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

1
2

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

VisionMobile.com/Strategy © VisionMobile 2012. Some rights reserved.
1

1
2


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 world's 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

1
2


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!

3

1
2


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.

4

1
2


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/

5

1
2


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.

6

1
2


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 couldn't 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

7

1
2


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,

8

1
2


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.

9

1
2


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

10

1
2


ambition, but is further behind in terms of its

11

1
2


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?

12

1
2


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

13

1
2


important, the business models of these

14

1
2


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.

15

1
2


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

16

1
2


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 don't 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

17

1
2


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?

18

1
2


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

19

1
2


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

20

1
2


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/

21

1
2


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,

22

1
2


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?

23

1
2


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.

24

1
2


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.

25

1
2


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 app's 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

26

1
2


access to local audiences, through innovation

27

1
2


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?

28

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

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Destacado

Destacado (7)

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

Similar a The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco (20)

Más de Ericsson Russia

Más de Ericsson Russia (18)

Último

Último (20)

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