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The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco
VisionMobile.com/Strategy
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The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco
About VisionMobile VisionMobile is an ecosystems analyst firm working with top telecom operators, handset makers and infrastructure companies. We are best known for Developer Economics, the de-facto knowledge hub of the app economy, and Mobile Innovation Economics, the strategy workshops helping telco executives to define winning innovation strategies. Our mantra: Distilling market noise into market sense. VisionMobile Ltd. 90 Long Acre, Covent Garden, London WC2E 9RZ +44 845 003 8742 www.visionmobile.com/blog Follow us: @visionmobile About Ericsson Ericsson is a world-leading provider of telecommunications equipment and services to mobile and fixed network 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. We are one of the few companies worldwide that can offer end-to-end solutions for all major mobile communication standards. Our networks, telecom services and multimedia solutions make it easier for people, across the world, to communicate. 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 that can benefit from a connection will have one. Our vision is to be the prime driver in an all-communicating world. For more information see: http://www.ericsson.com 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
Disclaimer VisionMobile believes the statements contained in this publication to be based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Opinions expressed are current opinions as of the date appearing on this publication only, and the information, including the opinions contained herein, are subject to change without notice. Use of this publication by any third party for whatever purpose should not and does not absolve such third party from using due diligence in verifying the publications contents. VisionMobile disclaims all implied warranties, including, without limitation, warranties of merchantability or fitness for a particular purpose. VisionMobile, its affiliates and representatives shall have no liability for any direct, incidental, special, or consequential damages or lost profits, if any, suffered by any third party as a result of decisions made, or not made, or actions taken, or not taken, based on this publication. Behind this report Project lead: Michael Vakulenko Senior analyst: Stijn Schuermans Marketing: Matos Kapetanakis Editorial: Andreas Constantinou
Also by VisionMobile Mobile Innovation Economics Workshop A strategy workshop introducing the new economic thinking necessary for successful innovation by telcos. Find out more visionmobile.com/strategy
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The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco
Contents
A new basis of competition ......................................................................................................... 5! The superiority of ecosystem economics .................................................................................... 7! Ecosystem engineering .............................................................................................................. 10! The modular telco ...................................................................................................................... 13! Asymmetric business models .................................................................................................... 16! The true value of innovation and the cost of doing nothing ..................................................... 19! Dealing with uncertainty: Discovery-driven planning ............................................................. 21! Ecosystem as a new distribution channel .................................................................................24! Keys to successful telco API strategies ......................................................................................26! Freeing voice from telephony ....................................................................................................29! Turning openness into a competitive advantage ...................................................................... 31! Conclusions................................................................................................................................ 33!
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The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco
Key Messages
Telcos are being disrupted because the basis of competition in mobile has fundamentally changed. It has changed from reliability and scale of networks to choice and flexibility of services, representing transition from mobile telephony to mobile computing. The change in the basis of competition is fundamental and irreversible. OTTs do not compete for telco service revenues; instead, they compete to control key links in the digital value chain, with business models that span consumer electronics, online advertising, software licensing, e-commerce and more. Thus, competition is asymmetrical, because unlike carriers, OTTs do not bear the burden of providing mobile Internet service. As iOS and Android have reached critical mass, and established well-entrenched market positions, operators need to look for ways to build unique user value atop the platforms rather than competing with OTT players. Telcos need to move their innovation focus from technologies (be it HTML5, NFC, IMS, VoLTE, M2M or RCS-e) to ecosystems. That requires a much better understanding of how ecosystems are engineered, and how ecosystems absorb and amplify innovation. Most telecom operators evolved as all-in-one businesses optimised to compete based on the reliability and scalability of a small set of core services (voice, SMS, data access). To adapt to the market shift, telco needs to be seen as an entity comprised of three distinct business layers: Access, Connectivity and Distribution. 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 todays telecom market. The reason for failure is that traditional financial tools systematically undervalue innovation by disregarding the costs of doing nothing. High levels of uncertainty require radically different planning methods. Discovery-driven planning acknowledges that in uncertain market conditions, very little is known and much is assumed. Instead of treating blue-sky assumptions as facts, this planning tool systematically converts assumptions into knowledge. 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. To be successful in API initiatives, telcos need to consider developers as value-added resellers, and therefore design their API propositions for win-win outcomes. In other words, the business models of telco APIs need to be aligned with the business models of developers. Notwithstanding the buzz around new OTT services, telcos are still considered the primary providers of voice services. That puts them in an excellent position to transform telephony into a thriving ecosystem of services designed for the new basis of competition: choice and flexibility. For example, using telephony APIs to lock enterprises into voice/data plans.
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The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco
INTRODUCTION
Analysis is based on value-chain evolution theory by Harvard Business School Professor Clayton Christensen
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2 http://www.niemanlab.org/2012/10/clay-christensen-onthe-news-industry-we-didnt-quite-understand-how-quicklythings-fall-off-the-cliff/
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The economic and strategy tools introduced here will guide telcos in their choices on what innovation initiatives they should pursue and how to execute on their choices in fundamentally new market conditions.
We describe ecosystem economics in the context of telco business in chapters 1 to 4, discuss the impact of traditional financial tools and the need for new innovation processes and KPI in chapters 5 and 6, and finally suggest how to leverage ecosystems to the benefit of the telco business in chapters 7 to 10.
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CHAPTER ONE
As of July 2012
4 http://tabtimes.com/news/ittech-statsresearch/2012/09/11/gartner-says-9-10-downloaded-appsare-free-insists-app
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driving the profits of the wildly successful iPhone and iPad devices. The Google Android ecosystem is built on very similar principles. It treats developers as partners who create vitally important complements. Googles core business is online ads, and the Android ecosystem is optimised to drive eyeballs to Google properties and deepen its consumer intelligence. As opposed to Apple, Google prioritises user reach over user experience, and makes Android freely available to the broadest range of handsets. In most developed mobile markets, operators are playing a supporting role within the iOS and Android ecosystems. Operators take on the financial burden of device subsidies, which reduces the cost of acquiring the smartphone users -- all in exchange for upselling users into higher-ARPU data plans. While telcos finance the expansion of smartphones, Apple and Google are taking over
the customer ownership and creating strong user lock-in that surpasses that of operator brands. Ecosystems are much better at delivering choice and flexibility, the new basis of competition. This is due to their global scale and vast developer reach. Despite these adverse effects to the telco business, there is little telcos can do to roll back the clock. The ecosystem genie is out of the bottle. As iOS and Android have reached critical mass, and established well-entrenched market positions, operators need to look for ways to build unique user value atop the platforms rather than competing with OTT players. Such over-the-platform innovation can indeed create new revenue streams, but even more importantly it offers opportunity to create unique differentiation relative to local competitors and avoid competition on price. Opportunities for such differentiation exist in the areas where platforms are inherently weak, or have little motivation to compete. These include local presence, user targeting and reach,
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content recommendations and vertical B2B solutions. Over the longer term, telcos can look for ways to build parallel ecosystems, using pages from the ecosystem economics textbook. An example is M2M. It holds the potential to create a vibrant ecosystem of users and solution providers, thereby establishing strong network effects and lock-in. Telcos can become the central force in this emerging ecosystem if they learn to engineer the ecosystems to their advantage. By looking at M2M through the lens of ecosystem economics, operators will see opportunities that are much bigger than just selling modems and data connections.
Key questions telcos need to ask when evaluating innovation investments Does your initiative compete with the network effects of an established ecosystem or is it leveraging those effects? Does your project aim to add value where platforms are weak or have no motivation to compete? Does your project promise to create a parallel ecosystem where telcos will play the dominant role?
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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 traditionally been focused on technology. For decades, GSM, CDMA, WCDMA, HSPA, and LTE defined the competitive landscape of mobile telecommunications. With the basis of competition being scale and reliability, these technologies helped telcos use spectrum more efficiently, within the limited wireless spectrum available to them. In other words, the key competitive characteristics of mobile networks were defined by air interface technologies that increased capacity to transport ever-growing amounts of voice and data traffic through a limited wireless spectrum. The new basis of competition is defined by ecosystem economics, and technology is just one part of a much more complex puzzle. HTML5 is a perfect example of how ecosystems surpass technology. Many operators placed their bets on HTML5 as a chance to regain positions lost to mobile ecosystems. They did so without realizing that HTML5 is an enabling technology that still misses key platform ingredients. Successful application platforms5 have five key ingredients: 1. Software foundations: a rich set of APIs6 with managed fragmentation and a toolset for creating apps Community of developers writing to the same set of APIs to spur innovation and cater to diverse use cases 3. 4. 5. Distribution (reach) across handsets, operators and regions A means of monetization, such as ads or micropayments A means of retailing content (discovery, promotion, search and social)
The next diagram details the five key ecosystem ingredients, their product success factors and the competences needed to bake each ingredient into the recipe. Platform owners control their ecosystems of users and developers by means of two control points. These points exist at the opposite ends of the value-chain. Firstly, platform owners control content creation by locking developers into a proprietary API. Secondly, platform owners control content distribution by gating how apps are distributed to and discovered by end users. These two control points allow platform owners to amplify the network effects by reducing friction to on-boarding of developers and users. Pitched as a killer of platform walled gardens, HTML5 in reality needs a lot of work before it can transition from an enabling technology to a complete and viable app platform, and compete in the league of Android and iOS ecosystems. HTML5 will not win on technological merit, but by creating pervasive solutions for the three key platform ingredients it currently lacks: distribution, monetization and retailing. Today, only two companies, Facebook and 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 Facebook Platform and Chrome Web Store. Mozillas Firefox OS (Boot2Gecko), which has the support of telcos, might have the same
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platform ingredients. Telcos need to move their innovation focus from technologies (be it HTML5, NFC, IMS, VoLTE, M2M or RCS-e) to ecosystems. That requires a much better understanding of how ecosystems are engineered, and how ecosystems absorb and amplify innovation This ecosystem view on innovation cannot only help to identify promising innovation opportunities, but equally important, help telcos avoid investments that lack key ecosystem success factors.
Key questions telcos need to ask when evaluating innovation investments Is your innovation initiative aimed at creating an ecosystem? If so, what ecosystem ingredients will it need to succeed? How can technology-led innovation play atop of existing ecosystems to create a competitive advantage for telcos? Are all of your current innovation projects designed with the key ingredients for ecosystem success?
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CHAPTER THREE
These three business layers are 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. The connectivity layer is boosted by an evergrowing need for anywhere, anytime connectivity to billions of devices. It will remain an important part of the digital ecosystem valuechain for the foreseeable future, and is a growth opportunity for telco. The main challenge is how to avoid commoditization, i.e., a lack of meaningful differentiation, which results in competition on price and diminishing profitability. At the service layer, things look very different. The smartphone ecosystem has produced a flood of innovative OTT alternatives that cut into traditional SMS and telephony service revenues. OTT alternatives can often achieve substantial user reach and service scalability based on budgets that are considered small in telco terms. For example, in just two years Viber topped 100M users, Whatsapp has 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
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companies are radically different from those of telcos. While traditional telephony is in stagnation, innovative voice solutions can present attractive opportunities for telco as we explain in later chapters. The OTT communication market continues to evolve at lighting speed. Telcos cannot compete with the pace, risk taking culture, free and freemium business models and global network effects of OTT ecosystems. Telco initiatives like Joyn and before it WAC, which were heralded as the answer to OTT threats, now look outdated and hopelessly behind leading OTT players. At the distribution business layer it is yet another story. Distribution is largely seen as a cost centre, not a new revenue opportunity, despite its strong potential to create new control points and revenue streams for telco. Apple, Google and Facebook have capitalized on the inflexibility of all-in-one telco offerings by gradually replacing key telco assets like location, 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.
For telco innovation to be successful, the three business layers need to operate and be measured independently, each pursuing the most appropriate innovation strategies, KPIs, processes and priorities. Applying different innovation mixes for their distinct connectivity, service and distribution business layers will enable telcos to succeed in the new basis of competition of choice and flexibility. Key questions telcos need to ask when evaluating innovation investments In which business layers do our digital initiatives operate? Are the right processes and KPIs in place to compete within this/these business layer(s)? Do the KPIs comply with industry best practices for a given layer? (e.g., scale and reliability are not appropriate when experimenting with new offerings at the service layer.) Is the innovation mix optimised for the respective business layers?
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CHAPTER FOUR
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increases when the price of its complements decrease. For example, gas and cars are complements. Cheaper gas means people drive more, and car manufacturers see their business grow. Similarly, the common interest of OTT players is to drive commoditisation of the telco connectivity business. Affordable mobile broadband means that more smartphones are sold, more ads viewed, more software sold and more ecommerce sites visited. While there is a symbiotic relationship between telcos and OTTs at the connectivity business layer, the nature of asymmetry is different at the telco services layer. Because connectivity costs are paid by the user, OTT players have great flexibility in their business models. OTTs can monetise ads, downloads, analytics or acquisitions, and are thus able to price their services either free (e.g., Viber), close to free (e.g., Whatsapp), or even less-than-free (in the
case of Google sharing app revenues with operators). The vertically integrated, all-in-one telco business model of bundling connectivity and service costs makes it impossible for telcos to compete with free or less-than-free OTT alternatives. Telco core voice and SMS services are suffering collateral damage in the wake of successful OTT strategies, rather than suffering as a result of direct competition. Because of the asymmetry in telco and OTT business models, telcos should avoid investing in head-on competition with OTT services. OTTs don't see telcos as competition, but rather as a complement to their business. More importantly, the telco digital business needs to be measured not by direct revenues, but according to whether it helps to grow and protect core telco business by increasing usage, creating user lock-in and driving subscriber acquisition. Similarly, success of Amazons
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Kindle is not measured by the number of units sold, but by content revenues and the amount of traffic to Amazon e-commerce properties. Instead of copying OTT initiatives, telco innovations should leverage unique advantages, in order to create user value that OTT players cannot match, such as localization, user targeting, privacy controls or MVNO service customization.
Key questions telcos need to ask when evaluating innovation investments How does the asymmetry of business models affect your project? Does the project drive the telco core business or does it attempt to compete with OTT players headon? Does the project incorporate unique aspects 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?
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CHAPTER FIVE
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become obsolete. Blockbusters 2002 press release read: "We have not seen a business model that is financially viable in the long term in this arena. Online rental services are 'serving a niche market.' " Netflix didnt have this dilemma, and for it the niche market looked to be an excellent opportunity. The rest is history, as Clayton Christensen explained in his Harvard Business School article on the Trap of Marginal Thinking7. The challenge for telcos isnt that OTT companies outspend them in innovation. Its that marginal cost analysis steers telcos towards investments in capabilities that were relevant in the old basis of competition, rather than toward developing new capabilities relevant for the new basis of competition. Telcos need to consider the costs of doing nothing and invest in innovation well before traditional financial analysis shows attractive returns. They must adopt discovery-driven planning methods suited for the prevailing conditions of high uncertainty. We
will introduce these methods in the following chapter. It is important to see the biases inherent to traditional financial analysis tools. The true value of innovation investment can only be seen when measured against the real costs of doing nothing, including the likely possibility of deteriorating telco business, and missed opportunities to develop new capabilities and competences. Key questions telcos need to ask when evaluating innovation investments How often do you use NPV/DCF financial tools for evaluating investments in telco innovation? Are you investing enough in developing capabilities relevant for the new basis of competition? How would you build new products for the new basis of competition, if you were a startup starting from scratch today?
http://hbswk.hbs.edu/item/7007.html
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CHAPTER SIX
http://hbr.org/1995/07/discovery-driven-planning/
http://www.iitstories.com/2012/04/12/story-of-instagram/
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on photo sharing, and built an iOS app, instead of continuing with HTML5 technology. The company continued to iterate on this buildmeasure-learn cycle, and was eventually acquired by Facebook in April, 2012 for $1B. As of September, 2012, Instagram had reached 100M active users. The Learn, Build, Measure cycle ensures that the decision to allocate significant resources is based on facts, rather than on unproven assumptions treated as facts. Compared to conventional planning methods, the iterative, small-step process of discoverydriven planning may seem counterintuitive. But it makes good sense when dealing with market uncertainty. The fast turn-around process maximizes exposure to upside opportunities (e.g., Instagram photo sharing): the faster you are, the more experiments you can run, and the more chances you have to discover valuable ideas. At the same time, discovery-based planning minimizes the downside risk (the cost of failure) by identifying wrong assumptions early in the process (Instagram location-based check-ins, and use of HTML5 technology). Thus, failing fast and cheap makes perfect sense when the market is uncertain, and the failure is taken as a source of valuable knowledge. Before you rush to say, Yes, we use 'agile development already, consider that discovery-driven planning is not about fast software development.
Instead, it involves systematically dealing with market uncertainty and setting new KPIs to measure business risks, rather than execution risks. With discovery-driven planning, risk can increase the value of innovation. Telcos need to take ownership of their innovation strategies and experiment with multiple initiatives in order to maximize exposure to unexpected opportunities. They must develop new organisational capabilities. This of course does not mean reckless risk-taking, but rather a systematic and disciplined process of converting assumptions into knowledge. As an example, WAC was based on three assumptions: a) the need for operator interoperability in the all-IP environment, b) users valuing web technology and c) developers looking for alternatives to native platforms. Instead of creating long-term commitments based on unproven assumptions, the WAC initiative would be much better of if it was operating based on discovery driven planning, i.e., validating assumptions early in the process by learning from the market and being open to discover new opportunities. Telcos need to clearly distinguish between investments in innovation that aim to improve existing business, and innovation aiming to discover new markets. For targeting existing customers with an existing business model,
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traditional planning methods work nicely. When targeting new customers, or a new business model, the only proven approach is iterative, discovery-driven planning. Telco innovation initiatives need to be measured by the speed of learning and validating assumptions, as well as potential to discover new opportunities. This contrasts conventional planning methods that focus on projections of scale and future cash flows, based on unproven assumptions.
Key questions telcos need to ask when evaluating innovation investments Do you allow projects to become profitable before prioritising for growth? Are you measuring new market innovations by the speed and cost of validating assumptions? Are you sufficiently addressing new opportunities by running many innovation initiatives?
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CHAPTER SEVEN
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Telco APIs will always be at a disadvantage versus players with global reach, if telco APIs are positioned in direct competition to native platforms or Internet companies.. However, if telcos allow and encourage developers to create locally-relevant differentiation on behalf of their subscribers, their fragmentation disadvantage could transform into the advantage of local presence. APIs need the flexibility to allow developers to experiment with new use cases, and thus 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 machineto-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.
Key questions telcos need to ask when evaluating innovation investments Is your API strategy designed to turn developers into value added resellers? How do you value the ability of developers to experiment in discovering new user cases? Is your API strategy flexible enough to attract a wide spectrum of partners, including mobile and web developers, MVNOs and M2M solution providers?
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CHAPTER EIGHT
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realized by telco APIs in their three business layers: access, services and distribution.
Key questions telcos need to ask when 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?
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CHAPTER NINE
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innovation should be not on technology, but on building developer ecosystems for voice services, discovery of new use cases and experimentation with new business models, and not on technology. If telcos wont do this, competitors will.
Key questions telcos need to ask when evaluating innovation investments What voice (not just telephony) use cases can help your enterprise customers to achieve their goals both internally and towards their clients? I.e., How can you offer voice APIs to drive enterprise sales of voice and data plans? How can telco APIs be leveraged to free voice from telephony by challenging telephony assumptions? How can you structure your voice APIs and services to enable developer ecosystems to uncover more use cases?
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CHAPTER TEN
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Key questions telcos need to ask when evaluating innovation investments How can you open up your complements; i.e., how can you reduce friction for ecosystem partners in order to create more value in the ecosystem as a whole? How can you integrate around your core business of voice data and texting in order to extract value from the ecosystem? Which regulations, standards or alliances are forcing you into competition to the best scenarios? Therefore, which innovation efforts are likely to lead only to short-term competitive advantages?
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CHAPTER ELEVEN
Closing thoughts
To succeed, telcos need to learn to play by the rules of the ecosystems.
Creating a next generation telco means looking beyond traditional telco business models in the context of the changing telecom value network. This paper introduces new economic thinking that telcos should use to accelerate their digital strategies, make the right innovation investments and avoid costly mistakes. To succeed, telcos need to learn to play by the rules of the ecosystems described in this paper. Moreover, each operator will need to define their own innovation mix, according to what best suits their local market, assets and financial conditions. Some operators will opt to focus on the utility business, providing price-competitive voice, text and data services (for example, Iliad/Free in France). Others will invest in complementary innovation, to maintain the growth and profitability of their core business (for example, Deutsche Telecom or AT&T). And others, like Smart Philippines, or Telefonica, will aggressively experiment with new business models and markets. In the words of Harvard Business School Professor Clayton Christensen, in his Business Week article, Your Strategy Is Not What You Say It Is11, real strategy is defined by the flow of investment decisions companies make to achieve their goals. Despite all the talk about innovation, today many telcos are still putting most of their money into old-school investments like network expansion and device subsidies. Such investments are only good for driving telco access business. It is difficult to act based on theory, without first collecting as much data as possible. However, data are always about the past, and their meaning becomes clear only when the game is over, as Harvard Business School Professor Clayton Christensen12 frequently says. Telcos cannot afford to wait for data before making safe decisions. The time to act is now.
11 http://www.businessweek.com/articles/2012-0514/message-to-managers-your-strategy-is-not-what-you-sayit-is
12 http://www.niemanlab.org/2012/10/clay-christensen-onthe-news-industry-we-didnt-quite-understand-how-quicklythings-fall-off-the-cliff/
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