Speed-dialing in to innovation: The pressing need for telecom operators to innovate or lose relevance
Today, telecom operators around the world are faced with a number of threats to their revenues, margins, and even their business models. In order to overcome these pressures, telecom operators must learn to innovate successfully.
Speed-dialing in to innovation The pressing need for telecom operators to innovate or lose relevance
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About the authors
Beirut Gabriel Chahine Partner +961-1-985-655 gabriel.chahine @strategyand.pwc.com Bahjat El-Darwiche Partner +961-1-985-655 bahjat.eldarwiche @strategyand.pwc.com Chady Smayra Partner +961-1-985-655 chady.smayra @strategyand.pwc.com Dubai Jayant Bhargava Partner +971-4-390-0260 jayant.bhargava @strategyand.pwc.com Jad Hajj Partner +971-4-390-0260 jad.hajj @strategyand.pwc.com Abhijit Navalekar Partner +971-4-390-0260 abhijit.navalekar @strategyand.pwc.com
David Tusa Partner +971-4-390-0260 david.tusa @strategyand.pwc.com Adel Belcaid Principal +971-4-390-0260 adel.belcaid @strategyand.pwc.com Bassam Hajhamad Principal +971-4-390-0260 bassam.hajhamad @strategyand.pwc.com Frankfurt/Dubai Olaf Acker Partner +49-69-97167-0 olaf.acker @strategyand.pwc.com Riyadh Hilal Halaoui Partner +966-11-249-7781 hilal.halaoui @strategyand.pwc.com
Olaf Acker is a partner with Strategy& in Frankfurt and Dubai. He focuses on business technology strategy and transformation programs for global companies in the telecommunications, media, and high-tech industries. Peter Weichsel was a partner with Booz & Company. Adel Belcaid is a principal with Strategy& in Dubai. He advises corporations, regulators, and government agencies on strategy for the telecommunications and media industries. Bassam Hajhamad is a principal with Strategy& in Dubai. He specializes in telecom strategy development with a particular focus on technology and corporate strategy.
Diptendu Mitra and Mrinal Anand also contributed to this report.
This report was originally published by Booz & Company in 2012.
Telecom operators around the world are faced with a number of threats to their revenues, margins, and even their business models. The pace of change is speeding up, the popularity of smartphones is booming, and business and consumer demand for new services keeps growing. Meanwhile, the competition to satisfy all these demands is increasing, much of it from companies outside the traditional telecom ecosystem. If telecom operators are to meet the needs of their customers and head off these new rivals, they must learn to innovate much more successfully than they have in the past. And they must do so in areas that may be unfamiliar to them, including new IT and cloud services and the development of content, applications, and other digital services. In this Perspective, we offer a four-step approach designed to enable telecom operators to boost their innovation efforts. First, they should develop separate centers for promoting innovation. Second, they must foster a strong internal culture of innovation. Third, they have to open up their networks and platforms to outside developers. Fourth, and finally, they must create autonomous venture capital arms for investing in promising new technologies and adjacent industries.
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GARDENS WITHOUT WALLS
The increase in demand from smart, connected, and demanding customers is placing telecom companies under unprecedented pressure. As smartphones and tablet computers become more popular and capable, end-users, both consumers and businesses, increasingly expect their applications and services to be available everywhere, all the time. The number of broadband lines worldwide is expected to total more than 4.2 billion by 2016, a 2.5-fold increase over 2011, and 94 percent of them will be mobile lines.1 This increase in demand has forced operators to invest significantly to boost network capacity and
connectivity, putting more and more pressure on telecom companies’ operating margins. At the same time, as industry verticals become increasingly digitized, they are demanding a wide variety of new services such as mobile payment platforms and cloud computing— even as the market for mobile apps continues to grow, a further disruptive force that operators must learn to benefit from. Thanks to these trends, the integrated value chain on which telecom operators have long depended— the proprietary networks, critical applications and services, billing platforms, and even the billing
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relationship with end-users—is becoming increasingly open, modular, and converged. It is moving out of the operators’ control. As a result, the telecom ecosystem itself is becoming much more competitive, as new entrants from adjacent industries look to exploit this openness, cater to burgeoning customer expectations, and thus challenge the telecom operators’ traditional walled gardens. Already, the smartphone application market, which has recently seen some sky-high valuations for developers such as Instagram, OMGPOP, and Funzio, is continuing its growth with very limited carrier participation. Worse, Apple is rumored to be
contemplating its own virtual carrier services, leveraging the high penetration of iPhones and iPads and the direct billing relationship it has with end-users through the iTunes platform. These new entrants come with a very different set of cultures and capabilities, the most worrisome of which is their long-standing ability to innovate rapidly and effectively. In these troubled waters, where network capability alone is no longer a differentiator, operators must understand clearly where they stand and then develop the innovation capabilities needed to reinvent themselves in the fast-evolving and ever more complex telecom
ecosystem. This is not just a matter of developing new ways to monetize data services beyond the existing business models. Rather, operators must shift their entire mind-sets away from focusing on cost optimization and synergies among current offerings and operating companies, or relying on M&A and globalization to drive inorganic growth. Instead, they should focus on enabling entirely new innovative services and industry partnerships that can generate new revenue streams. Operators today must learn to take the lead on innovation in the telecom industry, and learn quickly.
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Traditionally, telecom operators have not been known for their innovation prowess, especially in comparison with those companies in adjacent industries such as software and the Internet, and the computers and electronics industries that are now elbowing their way into the realm of communications. According to the results of Booz & Company’s 2011 Global Innovation
1000 study, the telecom industry spends significantly less money on research and development (R&D) as a percentage of revenue (an average of just 1.4 percent) than either of the other two groups (12.8 percent and 6.1 percent, respectively). The telecom operator that spent the most money in 2010 was Nippon Telephone and Telegraph (NTT), a total of US$3.1 billion, yet it was ranked just 42nd in terms of the absolute amount of money spent. The U.S.’s largest telecom company, AT&T, was ranked 91st, and Telefónica was ranked 112th. By comparison, Samsung, ranked seventh, spent $7.9 billion on innovation in 2010 (see Exhibit 1).
Furthermore, Samsung, Google, and Apple, which are consistently ranked among the most innovative companies globally, not only outperform operators in terms of the percentage of sales they devote to R&D and innovation, they also far outstrip them in the number of patents they have received. Patent ownership in the mobile communications space has become critically important, judging by the increasing number of patent lawsuits, and has been a primary factor in many recent acquisitions, including Google’s 2011 purchase of Motorola Mobility. A comparison of U.S. patent portfolios of mobile technologies, for example, shows that as
Exhibit 1 Evolution of Innovation Rankings
SELECTED SOFTWARE AND INTERNET, COMPUTING AND ELECTRONICS, AND TELECOM COMPANIES 2009–2010 COMPANY R&D SPEND (US$ MILLIONS) 2010 Microsoft Samsung Google Amazon Apple NTT BT AT&T Telefónica Vodafone Deutsche Telekom $ 8,714 $ 7,873 $ 3,762 $ 1,734 $ 1,782 $ 3,139 $ 1,296 $ 1,345 $ 1,057 $ 447 $ 133 R&D SPEND AS A PERCENTAGE OF REVENUE 2010 13.9% 5.9% 12.8% 5.1% 2.7% 2.6% 4.1% 1.1% 1.3% 0.6% 0.2% INNOVATION RANK BY R&D SPEND
2010 4 7 34 75 70 42 95 91 112 231 571
2009 2 10 44 89 82 40 64 104 106 204 299 Telecom Operators
Source: Booz & Company
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of 2011, AT&T was the only telecom operator among the top 10 companies with the highest number of patents (see Exhibit 2). In truth, with the exception of a few historical incumbents with fullyfledged R&D labs, telecom operators have traditionally been service companies. They have depended on other companies in the telecom value chain—the manufacturers of handsets, networking, and other equipment—for many of the critical technological innovations the operators then commercialized. In the U.S., for example, Verizon Wireless has long depended closely on Qualcomm
for much of its technology and service innovations, including infrastructure and service development platforms. Until a few years ago, this was a viable model, because the telecom operators’ backyards were still guarded by a licensed spectrum and the end-user billing relationship. In fact, there was a time when this model served operators pretty well, allowing them to focus on subscriber acquisition and retention, as well as on average revenue per user management, and to devote their financial and management resources to marketing and sales, spending significant amounts on promotions and advertising.
The downside of this model is that the resulting corporate culture inherently grants innovation a secondary status within the organization. Innovation processes, when they do exist, are typically owned by junior management. More important, innovation key performance indicators, such as the number of patents, revenue from new products, or the strength of the idea pipeline, are often absent and do not figure among the priorities of senior management. As a result, telecom operators are on the receiving end of much of the technological disruptions of recent years and now find themselves exposed like never before.
Exhibit 2 Telecom Operators Are Not as Innovative as Companies in Adjacent Industries
TOP U.S. MOBILE PATENT HOLDERS 2011
RIM Nokia Microsoft Qualcomm AT&T Samsung Motorola / Google IBM Sony HP 0 500 1,000 1,500 2,000 2,500 3,000 3,500 Granted Applied for
Number of U.S. Mobile Patents Applied for and Granted
Source: MDB Capital, Bloomberg, Booz & Company analysis
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CLOSING THE GAP
The significant difference in the number of mobile apps distributed by technology companies like Apple and Google compared with telecom operators is just one symptom of the growing gap in innovation between the two groups. By extension, the amount of revenues generated by those apps and the number of app developers in their respective ecosystems also illustrate the telecom company/ technology company divide. Companies from both the software and Internet industries and the computer and electronics industries have long boasted their own unique, systematic approaches to innovation. They develop innovative platforms, establish highly entrepreneurial internal cultures, create outreach programs, and employ flexible business models to build relationships with developers. As a result, they have succeeded in bringing attractive apps and services to their customers very quickly.
Google, for example, employs a technology-driven innovation strategy that gives technical personnel plenty of time to come up with new ideas, thanks in part to its well-known 70-20-10 rule. This allows employees to spend 70 percent of their time on core business tasks, 20 percent on related projects, and 10 percent on pet projects. The company has also benefited from its commitment to open-source code development, which includes sponsoring outreach programs such as “Google Summer of Code” and “Google Code-in” in collaboration with the wider developer community. Amazon takes a different approach, focusing on top-down innovation driven from corporate headquarters. The company maintains a separate R&D department to foster emerging opportunities. All new ideas are first evaluated by corporate executives; once developed and prototyped, they are pitched internally to corporate executives for approval. A final graduation test has to be passed that proves the project can be easily integrated into the company’s core business. After approval is received, the project is given additional resources and isolated from the core
R&D department to provide it with a start-up feel. The time line for each new project is structured so that new products are ready for the holiday shopping season. Employee innovation is encouraged through recognition during all-employee meetings, and bonuses to staff for new patents are regularly granted. Despite the telecom industry’s slow progress on the innovation front overall, some operators have taken significant steps toward boosting innovation, shifting their focus from creating scale advantages and optimizing costs to placing innovation, and the many opportunities offered by digitization, at the forefront of their strategies, in hopes of generating new revenue streams (digitization is the pervasive adoption of a wide variety of digital, real-time, and networked technologies). Those in the vanguard of the trend are building high-speed data pipes, enabled by long-term evolution and so-called FTTx technologies (broadband provision using optical fiber to replace phone wires), to deliver the next generation of products and services, implementing distributed innovation platforms, R&D centers, and open application programming interface
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Innovation at AT&T Recently named the most valuable telecom brand worldwide, AT&T, the world’s largest operator, with $127 billion in 2011 revenues, has long been among the most innovative operators. It holds more than 7,000 patents, employs 1,200 researchers, and its developer program has consistently been ranked the highest among U.S. operators for five straight years. Today, three trends are shaping the growth of AT&T: mobility, globalization, and virtualization. To support these trends, AT&T has made investments in several areas of innovation. AT&T Foundry Innovation Centers. In 2011, AT&T launched three innovation centers around the world, in Silicon Valley; Dallas, Texas; and Tel Aviv, Israel. Together with its partner-sponsors, including Alcatel-Lucent, Microsoft, Cisco, Ericsson, Amdocs, and Juniper Networks, AT&T committed $90 million to the centers over five years. AT&T’s vision is to create an open, collaborative environment of people and processes to inspire and promote the generation and progression of ideas from concept to commercialization between AT&T and third-party innovators. The centers focus on applications, devices, cloud services, and improvements in operations. Cloud computing. For AT&T, the cloud is not merely a service it can provide customers; it is at the very heart of the company’s business going forward and the only way to prevent AT&T from becoming little more than a provider of “dumb pipes” (i.e., a mere carrier of other’s signals). In addition to its Cloud Synaptic platform, AT&T recently announced its new Cloud Architect, an automated Web hosting and cloud-based infrastructure platform. In parallel, AT&T is deploying a gateway to give developers and enterprises direct access to its network to help them launch innovative new services and apps. Digitization. AT&T continues to be a leader in digitization, with 13 million machine-to-machine devices already connected to its network, generating more than 30 petabytes (equal to 30 million gigabytes) of data daily and growing at the rate of 1 million more devices every quarter. Its efforts in this area include AT&T mHealth, a new platform designed to bridge the gap between health and mobility. Developers will be able to build new mobile solutions for consumers, with a goal of allowing better use of their health data. AT&T’s Digital Life offering provides retail customers with such services as home control and automation, monitoring and security, and energy management. And with 90 percent of all new cars sold in 2020 expected to be connected to the Internet, AT&T has formed partnerships with Nissan, Ford, and BMW to connect their cars through AT&T’s network. Already, the service supports remote diagnostics, car location, traffic updates, pay-as-you-drive insurance, car unlock, and emergency alerts.
(API) platforms, and collaborating with other operators and with new partners including content players and software developers (see “Innovation at AT&T”). Orange, for example, has unlocked the full range of its APIs, including text or multimedia messages (SMS/MMS), authentication, location, and contacts and calendar, which have been used by French companies such as Schneider Electric and L’Assurance Maladie to deploy their own customized, targeted services to customers. It also offers developers a platform called “Orange Selection,” a portfolio of channels through which developers can feature and distribute their applications, widgets, and other content across platforms, devices, and countries. And it provides development centers, both physical and virtual, where developers can seamlessly test their applications across a range of channels. Telefónica’s BlueVia program is another example, offering developers extended access to its mobile and Web infrastructure through specific APIs, which gives them a direct path to a global base of close to 300 million subscribers. Other operators that have similar programs include Vodafone and T-Mobile.
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A BLUEPRINT FOR TELECOM INNOVATION
funded by the operator, universityfunded research, and the like. When locating an innovation center, issues such as the local talent pool, proximity to the operator’s own business units and other innovative companies, regulatory climate, and access to venture capital and other funding sources should be kept in mind. The layout of the center should be conducive to generating new ideas, and should include brainstorming rooms rather than isolated cubicles. The innovation center should be headed by a sufficiently empowered and visible manager. It should have dedicated departments for finance, legal affairs, business development, partnership development, and marketing, in addition to the core R&D department. A clear innovation process should be established to follow ideas throughout the innovation process, from inception to development to commercialization.
A formalized reporting schedule should also be developed and clearly communicated to the center’s staff. The innovation center’s impact should be consistently and regularly measured using an innovation dashboard that at minimum includes the following items: • Intellectual property portfolio: The number of patents filed and the number approved. • Commercial impact: The number of ideas that have been commercially deployed, and their impact on revenue. • Partner portfolio: The number of partnerships established and the number of new and commercially successful ideas from each new partnership. • Outreach: The number of new ideas, papers, and reports pre-
Even as some telecom operators are making real strides to become more innovative, the majority continues to struggle. If they are to succeed in this critical area and meet the competition now entering the telecom arena, they need to follow a four-step approach to expanding their innovation capabilities (see Exhibit 3). Develop Innovation Centers The nucleus of the innovation ecosystem, a true innovation center can provide operators with a platform for capturing and developing new ideas—whether generated internally or externally, through collaboration with partner companies, companies
Exhibit 3 An Innovation Framework for Telecom Operators
KEY INNOVATION TOOLS Innovation Center Dedicated unit to coordinate innovation activities and develop a guiding strategy
A Innovation APIs Extensive partnerships with developers, content players, and enterprises leveraging cloud services to accelerate pace of internal and open innovation Dedicated venture capital arm to identify and acquire technology start-ups, focusing on horizontal capabilities and adjacent verticals
Venture Capital Arm
Supportive culture to contribute/beneﬁt from innovation efforts Strong Innovation Culture
Innovation Enablers Innovation Activities
Source: Booz & Company
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sented in external conferences, standards bodies, industry forums, and the like. • Innovation process: The amount of time each project takes from idea to commercialization. The innovation center should be managed by an overarching governance body or council, made up of the center’s director and representatives from academic and commercial partners, and from the operator itself. Two decisionmaking bodies, a technology council and a business council, should be established to evaluate new ideas from a technical and a business perspective. A research council should also be established to provide guidance on new academic research. The center should actively attract innovators through a variety of outreach programs. An innovators program should be established to encourage new ideas and permit budding entrepreneurs to pitch for funding from the operator in return for an equity stake. This can be run in partnership with any other venture incubation program maintained by the operator. Conferences should be organized regularly to showcase the center’s achievements. This should be open to representatives from the operator’s business units as well as academic and commercial partners. Competitions to attract new ideas
with significant business potential should be organized. Prizes might include free attendance to innovation center conferences and priority access to commercial expertise. An innovation portal should be created that provides access to published material, enables the submission of new ideas, and allows developers and other innovators to download critical information. Finally, the center should make a real effort to attract partners from the telecom industry and allied industries. A tiered membership structure, with varying membership fees, voting rights, and access to research facilities, should be introduced. Some global operators, including T-Mobile, Vodafone, Verizon, and AT&T, have already established innovation centers that have made real contributions to their parent companies in terms of business growth and market leadership. Foster a Strong Culture of Innovation A culture of innovation is critical to the success of the effort to be inventive. Creating such a culture requires that operators pay attention to the following seven elements. 1. Innovative processes. Operators should implement processes that encourage entrepreneurship, risktaking, and experimentation, while encouraging collaboration across multiple functional teams.
2. Rewards and incentives. Incentives that promote the creation of innovative ideas should be established, and contributions to the innovation effort should be a key part of employees’ annual reviews. 3. People development. Programs designed to encourage the generation of new ideas and develop “out of the box” thinking among employees should be introduced. 4. Key performance indicators. Innovation results should be included as a key component in evaluating corporate and management performance. Metrics should include innovation return on investment, number of patents submitted and approved, R&D spend as a percentage of sales, and percentage of revenue growth generated from new products. 5. Clear communication. Operators should communicate clearly to their customers and developers their commitment to innovation, R&D, and new-product introductions, through Internet platforms, campaigns, newsletters, conferences, and the like. The entire workforce should be able to provide ideas that might lead to new products and services. 6. Leadership support. Support from the highest levels of management is critical in solidifying the fundamental importance of innovation to the core business of the operator.
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7. Diverse workforce. Hiring policies should be put in place to attract people from diverse backgrounds and with different experiences to ensure that the workforce accurately reflects the operator’s customer base and promotes innovative thinkers. Establish Open Innovation APIs Operators have many valuable assets, including networking and IT equipment, which can be of considerable value in the search for new products, services, and revenue streams. By giving developers and other innovators access to such assets,
operators can ensure that those assets are being used to their fullest potential. And operators can combine their own services with those of third parties to create a diverse yet cohesive service portfolio. In order to provide these services, a service delivery platform will need to be developed to virtually expose the operators’ assets to external developers through application programming interfaces. In addition to opening up access to their infrastructure, operators need to develop an optimal marketing strategy to maximize the use of the API portfolio. Each API should
be clearly described, including descriptions of its usage, applicability, functionality, and limitations. API pricing should be transparent, and any discount structure and exceptions clearly identified. How developers can acquire APIs, including allaccess channels, should be clearly documented and communicated (see Exhibit 4). Large global operators have already successfully developed innovation APIs and new service delivery platform capabilities as a means of entering into partnerships with developers and content players.
Exhibit 4 Operators Must Open Their Networks and Platforms to Outside Developers
AN OPEN API PLATFORM FOR OPERATORS
IDENTITY / SECURITY
LOCATION / PRESENCE
Source: Booz & Company
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Orange France, AT&T, Vodafone UK, and T-Mobile all offer open APIs that developers can use to develop applications specific to each operator’s platform. Operators should also look for different ways to expose network assets, even beyond their traditional macro network. For example, the Small Cell Forum, a not-for-profit that encourages innovation, has released a set of APIs that developers can use to create mobile applications to access operator small cells. Business models for open APIs continue to vary and offer more flexibility to developers. They range from free access to selected APIs, to revenue sharing and/or pay-per-use models. In general, most operators tend to charge monthly fees for basic access and offer volume discounts (with minimum commit for API calls). Other models and offers include tiered pricing, free trials, and combination/ mash-up plans that allow developers
to access multiple APIs within one application (e.g., location and messaging). Overall, pricing models should allow developers to experiment with the API, then scale up/pay more as their application takes off. In parallel, developers should be careful when using API-dependent features in their application, so it does not become costly for them with too many API calls. Create an Investment Arm Some operators have established venture capital units to invest in promising businesses at an early stage and to accelerate the pace of innovation. Vodafone, T-Mobile, Telefónica, and Orange all have venture capital arms aimed at identifying startups that can be of great use to the operators’ future business. Such units need to be composed of people with specific core skills, including a solid background in, and understanding of, the telecom ecosystem and the ability to identify
investment targets, assess the right investment size and the risk involved, and negotiate with the management of the target company. Detailed investment selection and evaluation criteria should be put in place to guide the activities of the venture capital arm. Moreover, a clear governance structure needs to be established to manage the interactions between the venture capital unit and the company being invested in. The venture capital arm should also function as the link between the target companies and the operator’s business units. It should provide commercial guidance and technical expertise as needed, review the progress of portfolio companies compared to plans, guide and challenge their business models, and develop an exit strategy once the investment has provided its anticipated return, such as equity divestment, absorption into a business unit, and the like.
Some operators have established venture capital units to invest in promising businesses at an early stage and to accelerate the pace of innovation.
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Rapid changes in the information and communications technology industry and the rise of new technologies are already posing a serious threat to the networking-based business model on which telecom operators have long depended. If they are to avoid the fate of becoming the “dumb pipes” through which a plethora of new and profitable services are carried, they must develop new products and services that can compete with the best that their rivals can offer.
That effort demands a significantly different approach to innovation than operators are used to following. Can they make the change? Yes, but it will require not just investing more money in R&D than they have in the past, but also developing the processes and capabilities needed to succeed. Most of all, they must make a conscious effort to imbue their corporate cultures with a more innovative, entrepreneurial spirit. And they must start now.
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Ovum’s Global Mobile Market Outlook (2011–2016) and Global Fixed Voice and Broadband Market Outlook (2011–2016).
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This report was originally published by Booz & Company in 2012.
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