the In most developed mobile markets, operators platforms rather than competing with OTT are playing a supporting role within the iOS and players. Such “over-the-platform” innovation Android ecosystems. Operators take on the can indeed create new revenue streams, but even financial burden of device subsidies, which more importantly it offers opportunity to create reduces the cost of acquiring the smartphone unique differentiation relative to local users -- all in exchange for upselling users into competitors and avoid competition on price. higher-ARPU data plans. Opportunities for such differentiation exist in the areas where platforms are inherently weak, While telcos finance the expansion of or have little motivation to compete. These smartphones, Apple and Google are taking over include local presence, user targeting and reach, © VisionMobile 2012. Some rights reserved. 8
  9. 9. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco content recommendations and vertical B2B Key questions telcos need to ask when solutions. evaluating innovation investments Over the longer term, telcos can look for ways to • Does your initiative compete with the build parallel ecosystems, using pages from the network effects of an established ecosystem ecosystem economics textbook. An example is or is it leveraging those effects? M2M. It holds the potential to create a vibrant • Does your project aim to add value where ecosystem of users and solution providers, platforms are weak or have no motivation to thereby establishing strong network effects and compete? lock-in. Telcos can become the central force in • Does your project promise to create a this emerging ecosystem if they learn to engineer parallel ecosystem where telcos will play the the ecosystems to their advantage. By looking at dominant role? M2M through the lens of ecosystem economics, operators will see opportunities that are much bigger than just selling modems and data connections. © VisionMobile 2012. Some rights reserved. 9
  10. 10. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco CHAPTER TWO Ecosystem engineering The new basis of competition is defined by ecosystem economics, and technology is just one part of a much more complex puzzle. Platform owners run their ecosystems of users and developers by means of five ingredients and two control points. Innovation in the telecoms industry has 3. Distribution (reach) across handsets, traditionally been focused on technology. For operators and regions decades, GSM, CDMA, WCDMA, HSPA, and 4. A means of monetization, such as ads or LTE defined the competitive landscape of mobile micropayments telecommunications. With the basis of 5. A means of retailing content (discovery, competition being scale and reliability, these promotion, search and social) technologies helped telcos use spectrum more efficiently, within the limited wireless spectrum The next diagram details the five key ecosystem available to them. In other words, the key ingredients, their product success factors and competitive characteristics of mobile networks the competences needed to bake each ingredient were defined by air interface technologies that into the recipe. increased capacity to transport ever-growing Platform owners control their ecosystems of amounts of voice and data traffic through a users and developers by means of two control limited wireless spectrum. points. These points exist at the opposite ends of The new basis of competition is defined by the value-chain. Firstly, platform owners control ecosystem economics, and technology is just one content creation by locking developers into a part of a much more complex puzzle. HTML5 is proprietary API. Secondly, platform owners a perfect example of how ecosystems surpass control content distribution by gating how apps technology. Many operators placed their bets on are distributed to and discovered by end users. HTML5 as a chance to regain positions lost to These two control points allow platform owners mobile ecosystems. They did so without realizing to amplify the network effects by reducing that HTML5 is an enabling technology that still friction to on-boarding of developers and users. misses key platform ingredients. Pitched as a killer of platform walled gardens, Successful application platforms5 have five key HTML5 in reality needs a lot of work before it ingredients: can transition from an enabling technology to a complete and viable app platform, and compete 1. Software foundations: a rich set of APIs6 in the league of Android and iOS ecosystems. with managed fragmentation and a toolset HTML5 will not win on technological merit, but for by creating pervasive solutions for the three key creating apps platform ingredients it currently lacks: 2. Community of developers writing to the distribution, monetization and retailing. same set of APIs to spur innovation and cater Today, only two companies, Facebook and to diverse use cases Google, are in a strong position to evolve HTML5 into a full-fledged platform. Both have rich sets of proprietary APIs, vibrant developer ecosystems and solutions for app monetisation, distribution and retailing in the form of 5 Also called computing platforms Facebook Platform and Chrome Web Store. 6 API - Application Programming Interface Mozilla’s Firefox OS (Boot2Gecko), which has the support of telcos, might have the same © VisionMobile 2012. Some rights reserved. 10
  11. 11. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco ambition, but is further behind in terms of its © VisionMobile 2012. Some rights reserved. 11
  12. 12. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco platform ingredients. Key questions telcos need to ask when evaluating innovation investments Telcos need to move their innovation focus from technologies (be it HTML5, NFC, IMS, VoLTE, • Is your innovation initiative aimed at M2M or RCS-e) to ecosystems. That requires a creating an ecosystem? If so, what much better understanding of how ecosystems ecosystem ingredients will it need to are engineered, and how ecosystems absorb and succeed? amplify innovation This ecosystem view on • How can technology-led innovation innovation cannot only help to identify play atop of existing ecosystems to promising innovation opportunities, but equally create a competitive advantage for important, help telcos avoid investments that telcos? lack key ecosystem success factors. • Are all of your current innovation projects designed with the key ingredients for ecosystem success? © VisionMobile 2012. Some rights reserved. 12
  13. 13. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco CHAPTER THREE The modular telco Contrary to Internet players, most telecom operators evolved as “all-in-one” businesses. To better understand the impact of the market disruption to telcos, it helps to visualise mobile operators as an entity comprised of three business layers: connectivity, services and distribution. Each of these business layers is affected differently by the market shift, and face very different operational challenges and competitive pressures. They also offer distinct opportunities for future growth, differentiation and profitability. Contrary to Internet players, most telecom 3. Distribution: physical and digital retail operators evolved as “all-in-one” businesses presence, consumer intelligence, customer optimised to compete based on the reliability care, telco own apps, web portals and more and scalability of a small set of core services (voice, SMS, data access). Vertical integration These three business layers are affected was necessary to provide these services with differently by the market shift, and face very “five nines” reliability for tens or even hundreds different operational challenges and competitive of millions of subscribers. The all-in-one telco pressures. They also offer distinct opportunities spans network operations, telephony, for future growth, differentiation and messaging, data access, user identity profitability. management, authentication and billing, as well The connectivity layer is boosted by an ever- as distribution and retail. growing need for “anywhere, anytime” As the basis of competition changed to “choice connectivity to billions of devices. It will remain and flexibility”, vertical integration lost its an important part of the digital ecosystem value- advantage. Moreover, the lack of flexibility chain for the foreseeable future, and is a growth inherent to vertical integration has often slowed opportunity for telco. The main challenge is how telco attempts to adjust to new market to avoid commoditization, i.e., a lack of conditions. It explains why telcos lost out to meaningful differentiation, which results in smartphone and Internet platforms in the areas competition on price and diminishing of location services, authentication, single sign- profitability. on, user identity, and billing. At the service layer, things look very To better understand the impact of this market different. The smartphone ecosystem has shift on telcos, it helps to visualise mobile produced a flood of innovative OTT alternatives operators as an entity comprised of three that cut into traditional SMS and telephony business layers: service revenues. OTT alternatives can often achieve substantial user reach and service 1. Connectivity business: high-speed mobile scalability based on budgets that are considered Internet access and wide area connectivity small in telco terms. For example, in just two 2. Services: telephony, SMS, content portals years Viber topped 100M users, Whatsapp has and other value-added services scaled to servicing over 10B text messages a day and Tango, a video-calling app, grew to 23 million subscribers in 190 countries. No less © VisionMobile 2012. Some rights reserved. 13
  14. 14. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco important, the business models of these © VisionMobile 2012. Some rights reserved. 14
  15. 15. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco companies are radically different from those of For telco innovation to be successful, the three telcos. While traditional telephony is in business layers need to operate and be measured stagnation, innovative voice solutions can independently, each pursuing the most present attractive opportunities for telco as we appropriate innovation strategies, KPIs, explain in later chapters. processes and priorities. Applying different innovation mixes for their distinct connectivity, The OTT communication market continues to service and distribution business layers will evolve at lighting speed. Telcos cannot compete enable telcos to succeed in the new basis of with the pace, risk taking culture, free and competition of choice and flexibility. freemium business models and global network effects of OTT ecosystems. Telco initiatives like Key questions telcos need to ask when Joyn and before it WAC, which were heralded as evaluating innovation investments the answer to OTT threats, now look outdated and hopelessly behind leading OTT players. • In which business layers do our digital initiatives operate? At the distribution business layer it is yet • Are the right processes and KPIs in another story. Distribution is largely seen as a place to compete within this/these cost centre, not a new revenue opportunity, business layer(s)? Do the KPIs comply despite its strong potential to create new control with industry best practices for a given points and revenue streams for telco. layer? (e.g., scale and reliability are not appropriate when experimenting with Apple, Google and Facebook have capitalized on new offerings at the service layer.) the inflexibility of all-in-one telco offerings by • Is the innovation mix optimised for the gradually replacing key telco assets like location, respective business layers? authentication, single sign-on, user identity, and billing with proprietary solutions. Hindered by internal conflicts between business layers, telcos were late to market with services of their own in these areas. Lured by the promise of attracting higher-ARPU smartphone users, telcos worked hard to flood the market with smartphones at a wide range of price points. This strategy served the short-term goal of boosting the connectivity business, but at the same time jeopardized the long-term competitiveness of the service business by surrendering the customer ownership associated with authentication, user identity management and billing services. © VisionMobile 2012. Some rights reserved. 15
  16. 16. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco CHAPTER FOUR Asymmetric business models As OTT players put increasing pressure on traditional telco profit centers, it is tempting to see them as direct competitors. Yet they don’t compete for profits, but for control of the value chain. Mobile Internet has become an integral part of licensing, e-commerce and more. Thus, the digital services and content ecosystem. In competition is not symmetrical, because unlike that context, mobile operators, Internet carriers, OTTs do not bear the burden of companies, handset makers, software vendors providing mobile Internet service. Connectivity and content providers are part of the same value may be as important to their business model as network. gas to a car; yet, it’s the telcos who supply it, not the OTTs themselves. This asymmetry makes it As OTT players put increasing pressure on difficult for telcos to protect the profitability of traditional telco profit centers, it is tempting to some legacy business models. see them as direct competitors. Yet, OTTs do not compete for telco service revenues; instead, they In economic terms, telco connectivity compete to control key links in the digital value complements OTT business. A complement is a chain, with business models that span consumer product that is consumed together with another electronics, online advertising, software product (see Chapter 1). Demand for a product © VisionMobile 2012. Some rights reserved. 16
  17. 17. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco increases when the price of its complements case of Google sharing app revenues with decrease. For example, gas and cars are operators). complements. Cheaper gas means people drive more, and car manufacturers see their business The vertically integrated, “all-in-one” telco grow. business model of bundling connectivity and service costs makes it impossible for telcos to Similarly, the common interest of OTT players is compete with free or less-than-free OTT to drive commoditisation of the telco alternatives. Telco core voice and SMS services connectivity business. Affordable mobile are suffering “collateral damage” in the wake of broadband means that more smartphones are successful OTT strategies, rather than suffering sold, more ads viewed, more software sold and as a result of direct competition. more ecommerce sites visited. Because of the asymmetry in telco and OTT While there is a symbiotic relationship between business models, telcos should avoid investing in telcos and OTTs at the connectivity business head-on competition with OTT services. OTTs layer, the nature of asymmetry is different at the dont see telcos as competition, but rather as a telco services layer. Because connectivity costs complement to their business. are paid by the user, OTT players have great flexibility in their business models. OTTs can More importantly, the telco digital business monetise ads, downloads, analytics or needs to be measured not by direct revenues, but acquisitions, and are thus able to price their according to whether it helps to grow and services either free (e.g., Viber), close to free protect core telco business by increasing usage, (e.g., Whatsapp), or even less-than-free (in the creating user lock-in and driving subscriber acquisition. Similarly, success of Amazon’s © VisionMobile 2012. Some rights reserved. 17
  18. 18. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco Kindle is not measured by the number of units Key questions telcos need to ask when sold, but by content revenues and the amount of evaluating innovation investments traffic to Amazon e-commerce properties. • How does the asymmetry of business Instead of copying OTT initiatives, telco models affect your project? Does the project innovations should leverage unique advantages, drive the telco core business or does it in order to create user value that OTT players attempt to compete with OTT players head- cannot match, such as localization, user on? targeting, privacy controls or MVNO service • Does the project incorporate unique aspects customization. of value that OTT players cannot match (e.g., localization, user targeting, privacy controls, or MVNO service customization)? • What are the complements to the telco core business (e.g., user identity management API) that if freely given will drive core telco business, attract developers or weaken OTT players? © VisionMobile 2012. Some rights reserved. 18
  19. 19. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco CHAPTER FIVE The true value of innovation and the cost of doing nothing Traditional financial tools are designed for stable market environments, but fail predictably when applied to innovation under conditions of uncertainty and rapid change, which characterizes today’s telecom market. Traditional financial tools work well when The second “cost of doing nothing” is the missed evaluating investments in capital-intensive opportunity to develop new capabilities critical telecom infrastructure. In such investments, for future telco competitiveness. future costs and revenues can be predicted fairly accurately by using traditional financial It’s a common practice to evaluate investments forecasting tools like discounted cash flow (DCF) based on marginal costs and revenues while or net present value (NPV). ignoring sunk and fixed costs. I.e., investments are valued based on their potential to produce Traditional financial tools are designed for valuable goods or services based on current stable market environments, but fail assets. That only makes sense when the market predictably when applied to innovation conditions are stable and the current telco assets under conditions of uncertainty and are expected to retain their competitive value in rapid change, which characterizes today’s the future. telecom market. The reason for failure is that traditional financial tools systematically Let’s take the example of Rich Communication undervalue innovation by disregarding the costs Services--enhanced (RCS-e), which leverages of doing nothing, as explained in Harvard expensive IMS infrastructure. Marginal cost Business Review article “Innovation Killers, How analysis makes it an attractive choice for new Financial Tools Destroy Your Capacity to Do presence and messaging services designed New Things” by Clayton M. Christensen, according to traditional telco service models. Stephen P. Kaufman, and Willy C. Shih. However, according to the new basis for competition, the scalability and interoperability There are two “costs of doing nothing” for telco offered by IMS are less important than that escape the attention of traditional financial flexibility. Telcos could be better off investing in tools: The risk of non-linear deterioration of the new, more flexible infrastructure better suited telco business and the missed opportunity to for experimentation with new services, use cases develop new capabilities necessary for the and business models. future. Due to the changing basis of competition, future Traditional telco financial tools implicitly success requires new capabilities that telecom assume that business is stable and its present operators are missing today. Marginal cost state will persist into the future. In other words, analysis, however, will systematically undervalue if an innovation investment is not made, things investment in creating such new capabilities. will be at least as good as they are today. This is Incremental investments into the existing assets, definitely not the case for telcos trying to adapt such as network expansion, will always seem to the new basis of competition. The more attractive compared to the full costs of commoditization of core telco services and the creating new competitive capabilities. For entry of disruptive OTT players will inevitably example, Blockbuster saw Netflix developing result in the decline of the telco business. new models for movie delivery. Marginal cost Therefore, the true value on innovation is not in analysis, however, could not justify building new improving on the status quo, but in preventing capabilities, and instead Blockbuster continued future deterioration of the telco business. investing in its current assets, which soon will © VisionMobile 2012. Some rights reserved. 19
  20. 20. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco become obsolete. Blockbuster’s 2002 press will introduce these methods in the following release read: "We have not seen a business chapter. model that is financially viable in the long term in this arena. Online rental services are serving It is important to see the biases inherent to a niche market. " traditional financial analysis tools. The true value of innovation investment can only be seen Netflix didn’t have this dilemma, and for it the when measured against the real costs of doing “niche market” looked to be an excellent nothing, including the likely possibility of opportunity. The rest is history, as Clayton deteriorating telco business, and missed Christensen explained in his Harvard Business opportunities to develop new capabilities and School article on the Trap of Marginal Thinking7. competences. The challenge for telcos isn’t that OTT Key questions telcos need to ask when companies outspend them in innovation. It’s evaluating innovation investments that marginal cost analysis steers telcos towards investments in capabilities that were relevant in • How often do you use NPV/DCF financial the old basis of competition, rather than toward tools for evaluating investments in telco developing new capabilities relevant for the new innovation? basis of competition. • Are you investing enough in developing capabilities relevant for the new basis of Telcos need to consider the costs of doing competition? nothing and invest in innovation well before • How would you build new products for the traditional financial analysis shows new basis of competition, if you were a attractive returns. They must adopt startup starting from scratch today? discovery-driven planning methods suited for the prevailing conditions of high uncertainty. We 7 http://hbswk.hbs.edu/item/7007.html © VisionMobile 2012. Some rights reserved. 20
  21. 21. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco CHAPTER SIX Dealing with uncertainty: Discovery-driven planning High levels of uncertainty require radically different planning methods. Instead of treating blue-sky assumptions as facts, discovery-based planning systematically converts assumptions into knowledge. Today’s unpredictable mobile environment early as possible in the process, while constantly defies traditional planning methods telcos adjusting the action plan based on the new developed during the golden years of the knowledge gained from the market. connectivity business. As we saw in Chapter 5, conventional planning methods assume that In other words, conventional planning companies can reliably predict the future methods are optimised for dealing with outcome of investments based on past execution risks, while discovery driven experience. That worked well for infrastructure planning is optimised for dealing with investments, for example when upgrading from market uncertainty. The management tool 2G to 3G and now to LTE, where the focus is on works according to a “Learn, Build, Measure” managing execution risks. But since the basis of cycle. This approach is also promoted by the competition changed, telcos face a totally new Lean Startup movement, which today has competitive environment where they lack become the role model for building a successful reliable knowledge about new economics and startup. business models. The need to deal with uncertainty might be new Competition in the age of ecosystems is shaped in telecoms, but is well understood in other by the interaction of a diverse number of players. business circles. As shown by Amar Bhide in his It is not just uncertain, but fundamentally book, “Origin and Evolution of new Business”, unpredictable. Often the new players are too 93% of companies that became successful small to show up on a telco’s competitive radar abandoned their original strategy. until it’s too late. Whatsapp, Viber, Tango, For example, Instagram, a well-known success KakaoTalk, and textPlus are just a few examples story, began life as a very different kind of of the numerous startups disrupting telco company. In the words of co-founder Mike services. Krieger9, Instagram was an app that only took 8 High levels of uncertainty require radically weeks to build and ship, but was a result of over different planning methods. An alternative was a year of work. suggested in a 1995 Harvard Business Review The project started with an investment of paper called “Discovery-Driven Planning” by $500K, and the initial idea to build a location- Rita Gunther McGrath and Ian C. MacMillan 8. based HTML5 app. The team has built an Discovery-driven planning acknowledges that in HTML5 mobile web app that lets users “check uncertain market conditions, very little is known into” locations, make plans and earn points for a and much is assumed. Instead of treating blue- number of social activities. By measuring how sky assumptions as facts, this planning tool people used the app, the team discovered that systematically converts assumptions into photo sharing drove usage. Learning from the knowledge. This is achieved by proactively behaviour of real users, the company refocused testing assumptions with minimal costs and as 8 http://hbr.org/1995/07/discovery-driven-planning/ 9 http://www.iitstories.com/2012/04/12/story-of-instagram/ © VisionMobile 2012. Some rights reserved. 21
  22. 22. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco on photo sharing, and built an iOS app, instead Instead, it involves systematically dealing with of continuing with HTML5 technology. The market uncertainty and setting new KPIs to company continued to iterate on this build- measure business risks, rather than execution measure-learn cycle, and was eventually risks. acquired by Facebook in April, 2012 for $1B. As of September, 2012, Instagram had reached With discovery-driven planning, risk can 100M active users. increase the value of innovation. Telcos need to take ownership of their innovation strategies The Learn, Build, Measure cycle ensures that the and experiment with multiple initiatives in order decision to allocate significant resources is based to maximize exposure to unexpected on facts, rather than on unproven assumptions opportunities. They must develop new treated as facts. organisational capabilities. This of course does not mean reckless risk-taking, but rather a Compared to conventional planning methods, systematic and disciplined process of converting the iterative, small-step process of discovery- assumptions into knowledge. driven planning may seem counterintuitive. But it makes good sense when dealing with market As an example, WAC was based on three uncertainty. The fast turn-around process assumptions: a) the need for operator maximizes exposure to upside opportunities interoperability in the all-IP environment, b) (e.g., Instagram photo sharing): the faster you users valuing web technology and c) developers are, the more experiments you can run, and the looking for alternatives to native platforms. more chances you have to discover valuable Instead of creating long-term commitments ideas. At the same time, discovery-based based on unproven assumptions, the WAC planning minimizes the “downside risk” (the initiative would be much better of if it was cost of failure) by identifying wrong assumptions operating based on discovery driven planning, early in the process (Instagram location-based i.e., validating assumptions early in the process check-ins, and use of HTML5 technology). Thus, by learning from the market and being open to “failing fast and cheap” makes perfect sense discover new opportunities. when the market is uncertain, and the failure is taken as a source of valuable knowledge. Before Telcos need to clearly distinguish between you rush to say, “Yes, we use agile development’ investments in innovation that aim to improve already,” consider that discovery-driven existing business, and innovation aiming to planning is not about fast software development. discover new markets. For targeting existing customers with an existing business model, © VisionMobile 2012. Some rights reserved. 22
  23. 23. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco traditional planning methods work nicely. When Key questions telcos need to ask when targeting new customers, or a new business evaluating innovation investments model, the only proven approach is iterative, discovery-driven planning. • Do you allow projects to become profitable before prioritising for Telco innovation initiatives need to be measured growth? by the speed of learning and validating • Are you measuring new market assumptions, as well as potential to discover new innovations by the speed and cost of opportunities. This contrasts conventional validating assumptions? planning methods that focus on projections of • Are you sufficiently addressing new scale and future cash flows, based on unproven opportunities by running many assumptions. innovation initiatives? © VisionMobile 2012. Some rights reserved. 23
  24. 24. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco CHAPTER SEVEN Ecosystems as a new distribution channel Ecosystems are a new distribution channel similar to value added resellers. In the case of telcos, ecosystem partners are the resellers that will push telco services, to new users, new usage models and new market niches. Direct distribution networks made perfect sense In effect, ecosystems are a new distribution when operators competed based on the channel similar to “value added resellers”. In the reliability and scale of a small set of services. case of telcos, ecosystem partners are the Competing on choice and flexibility requires resellers that will push telco services, to new solutions that address thousands of user needs users, new usage models and new market niches. for each walk of life. Moreover, user expectations The key advantages of this newfound constantly continually evolve, making it distribution channel are the ability to create practically impossible for a single company to solutions for many small user niches predict and satisfy a wide spectrum of user customization, as well as engage in needs. experimentation to discover new needs and opportunities. In the previous two decades, mobile phone users expected four basic "apps": voice, text, contacts Building an ecosystem amounts to offloading and camera. Now, they expect availability of many of the costs and risks of entrepreneurship hundreds of thousands of apps. Companies like to value-added resellers. By doing that, the value Google, Netflix, Facebook, Amazon and even of the ecosystem as a whole can grow far beyond FedEx realize that the only way to compete on what a telco could create on its own. In effect, choice and flexibility is to create an ecosystem of external partners, be it developers or service tens of thousands of partners around their core providers, become investors in the ecosystem, product. subsidizing the expansion of the telco business. For example, Netflix started as a direct mail Telco APIs are the key technology enablers of DVD rental company and expanded into video this new distribution channel. The goal of telco streaming services. To compete based on choice API programs is to allow developers to take telco and flexibility, Netflix created an ecosystem of services into new niches and use cases, and scale device partners and developers around its video from hundreds to thousands of partners. Some streaming service. This ecosystem takes Netflix of these new use cases will result in services into over 800 device types and allows supplemental telco revenue streams, some will 80,000 Netflix Open API developers to add facilitate customer acquisition, while others will value by experimenting with new discovery subsidise ecosystem creation costs. methods and use cases. © VisionMobile 2012. Some rights reserved. 24
  25. 25. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco Telco APIs will always be at a disadvantage Key questions telcos need to ask when versus players with global reach, if telco APIs are evaluating innovation investments positioned in direct competition to native platforms or Internet companies.. However, if • Is your API strategy designed to turn telcos allow and encourage developers to create developers into value added resellers? locally-relevant differentiation on behalf of their • How do you value the ability of developers subscribers, their fragmentation disadvantage to experiment in discovering new user could transform into the advantage of local cases? presence. • Is your API strategy flexible enough to attract a wide spectrum of partners, APIs need the flexibility to allow developers to including mobile and web developers, experiment with new use cases, and thus MVNOs and M2M solution providers? discover and satisfy unmet user needs. The nature of this experimentation is such that many developers will fail, but those who succeed will create differentiation and growth for telco services. It is important to note that the same ecosystem economics that work for telco APIs and app developers can be applied to other types of partners and service providers, such as Mobile Virtual Network Operators (MVNO) or machine- to-machine (M2M) initiatives. MVNOs can build ecosystems around the distribution business layer. App developers can build ecosystems around the service layer. And M2M companies, meanwhile, can build ecosystems around the connectivity business. © VisionMobile 2012. Some rights reserved. 25
  26. 26. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco CHAPTER EIGHT Keys to successful telco API strategies It is common for telcos to see developers and content providers as a source of direct revenues, or even push for “redistribution of profits” from OTT companies to telcos. These strategies are destined to fail because of fundamental conflicts with developers’ business models. For example, Internet business models usually the principles of discovery-driven planning assume free or almost-free distribution: the last- described in Chapter 6. Meanwhile, high barriers mile bandwidth is paid by the user, and is free to to experimentation result from many telco API the service provider. Attempts to ask developers practices, like up-front payment, extensive legal pay for the wireless data will not only be faced arrangements, demanding certification with natural resistance, but have the potential to requirements or long-term contracts. To reduce render the business models of many mobile and friction and help developers discover new user Internet companies unsustainable. Faced with needs and opportunities, telco API business such challenges, developers will quickly find models need to subsidize experimentation and alternatives, as happened with location and be designed for the ability to fail and retry authentication, which were once only provided cheaply. by telcos at a mass scale. More specifically, if developers are charged To be successful in API initiatives, telcos need to based on telco API usage, the apps business consider developers as value-added resellers, model must have a stable, usage-based income and therefore design their API propositions for stream. This is rarely the case. By allowing free, win-win outcomes. In other words, the business small-scale usage of the API, telcos permit models of telco APIs need to be aligned with the developers to experiment with multiple business business models of developers. models, including free, until a sustainable, workable business model can be found. But what is a developer? The reality is that the developer ecosystem is a complex mosaic of Developers should be offered assistance to scale large and small companies, communities and and deepen their business, by using the correct individuals. VisionMobile’s developer “business model polarity”, as shown in the next segmentation model classifies developers into page. Instead of charging developers upfront and eight categories that differ according to creating unnecessary friction to experimentation developer motivations and commercial drivers. and API adoption, telcos need to align the Some developers are after direct monetisation business model of the API with those of (e.g. ZeptoLab, the author of popular Cut the developers. For example, Facebook and Rope game), some are after user reach (e.g. LinkedIn are both social networks. The two, Facebook), and yet others are looking to extend however, are driven by rather different business their non-mobile products and services (e.g. models. The alignment of API business model Nike, DropBox or FedEx). with Facebook will mean helping Facebook drive user acquisition and user engagement. The There is no such thing as an “average developer”. alignment of API business model with LinkedIn Telco API business models therefore need to be will mean helping users make valuable business designed to target one or more specific connections. developer segments. A “one size fits all” approach to telco API business models can Most developers face fierce competition in the severely limit the available market. platform app stores, and are in dire need of differentiation and competitive advantage. Many entrepreneurs, development companies Telcos can attract developers by affording them and individual developers operate according to © VisionMobile 2012. Some rights reserved. 26
  27. 27. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco access to local audiences, through innovation © VisionMobile 2012. Some rights reserved. 27
  28. 28. 12 The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco realized by telco APIs in their three business Key questions telcos need to ask when layers: access, services and distribution. evaluating innovation investments • Which developer segments are you targeting with your API strategy? • Are the business models of your telco APIs aligned with the target developer segments? I.e. how the target developer segments build a sustainable business. • How are you exposing telco assets such as distribution, retailing and voice to help developers cater to new markets and niches? © VisionMobile 2012. Some rights reserved. 28

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