Opening up: How R&D is changing in the telecommunications sector today

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Opening up: How R&D is changing in the telecommunications sector today investigates how technology and telecommunications firms are dealing with the process of innovation. The report was commissioned by SAS.

The Economist Intelligence Unit bears sole responsibility for the content of this report. The Economist Intelligence Unit’s editorial team executed the online survey, conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. The research drew on two main initiatives:

● The Economist Intelligence Unit conducted a wide ranging online survey of senior technology and telecoms executives worldwide during February 2008. In total, 327 executives took part.

● To supplement the survey results, the Economist Intelligence Unit also conducted in-depth interviews with senior executives from a range of technology and telecoms companies globally.

Duncan Campbell-Smith was the author of the report and James Watson was the editor.We would like to thank all the executives who participated in the survey and interviews for their time and insights.

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Opening up: How R&D is changing in the telecommunications sector today

  1. 1. Opening up How R&D is changing in the telecommunications sector today An Economist Intelligence Unit reportsponsored by
  2. 2. Opening upHow R&D is changing in the telecommunications sector today Preface Opening up: How R&D is changing in the telecommunications sector today investigates how technology and telecommunications firms are dealing with the process of innovation. The report was commissioned by SAS. The Economist Intelligence Unit bears sole responsibility for the content of this report. The Economist Intelligence Unit’s editorial team executed the online survey, conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. The research drew on two main initiatives: ● The Economist Intelligence Unit conducted a wide- ranging online survey of senior technology and telecoms executives worldwide during February 2008. In total, 327 executives took part. ● To supplement the survey results, the Economist Intelligence Unit also conducted in-depth interviews with senior executives from a range of technology and telecoms companies globally. Duncan Campbell-Smith was the author of the report and James Watson was the editor. We would like to thank all the executives who participated in the survey and interviews for their time and insights. April 2008 © The Economist Intelligence Unit 2008 1
  3. 3. Opening up How R&D is changing in the telecommunications sector today Executive summary F ew industries can rival the rate of innovation professor Henry Chesbrough1, which instead seeks seen within the telecommunications sector to engage suppliers, corporate partners, academia over the past decade. In 1998, mobile phone and customers in the R&D process. This extends companies such as Nokia boasted of high-end models to intellectual property (IP), where companies with built-in FM radio and infrared connectivity. By profit from others use of their own ideas, while also 2007, many phones offered digital cameras and music licensing ideas from elsewhere. The majority (74%) of players, video conferencing, wireless networking and telecoms companies polled for this report agree that the capability to browse the Internet and respond the way they innovate today is significantly different to e-mails. Accordingly, phone networks have been from how they approached innovation a decade ago. upgraded to handle rising volumes of voice, video and data traffic, even as users increasingly route their calls ● Open Innovation involves closer links with a over the Internet instead. Less than five years ago, growing number of external partners... Shifting a start-up company released the first version of its to an OI model will typically mean fostering more software that allowed users to make free phone calls of a venture-capital environment internally, while between any two computers. Today, Skype is used by cultivating stronger links with start-up firms, some 276m people to make voice or video calls, share academic researchers and commercial partners. Over files and send money. the past two years, companies typically partnered with It has been a busy decade to keep up with. This two to five other organisations, although about one is especially true for the thousands of companies in four tied up with just one or none at all. Looking responsible for these breakthroughs—or for those ahead, the number of those who won’t partner aiming to enter the telecoms market. As the rate of will decline (from 10% to less than 6%), while the innovation has increased, so have the pressures and proportion of those partnering with more than five demands placed on those responsible for this R&D other organisations will increase (from 23% to 35%). effort. Inevitably, this has forced them to change However, survey respondents also expect this to prove the way they work. This report from the Economist more expensive and labour-intensive. Intelligence Unit, sponsored by SAS, aims to explore these changes in greater detail and the overall impact ● …but most of all with customers. Perhaps most on the innovation process. Some of the key findings important of all will be the expansion of the role within the report include: played by customers in OI. More respondents to this survey (63%) say they have involved customers in the ● Telecoms firms are increasingly embracing Open innovation process than any other of ten suggested Innovation. The traditional R&D model in telecoms, approaches, including partnering with other firms,1. Open Innovation, as in other industries, was to keep research tightly acquiring new technologies or financing a start-up.The new imperative forcreating and profiting under wraps as companies developed new products Previous liberalisations of the telecoms marketplacefrom technology, HenryChesbrough, Harvard or services. But this approach is giving way to a more saw first equipment manufacturing and then networkBusiness School Press,2003. open one, dubbed Open Innovation (OI) by business services transformed by new entrants. The impact of2 © The Economist Intelligence Unit 2008
  4. 4. Opening up How R&D is changing in the telecommunications sector todaycustomers on the innovation process may prove to be steadily eroding. About two-thirds (64%) of firmsequally transformational. polled say that a new rival has entered their market through a new innovation over the past five years,● But opening up the R&D process often requires with most of the balance expecting this to happenorganisational upheaval. Large companies with a in the next five years. Just 8% don’t believe this willlong history in the industry will need to revise their happen. In this environment, companies are lookingorganisational structures and processes significantly to OI as a key resource—helping them to identifyif they are to pursue OI successfully. Years of future revenue streams, speed up their response toupheaval have prepared many of them for this next technological change and come up with ideas for newbig change. But newer, smaller companies with products and services.less of an organisational legacy may yet prove—likenewly modernising countries with less of a legacy Over the coming decade, technological developmentsinfrastructure—to be keen competitors at the in the telecoms market will continue their rapidinnovation game. R&D managers will have their work evolution. Companies seeking a source of innovationcut out for them. will look to tap into ideas from all over the world. Indeed, today’s emerging markets look likely to● Most telecoms firms have already had new rivals be a major source of tomorrow’s ideas. Take India-enter their market through new innovations— based Spice, for example. The telecoms firm recentlyor expect this to happen soon. Within the introduced a mobile phone costing just US$20, incommunications sector as a whole, the boundaries response to local customer demand. Expect morebetween telecoms and computer software have been innovations from unexpected places. © The Economist Intelligence Unit 2008 3
  5. 5. Opening up How R&D is changing in the telecommunications sector today Introduction T en years ago, with projected sales for mobile researchers, industry partners and perhaps above phones and anything connected with the all customers—on the development of new products Internet already pointing vertiginously and services. How this collaboration will work differs upwards, it was still possible for leading companies from one project to the next and needs constant in the telecommunications industry to see top- reappraisal. But the objective in every case is to secret laboratories as their ticket to the future. New harness ideas and expertise across a wider horizon products were generally being kept behind closed than even the largest company could contemplate doors, as ever, until the marketing people were ready on its own. Matt Bross, BT Group’s chief technology to unleash them. Senior research executives might officer, talks about seeking innovation “beyond the attend industry conferences for a welcome change of boundaries of our payroll”. And where this can be scene and some dutiful networking. But they needed fused with internal innovation, the result will be to be wary of disclosing any proprietary information. waves of successive innovations that catch up with When Nicolas Demassieux left the academic world customers’ constantly changing needs almost as soon to join Motorola in 1997, he was surprised to find as they appear (or, indeed, rather sooner if needs can that in some cases its employees were discouraged be anticipated). Mr Bross likes to call it “innovation at from attending conferences at all: the risk of leaking the speed of life, not the speed of technology”. valuable titbits, in the view of his US-based seniors, To the extent that this means innovation is led far outweighed the chances of learning anything that by incremental, pragmatic adjustments rather than Motorola did not already know. blockbuster inventions, the phenomenon is nothing Today, as director of its broadband wireless new. But OI has lifted the concept to a new level, research, Mr Demassieux is one of the key figures by bringing some of the most advanced ideas in the shaping Motorola’s whole approach to technology world’s applied research laboratories into direct and and innovation. He looks back at the late 1990s as two-way contact with mass-market consumerism. the end of the road for the big R&D laboratories that In a world of universal access to computers and the dominated the global telecoms industry through Internet, millions of mobile handset-users have ideas most of the second half of the 20th century. Ten years about innovation and ways of sharing them. The OI on, he and his industry peers around the world must phenomenon is not unique to the telecoms business, now work within a completely different paradigm. but few others exemplify its impact so dramatically. It is universally known as Open Innovation (OI) and In a sense it marks a third, climactic stage in has been winning converts rapidly in recent years. the long-drawn-out liberalisation of the old global Adapting to it is now prompting changes in the marketplace run by state-owned telecoms monopolies. telecoms industry that are transforming the R&D In the first, it was opened up to outside equipment process out of all recognition—and reaching beyond it manufacturers, who transformed the hardware. In the into every aspect of the business. second, its networks and international cables were The essence of OI is an acceptance of the need to opened up to outside service providers, who helped collaborate with other parties—suppliers, academic to ensure that, when the time came, the blessings of4 © The Economist Intelligence Unit 2008
  6. 6. Opening up How R&D is changing in the telecommunications sector todayOver the next two years, how do you expect the pace, cost and complexity of researchingand developing new products/services to change?(% respondents) Increase significantly Increase moderately No changeComplexity of R&D 40 44 11Pace of R&D 34 49 14Cost of R&D 21 56 15Source: Economist Intelligence Unit surveythe worldwide web were quickly made available via 74% of the respondents agree that their approach tobroadband to millions of ordinary customers. And now, innovation is already significantly different from the wayin the third stage, it is wide open to the new ideas and they handled it five to ten years ago. When asked aboutvaulting demands of those same customers. their expectations of change in the next two years, The broad consequence for industry executives is there was roughly an 80/20 split among respondentsa quantum step-up in the pace of change, bringing regarding pace, cost and complexity: around 80%increased complexity (and some additional spending) think change will be increasing either moderately orin its wake. In our survey of more than 320 executives, significantly under all of these three headings. © The Economist Intelligence Unit 2008 5
  7. 7. Opening up How R&D is changing in the telecommunications sector today From telco to softco T raditional telephone companies were large stretch to over one-fifth of the workforce. A new breed organisations dominated by linear processes of “innovation directors” has emerged at corporate and silo-bound structures. Adapting them to level, charged with remoulding the old structures the world of OI is taking time: there are many internal and processes. Theirs is a challenging task, however, barriers that need dismantling before colleagues and it has really only just begun. Whatever the new can pool their work together and lift the boundaries familiarity of OI as a popular buzz phrase, traditional between themselves and the outside world. “Everyone attitudes will be hard to dislodge. Our survey invited in the company really has to believe that the OI model respondents to indicate the extent of their R&D is going to work,” says Mr Demassieux. collaboration with outside partners across a range of Most of the world’s large telecoms groups, both seven categories. Nearly 30% chose an alternative: equipment manufacturers and service providers, have continuing to develop new products and services set off in search of new and better R&D models, with entirely in-house. real momentum since about 2004. More than 40% Leaving behind this model in favour of OI is of our survey respondents estimate that over 10% of described by Mr Bross at BT as “turning telco into their employees are engaged on innovative projects, softco”. It is not widely expected to save on R&D costs: and a sizable minority, 23%, think the numbers one-half of respondents say that they have increased R&D spending over the past two years and even more (59%) expect it to rise over the next two years, with Which of the following approaches has your company primarily many anticipating an increase of more than 10%. Some taken to develop new products/services over the past two years? Select up to two. of the conspicuous features of the process include: (% respondents) Developing new products/services partly in-house, but relying ● Setting up internal “incubation units” to pursue on partners for some parts of this process 53 new ideas within a kind of venture-capital Developing new products/services entirely in-house environment. This will provide access to funding 28 Developing new products/services in partnership/ and technical support, even though senior collaboration with other firms 24 management knows that barely a quarter or so of Developing new products/services in partnership/ the ideas, at best, will ever be carried through into collaboration with our customers 18 commercial launches. Focusing on developing concepts/architectures, while ● Being alert to start-up businesses, not just in relying on partners for the rest 15 telecoms but anywhere that a promising idea Relying on mergers and acquisitions to bring in new products/services 13 has taken off with a possible future application Licensing intellectual property from third parties in telecoms. Their funding needs will invariably 10 Outsourcing all/most of our R&D to third parties present opportunities for an enterprising telco 4 to step in as an investor or perhaps assume full Other 1 ownership. Source: Economist Intelligence Unit survey6 © The Economist Intelligence Unit 2008
  8. 8. Opening up How R&D is changing in the telecommunications sector today● Entering mutually supportive relationships with interest in partnerships or acquisitions over the applied research teams at the top universities next two years, compared with the past two years. around the world. These typically used to be Also, rather than ignoring intellectual property sponsorship deals for blue-sky thinking that carried (IP) being developed by others, companies are a “long-term” tag, but they are now just as likely encouraged to draw on it. Equally, internal patents to be jointly managed investigations targeted can be licensed to other firms as a source of at specific problems and (or so management will revenue (rather than, as is often the case, using be hoping) a short-cut to clever solutions in the it as a defence mechanism against another firm near to medium term. Around one-half of our developing the same IP). survey’s respondents acknowledge active links with academic research. Above all, perhaps, the process involves a readiness to accept that individuals, coming together● Forming strategic partnerships with other large from disparate corporate and non-corporate companies, not just from the telecoms industry but backgrounds, may now hold the key to the most from adjacent sectors such as television, computer successful brainstorming sessions. BT talks about games and publishing. Our survey indicates a “agile working” groups—drawing on technical, big drop in the proportion of firms showing no development, marketing and sales skills all in one Case study: Telefónica’s techno-heads attracted to the Campus comments, says Mr Shaw, have assisted Party from companies, consultancies, uni- O2 in numerous ways—helping, for Internet laboratory versities and bedroom start-ups, he thinks example, to iron out some of the initial it “encapsulates the essence of Open Inno- security concerns among users, which the vation”. company might otherwise have seriously Young people in particular—armed with He originally worked for O2, a UK underestimated in the promotion of the laptop computers, mobile phones, the mobile operator that was acquired by product (finally launched in March 2008). power of the web and plenty of time at Telefónica in March 2006. Since then, and Another example has involved a much their disposal—have become a potent still branded as O2, the business has been more structured approach to customers: in ingredient of any successful R&D effort. able to harness customer feedback for OI November 2007 a ring-fenced development One striking reminder of this has been an projects over the Internet, in ways that team put “O2 Wallet” into the London extraordinary event held annually since have often surprised Mr Shaw. At the start market for a trial period with 500 users. 2000 in the Spanish city of Valencia and of 2007, for example, O2 squirreled away It is a mobile service that includes a known as the Campus Party. Around the on its website the prototype of a proposed travel card capability for the city (under clock for seven days, thousands of (mostly new mass-market product called Blue the Oyster card aegis) and a Barclaycard young) participants exchange ideas on Book. It has been designed to straddle component. The trial will last six months, the latest crazes in computer simulation, mobile phones and the internet, allowing and customer feedback via the internet is communications software and all things users to copy information (including already prompting significant refinements. digital. The Valencia event is sponsored photographs) off their handsets and onto Mr Shaw sees the process as the kind of these days by Telefónica, the giant Span- their websites at the touch of a key or two. internal incubation that suits OI perfectly: ish group with telecoms businesses across Within weeks, despite being quite hard to “it is all about setting up an environment in Europe and Latin America. Russ Shaw was locate, the service attracted thousands which managers can get away from the day- appointed as Telefónica’s first director of of experimental users. By December to-day operating business while remaining innovation in 2007. Sizing up the assorted 2007, it had 40,000 subscribers. Their extremely close to their customers”. © The Economist Intelligence Unit 2008 7
  9. 9. Opening up How R&D is changing in the telecommunications sector today How many new products/services did your firm bring to market over the past two years—and how many does it plan to introduce in the next two years? (% respondents) None Less than 3 3 to 6 7 to 20 More than 20 Don’t know Past two years 5 27 30 22 15 1 Next two years 2 18 28 34 13 5 Source: Economist Intelligence Unit survey room—that can bring a new dimension of flexibility The Internet has left the telecoms industry with no to its development programmes, delivering a better option but to treat customers as an integral part of end-product faster and more cheaply that in the past. the innovation process. Almost two-thirds of the As recently as 2005, agile working accounted for respondents to the survey confirm that they have less than 15% of the development prospects inside involved customers in the innovation process over the BT. By January 2008, the corresponding figure was past two years. As this suggests, Internet feedback is 70%. The company also taps external expertise with playing a steadily greater role in new product launches “hothouse” discussions—and in deference to some of everywhere, and there is going to be no shortage of the most knowledgeable customers in the market, the these. The number of new products headed for the company has not been slow to invite the participation marketplace looks set to rise inexorably. Among the of teenagers at schools in the vicinity of its main UK survey respondents, about one in three expect to research laboratories. launch between seven and 20 new products in the More broadly, every teenager with a view now next two years, up from about one in five over the past has the power to share it with a million of his or her two years. This increase exactly matches a drop among peers (see box: Telefónica’s Internet laboratory). those anticipating few or no launches.8 © The Economist Intelligence Unit 2008
  10. 10. Opening up How R&D is changing in the telecommunications sector todayRaising the barO f course, people across the industry know underlying today’s leading-edge products often dates that OI is about much more than last- back decades. For example, the coding technology minute market trials for emerging products. at the core of the mobile communications standard,To really prove its worth, OI must help telecoms CDMA, was originally a military technology designedcompanies to meet three principal objectives: help during the second world war. Contrast this with thefind new ideas; accelerate new product development; range of life cycles assigned by survey respondentsand create stronger links with customers. to their average product: a bell-curve distribution runs from less than three months to over three years,● First, it needs to stimulate fresh thinking about with the median cycle lasting 12-18 months. Whenfuture sources of revenue for an industry that has seen asked about the future trend, one-half expect to seethe profitability of its traditional services worn to a life cycles shorten further in the next two years andthread by competition: in many markets, including the one-fifth of respondents think that they will shrinkUS, basic voice and data services are now increasingly by at least 30%. Mr Demassieux at Motorola says itfree to the end-user. Telecoms firms must find ways of is hard to see how the time needed to establish alinking remarkable new digital technologies to their basic communications standard like 3G could ever bemass-market customer bases, through partnerships compressed to much less than ten years. “But we mustwhere appropriate, or risk losing their customers to learn as an industry how to use OI to help us reducebreakthrough ideas from their rivals, which include the gestation period on new product ideas from 10-15some of the most innovative companies on the planet. years down to three years or less.”The danger is evident already in the extent to whichthe boundaries of the traditional telco sector are What is the average amount of time it takes for your firm’s products/services to reach the maturity phase of their lifecyclebeing blurred. In the survey, about two-thirds (64%) in their particular market?of respondents say that, within the past five years, (% respondents)they have seen firms entering their marketplace for Less than 3 monthsthe first time on the back of a new innovation, and the 2 3 to 6 monthssurvey garnered plenty of examples, such as Apple’s 9entry into the mobile handset market. 6 to 9 months 16 9 to 12 months● A second main objective of OI is to accelerate the 16 12 to 18 monthswhole business of turning blue-sky thinking into 21 18 to 24 monthsmarketable products and services. The rationale 14for good old-fashioned joint ventures has always 24 to 36 months 9included a sharing of costs and a pooling of ideas, but More than 36 monthsan added dimension of OI is the way that non-linear 7 Don’t know/Not applicableprocesses might be used to move the whole R&D effort 6along much more quickly. The fundamental research Source: Economist Intelligence Unit survey © The Economist Intelligence Unit 2008 9
  11. 11. Opening up How R&D is changing in the telecommunications sector today To what extent do you agree or disagree with the following? (% respondents) Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree Customers have a much greater impact on our innovation process today than in the past 31 47 16 4 1 Source: The Economist Intelligence Unit survey ● The third main objective is that OI must help merging, that is, of hitherto separate services. The companies to identify what Russ Shaw, director of marketing folk want to find new products with which innovation at Spanish telecom group Telefónica customers will develop some emotional affinity. It calls “differentiated customer experiences”. This is has happened in other high-tech markets: witness where a much expanded role for customers in the the way in which businesspeople especially have innovation process might bring real dividends for come to identify so strongly with a branded product the marketing department. As ever, they are looking such as RIM’s ubiquitous Blackberry. OI will really for new products that offer far more than just a lower prove its mettle if it can help to lead to this kind of price or even a better route to “convergence”—the breakthrough.10 © The Economist Intelligence Unit 2008
  12. 12. Opening up How R&D is changing in the telecommunications sector todayToday new technology, tomorrow a new organisationA dopting OI with these goals in mind, however, “innovation” is not just about the introduction of new is simply not compatible with the risk-averse technology. As Mr Bross at BT puts it, “the innovation culture that characterised the old telecoms genie is out of the bottle”. In the survey, respondentsindustry when so much of it was berthed alongside were asked how far innovation would actually amountnational post offices. For many managers, perhaps over the next two years to a refinement of existingmost, the learning process is only just beginning. They business processes. Almost 50% see it being “stronglywill need, for instance, to contend with the difficulties focused” in this direction, a notable shift from theof handling far more partners at the same time, 29% who think the same is true of the past two years.juggling different timelines and conflicting priorities. Accordingly, there is strong endorsement for theThey will face HR problems in the workplace, where view that business-process innovation would beyounger engineers will inevitably adjust to an increasingly important over the next two years.outward-facing (and heavily Internet-influenced) But then, standard business practices have beenculture rather more easily than will most of the under pressure from all sides and not just from a needgreybeards. And in place of the old assumption that to rethink R&D methodologies. With a rising portion ofnothing would be sourced externally that could be income derived from mobile advertising, for example,made in-house, they will have to confront some tricky many firms have needed to revise their basic revenuemake/buy decisions over the R&D budget—not least in model: 58% of respondents agree that they have donepersuading in-house engineers to part with money for so in the past two years or would be doing so in theresearch by third parties. next two. In short, no industry is more exposed than In fact, novel make/buy decisions will crop up telecoms to the need for that fundamental break withat every point of the value chain as the switch to OI past organisational norms that is now being so muchgathers pace. The essence of a more open approach discussed in management circles. As the strategyis that successive collaborative projects will need guru, Gary Hamel, puts it in the first 2008 edition ofhandling in different ways. Every corporate function The McKinsey Quarterly2, “The Internet is making itfrom finance and marketing to the management of possible to amplify and aggregate human capabilitiesintellectual rights and corporate communications in ways never before possible … [so] we’re going towill therefore need continuous reassessment. This have to turn a lot of our legacy management beliefsprompts many people in the industry to observe that on their head.” But does this mean that youngerTo what extent is innovation at your firm focused on refining existing business processes (eg, enhanced billing process)or developing new business processes?(% respondents) Strongly focused on Somewhat focused on Little or not at all focused on Don’t know/ refining business processes refining business processes refining business processes Not applicablePast two years 29 46 20 5Next two years 48 33 12 6 2. The McKinsey Quarterly, McKinsey & Company,Source: Economist Intelligence Unit survey 2008. © The Economist Intelligence Unit 2008 11
  13. 13. Opening up How R&D is changing in the telecommunications sector today Has your company revised its revenue model over the past two Those inside the biggest global groups can make years, or does it plan to do so within the next two years, to reflect the rapidly changing telecommunications landscape a fair case that the fixed-line business model has (eg, switching to an ad-based revenue model)? been under threat for so long that their teams are (% respondents) now well and truly open to new ideas. Some smaller We already did so more than two years ago 9 mobile operators, by contrast, have yet to see their Yes, we did so in the past two years core voice and SMS traffic volumes peaking: their 31 Yes, we plan to do so within the next two years businesses, it is implied, are less flexible than some 27 outsiders might suppose. And along with their legacy We are considering this, but have no plans to do so right now 14 management beliefs, most of the big groups have We have not changed our model and don’t plan to do so right now of course inherited plenty of cash. They can use it to 9 Source: Economist Intelligence Unit survey speed the realignment of their organisations, not least by purchasing successful mobile operators. No doubt acquisitions will go on being used to perk up the innovation score sheet, especially where they companies with less of a legacy to worry about might bring direct benefits to the bottom line as might enjoy a lasting advantage? Given the heavily well as bright ideas. As Mr Shaw confirms, “If, in the structured nature of the traditional telco and the process of looking for venture-capital targets, I come appearance of so many sprightly new competitors across a company that has a more efficient way of since the 1990s, it is a potent question for the delivering an existing service, I’m certainly going to industry. take a closer look.”12 © The Economist Intelligence Unit 2008
  14. 14. Opening up How R&D is changing in the telecommunications sector todayStrategy before structureW ithin more than one successful upstart ran the trains. But maintaining the infrastructure company, however, there is an evident and looking after the passengers came eventually to conviction that their lack of past baggage be recognised as different businesses. Integrationcan be a powerful source of advantage. No upstart was left behind, so that modern customer-facinghas grown faster than Skype, the Internet-borne travel companies could offer their services on a safecommunications company that was launched in 2003 network owned and operated by others as a basicand then bought by eBay for US$2.6bn in 2005: utility. The parallel outcome in telecoms will seeit had 276m subscribers at the last count. Stefan software-driven companies (like Skype) developingÖberg heads up the development of its telecoms and ever better applications for the end-user, while thebusiness products and sees OI as a critical part of big telco groups settle down to making good moneythe company’s DNA: “Openness was built in from the as guardians of the cable networks. Open Innovationbeginning.” With no central infrastructure of its own will be critical to the first group, much less so to theand a complete reliance on the Internet, management second, and different aptitudes at OI will have muchknows the business will live or die depending on its to do with sorting out the one group from the other.ability to keep up with its customers. “Many of the big global groups are struggling with this Thus, it was quick to take note when a surprisingly emerging divide,” comments Mr Öberg. “They do needlarge proportion of its subscribers wanted to use to change their business model.”a web-cam device to make video telephone calls. The notion that time is fast running out for theEarly in 2006, it launched a prototype service, Video old vertically integrated telecoms industry is readilyCalling, and then worked closely with a network of endorsed by Anastassia Lauterbach. She is the head1,500 or so customers on addressing the early flaws. of strategy at T-Mobile International, a subsidiaryTheir feedback—and a close partnership with an of Deutsche Telekom. The introduction of newexternal hardware developer, Logitech—led directly networks based on Internet protocols has led, sheto the launch late last year of High Quality Video, says, “to a whole new eco-system”—a horizontala much refined service with a new and far superior marketplace, that might indeed be teeming one daycamera. Skype managers think video conferencing with new applications from every household name inhas enormous potential. They can pursue successive the software business. But to envisage an industryrounds of innovation without needing to invest polarised between infrastructure companies andheavily each time in a fresh infrastructure, and they consumer-led providers is to predict a future with acan work within a culture wholly committed to the fundamental flaw. Those who operate the networks,next big change. As Mr Öberg points out, “We don’t she says, will also run the customer call centres. Andhave to deal with the risks of cannibalisation.” why would a T-Mobile centre be interested in taking He and his colleagues are inclined to compare calls from irate customers of third-party services?current trends in the telecoms industry with the Or to put the problem in a wider context, why wouldevolution of the railways. In the beginning was total a network operator with billions invested in itsvertical integration: those who built the track also infrastructure be happy to let asset-light rivals steal © The Economist Intelligence Unit 2008 13
  15. 15. Opening up How R&D is changing in the telecommunications sector today a march on it in building hugely valuable consumer expertise in the “middleware” of enabling devices, as brands? Ms Lauterbach sees it as one of the biggest well as the hardware of cables and relay stations—and strategic issues facing her peers, and one of the then learn to focus on the portfolio of selected least understood. “Its importance is being hugely applications that underpin their brand with end-users. underestimated within the industry itself as well as This will mean making difficult choices. Ms Lauterbach within the broader marketplace.” believes that most of the leading operators have only Like her counterpart at Skype, she thinks begun to think seriously about this in the past year or business models are therefore in urgent need of two. But no amount of innovation, open or otherwise, reappraisal. Unsurprisingly, however, she draws a will compensate the operators in the long run for a different conclusion. The biggest network operators, lack of strategic direction. First they must decide on like T-Mobile’s own parent group, must sustain their focus, before turning their resources to building the competitive position derived from their core the innovative operating systems and services that knowledge of the networks—their accumulated their customers will expect from them.14 © The Economist Intelligence Unit 2008
  16. 16. Opening up How R&D is changing in the telecommunications sector todayConclusionT he Internet has transformed the process of wireless telecoms marketplaces in the world. Perhaps innovation in telecoms. This is quickening the same kind of leap-frog phenomenon will recur the pace of technological change, putting now in other places, from Latin America to southerntraditional organisational structures under great Asia. So where, among the largest countries, shouldpressure and raising some fundamental strategic leading telecoms operators be looking hardest atissues for the industry. It is also, of course, speeding consumer behaviour for a clue to future trends? Not toalong its globalisation, but it is worth noting continental Europe, according to our survey. The UShere that national markets can still retain unique and Japan are seen as the best bellwether markets,characteristics. And as with companies, so with followed by China, South Korea and India.countries: some have moved much more quickly But whatever the trends, senior executives inthan others to ensure that their telecoms markets the telecoms industry seem universally agreed thatare open to innovation. Those with the least to lose the companies best placed to keep up with them arehave been among the first to ditch the old ways. It is very likely over time to be those that can genuinelyno coincidence that the software engineers behind embrace Open Innovation. Less clear is the extent toSkype were based in Tallinn, the capital of Estonia which they have yet taken to heart the organisational(population: 1.3m). The company’s development and strategic implications—and without a doubt thecentre is still located there, in a country that transformation that many anticipate on the back ofabandoned much of its decrepit fixed-line network OI has only just begun. “Our industry has a long wayin the immediate aftermath of the Soviet empire’s to go,” says Telefónica’s Mr Shaw. “We are only on thecollapse and now boasts one of the most sophisticated cusp of this.” © The Economist Intelligence Unit 2008 15
  17. 17. Appendix: Survey resultsOpening up: How R&D is changing in the telecommunications sector today Appendix In February 2008, The Economist Intelligence Unit surveyed 327 senior technology and telecoms executives from around the world. Our sincere thanks go to all those who took part in the survey. Please note that not all answers add up to 100%, because of rounding or because respondents were able to provide multiple answers to some questions. What is your company’s main line of business? What percentage of your workforce is currently involved in an (% respondents) innovation project (eg, spending at least half of their time working on a relevant project aimed at identifying a new Full-service integrated telecommunications provider product/service, or upgrading a current product/service or 24 process, or a combination of both)? IT services provider (% respondents) 14 IT software provider None 14 1 Telecommunications equipment manufacturer Less than 3% 11 21 Telecommunications software provider (eg, billing, inventory management) 3% to 4% 8 14 IT hardware provider 5% to 9% 6 18 Mobile-only telecommunications provider 10% to 19% 6 20 Value-added services provider (eg, billing, customer care) 20% to 50% 4 14 Fixed-line telecommunications provider only More than 50% 3 9 Consumer electronics manufacturer Don’t know 3 3 Cable operator 1 Satellite provider 1 Which of the following most closely describes your firm’s efforts Other to conduct basic (eg, fundamental or theoretical) scientific 6 research, if any? (% respondents) We don’t engage in basic scientific research at any level. All our Approximately what is your company’s total R&D spending innovation is based on existing technologies (eg, applied research) as a proportion of its annual revenue? 38 (% respondents) We support mixed teams of researchers, including both in-house corporate researchers and also external academic researchers 22 Less than 1% 11 We don’t directly invest in basic research, but we closely monitor 1% to 2% 13 ongoing research within the academic community and seek to acquire/ license relevant technologies/start-ups emerging from them 3% to 4% 17 18 5% to 6% 12 We conduct basic scientific research in-house 14 7% to 9% 7 We sponsor academic laboratories conducting basic scientific research 10% or more 33 7 Don’t know 616 © The Economist Intelligence Unit 2008
  18. 18. Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector todayHow has the proportion of revenue your company spends on R&D changed over the past two years,and how is it expected to change in the next two years?(% respondents) Increase by more than 10% Increase 1% to 10% No change Decrease 1% to 10% Decrease by more than 10% Don’t knowPast two years 18 32 35 9 1 5Next two years 22 37 25 6 3 8How many new products/services did your firm bring to market over the past two years—and howmany does it plan to introduce in the next two years?(% respondents) None Less than 3 3 to 6 7 to 10 11 to 15 16 to 20 More than 20 Don’t knowPast two years 5 27 30 15 5 2 15 1Next two years 2 18 28 19 10 5 13 5Which of the following approaches has your company primarily And what will it focus on over the next two years?taken to develop new products/services over the past two years? Select up to two.Select up to two. (% respondents)(% respondents) Developing new products/services partly in-house, but relyingDeveloping new products/services partly in-house, but relying on partners for some parts of this processon partners for some parts of this process 45 53 Developing new products/services entirely in-houseDeveloping new products/services entirely in-house 29 28 Developing new products/services in partnership/Developing new products/services in partnership/ collaboration with other firmscollaboration with other firms 24 24 Developing new products/services in partnership/Developing new products/services in partnership/ collaboration with our customerscollaboration with our customers 23 18 Focusing on developing concepts/architectures, whileFocusing on developing concepts/architectures, while relying on partners for the restrelying on partners for the rest 17 15 Relying on mergers and acquisitions to bring in new products/servicesRelying on mergers and acquisitions to bring in new products/services 15 13 Licensing intellectual property from third partiesLicensing intellectual property from third parties 8 10 Outsourcing all/most of our R&D to third partiesOutsourcing all/most of our R&D to third parties 6 4 OtherOther 0 1 Don’t knowDon’t know 1 1 © The Economist Intelligence Unit 2008 17
  19. 19. Appendix: Survey resultsOpening up: How R&D is changing in the telecommunications sector today How many companies did your firm either acquire or partner with in the past two years, with the primary intention of bringing new technologies, products or services on board? And how many does it intend to acquire and partner with over the next two years? (% respondents) None 1 2 to 5 6 to 9 10 to 20 More than 20 Don’t know Acquire Past two years 46 17 27 4 3 1 3 Next two years 30 14 27 6 3 2 17 Partner with Past two years 10 15 50 10 7 6 3 Next two years 5 9 41 16 7 7 16 Which of the following approaches has your company carried Which of the following metrics does your firm’s senior out in its pursuit of innovation over the past two years? management primarily use to account for or measure R&D Select all that apply. progress? Select up to three. (% respondents) (% respondents) Involving customers in the innovation process ROI from new products/services launched 63 46 Collaborating with third parties to develop new products/services Proportion of revenue derived from new products/services 54 37 Working with third parties to turn an innovation Total number of products/services currently under development process into working products/services 23 34 Feedback on new products/services from internal or Identifying a specific technology/innovation process external review groups and/or customers and then acquiring or licensing it 18 25 Total spending on R&D Providing a significant internal bonus for employees 16 developing a successful product/service Ratio of ideas that are developed into commercial products/services 23 16 Sharing an internal innovation process with third parties Total time taken for an innovation to generate revenue to help deliver new breakthroughs 16 16 Number of patents filed Financing third party start-up companies or academic institutions 15 13 Number of proposals created for new products/services Giving employees a certain percentage of work time 14 to pursue their innovations of their own choice 12 Time taken from inception to launch for new products/services 14 Investing in a highly speculative technology/innovation process in the hope of a major breakthrough None; we don’t seek to measure R&D in a quantifiable way 12 9 Launching a specific technology incubator to develop start-ups Total headcount in R&D function 8 7 Providing a prize of some sort to spur innovation from outside the company Don’t know/Not applicable 7 6 Other Other 1 118 © The Economist Intelligence Unit 2008
  20. 20. Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector todayIn your view, has your company’s strategy of acquisition and/or partnership been broadlysuccessful, in terms of developing new innovations?(% respondents) Highly successful Somewhat successful Neutral Somewhat unsuccessful Highly unsuccessful Not applicableAcquisitions strategy 11 31 18 8 4 29Partnerships strategy 20 46 17 9 2 6To what extent is innovation at your firm focused on refining existing business processes (eg, enhanced billing process)or developing new business processes?(% respondents) Strongly focused on Somewhat focused on Little or not at all focused on Don’t know/ refining business processes refining business processes refining business processes Not applicablePast two years 29 46 20 5Next two years 48 33 12 6How would you rate your company’s overall performance with the new products/services it introduced over the past twoyears, in terms of commercial success, customer satisfaction and technological breakthroughs?(% respondents) Highly successful Somewhat successful Not at all successfulCommercially 30 63 7Customer satisfaction 42 55 4Technological breakthroughs 28 58 14Has your company revised its revenue model over the past two Which of the following metrics does your firm track?years, or does it plan to do so within the next two years, to Select all that apply.reflect the rapidly changing telecommunications landscape (% respondents)(eg, switching to an ad-based revenue model)?(% respondents) Percentage of capital invested in innovation-related activities 51We already did so more than two years ago Number of employees in an innovation or entrepreneur-related role 9 36Yes, we did so in the past two years Percentage of time that employees spend on innovation-related projects 31 29Yes, we plan to do so within the next two years Percentage of employees for whom innovation is one of their key goals 27 20We are considering this, but have no plans to do so right now Percentage of executives’ time spent on innovation-related issues, 14 rather than day-to-day operationsWe have not changed our model and don’t plan to do so right now 18 9 Percentage of managers with an innovation-relatedDon’t know/Not applicable background and/or training 10 9 Other 2 Dont know/Not applicable 22 © The Economist Intelligence Unit 2008 19
  21. 21. Appendix: Survey resultsOpening up: How R&D is changing in the telecommunications sector today Has your company had a new competitor from outside your traditional sector enter your market through a new innovation (eg, a software firm entering the voice communications business)? Has your firm entered a new market through the same mechanism? (% respondents) Yes, this has happened Yes, this has happened No, but we expect this to happen No, but we expect this to happen No, and do not expect Don’t know in the past five years in the past two years within the next two years within the next five years it to happen Another firm entering our market through a new innovation 23 38 17 10 8 4 My firm entering a new market through a new innovation 15 35 26 9 9 5 To what extent do you agree or disagree with the following? (% respondents) Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree Don’t know/ Not applicable The way we innovate today is significantly different from how we approached it five to ten years ago 30 44 15 5 1 4 Customers have a much greater impact on our innovation process today than in the past 31 47 16 4 11 Innovation costs us a lot more today than it did five or ten years ago 15 31 23 21 4 5 Our company only has a vague sense of how effective any particular innovation initiative is 7 31 25 25 10 2 Business process innovation is increasingly important for our company’s future success 38 45 12 1 2 1 Innovative marketing is where we put most of our attention (eg, new ways of promoting products/services), rather than actual product or process innovation 15 30 26 22 7 1 Over the next two years, how do you expect the pace, cost and complexity of researching and developing new products/services to change? (% respondents) Increase significantly Increase moderately No change Decrease moderately Decrease significantly Don’t know Pace of R&D 34 49 14 2 1 Cost of R&D 21 56 15 71 Complexity of R&D 40 44 11 2 120 © The Economist Intelligence Unit 2008
  22. 22. Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector todayHow long is the average lifecycle of your firm’s products/services today, compared with what it was two years ago?And how do you expect it to change in two years’ time?(% respondents) Much longer A little longer About the same A little shorter Much shorter Don’t know/ (at least 30%) (10%-29%) (+/- 10%) (10%-29%) (at least 30%) Not applicableToday, compared to two years ago 6 19 28 29 11 7In two years’ time, compared to today 8 10 26 30 20 7What do you see as the most significant innovation challenges What is the average amount of time it takes for your firm’sfacing firms in the telecommunications industry today? products/services to reach the maturity phase of their lifecycleSelect up to three. in their particular market?(% respondents) (% respondents)Pace of technological change in the industry Less than 3 months 46 2Dealing with disruptive technologies (eg, WiMax, VoIP) 3 to 6 months 44 9Determining an appropriate business model for new products/services 6 to 9 months 34 16Distinguishing breakthrough new technologies from over-hyped innovation 9 to 12 months 32 16Constant downward pressure from customers on pricing 12 to 18 months 24 21Choosing which companies to partner/collaborate with 18 to 24 months 24 14Sustaining R&D investment through a business/economic downturn 24 to 36 months 19 9Dealing with the shortage and/or cost of talent More than 36 months 19 7Collaborating with multiple industry stakeholders (eg, operators, handset makers) Don’t know/Not applicable 11 6Understanding how to integrate content appropriately 9Knowing when to “fail” and switch R&D direction 8 In your opinion, which of the following countries do you thinkMeeting regulatory requirements provides the strongest indicator of what future consumer trends 7 might look like for the telecommunications industry? (% respondents)Ensuring that new products/services are not infringing on existing patent rights 5Other US 20 2 Japan 19 South Korea 14 China 14 India 12 UK 10 France 2 Germany 2 Canada 1 Other 4 Don’t know 4 © The Economist Intelligence Unit 2008 21
  23. 23. Appendix: Survey resultsOpening up: How R&D is changing in the telecommunications sector today About the respondents In which region are you personally based? What are your main functional roles? (% respondents) Please choose no more than three functions. (% respondents) Asia-Pacific 33 Strategy and business development Western Europe 45 31 General management North America 39 16 Marketing and sales Eastern Europe 29 8 IT Middle East and Africa 17 7 R&D Latin America 16 3 Operations and production 16 Finance 14 What is your title? Information and research (% respondents) 13 Customer service Board member 9 4 Risk CEO/President/Managing director 6 23 Procurement CFO/Treasurer/Comptroller 3 5 Legal CIO/Technology director 3 6 Human resources Other C-level executive 2 11 Supply-chain management SVP/VP/Director 2 23 Other Head of Business Unit 2 9 Head of Department 1922 © The Economist Intelligence Unit 2008
  24. 24. Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector todayWhat are your company’s annual global revenues in US dollars? How has your company’s EBITDA changed each year, on average,(% respondents) over the past three years? (% respondents) Decrease 12 $500m or less 51 No change $500m to $1bn 10 10 1% to 5% increase $1bn to $5bn 18 19 $5bn to $10bn 5 5% to 10% increase 21 $10bn or more 16 10% to 20% increase 11 Over 20% increase 12 Don’t know 14How has your organisation’s share price changed over the pastthree years, if applicable?(% respondents)Over 100% increase 851% to 100% increase 531% to 50% increase 1011% to 30% increase 12Less than 10% increase 6No change 4Less than 10% decrease 511% to 20% decrease 4Over 20% decrease 7Don’t know/Not applicable 38 © The Economist Intelligence Unit 2008 23
  25. 25. Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper.24 © The Economist Intelligence Unit 2008
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