THE INNOVATION BLUEPRINT
To succeed in the future, telecom service providers need to reconnect the dots and drastically change how they do business, innovating on services, business models and corporate structure like never before. Are they up to the challenge?
There is no shortage of ideas, brainstorms and potential new business models poised to remake the telecom industry. Like a certain south-facing part of the anatomy, everyone has an opinion about what direction service providers should take.
In the last issue of Connected Planet, we took an in-depth look at the evolving digital value chain and where telecom operators fit in today — and tomorrow.
This issue, we look at the idea — and the challenge — of innovation. Not technical or pure science innovation. Telcos have long been bastions of technology R&D; they know that routine pretty well (as our own Kevin Fitchard detailed in his “Future of R&D” opus earlier this year). No, what's needed today is a different kind of innovation in the form of new and, most of all, effective thinking about how telecom operators can reinvent how they do business.
“There are lots of different ways to be innovative,” said Scott Anthony, managing director of venture capital firm Innosight Ventures and a frequent writer on innovation (see Innovation Playbook Q&A on page 19) “The first is business model innovation, which involves new revenue models, delivery models, new production models and so on. The second is service innovation, finding non-product levers that create new growth. The third is organizational innovation, finding different ways to structure and organize to release the innovation energy that is bottled up in most companies.”
Given those parameters — themes that we heard consistently as we talked to a broad cross-section of service providers, the vendors serving them and the companies partnering with them — how should telecom companies approach innovation? Should it happen at the corporate or board level? Bubble up from the bottom? Or come from the outside? Which approaches work best, in theory and in practice? Which companies are making the biggest bets and having the greatest success? Who is poised to be left behind? In short: For an industry not known for innovation, how are service providers faring at this moment of monumental change?
Neil Cox took a roundabout path to his current gig — where he is essentially responsible for new business and service development as executive vice president of product and IT for Qwest — starting more than 30 years ago at Indiana Bell. From there, he traveled a fairly traditional telecom industry route before jumping into the venture capital business earlier this decade. He came back to telecom about a year ago, crafting a job that puts him in charge of fostering innovation at the third-largest U.S.-based service provider.
“Essentially what we try to do is really look at how we drive innovation by looking at how customers are likely to really use the innovative products and services we can deliver,” Cox said. To do that, he relies a bit on instinct — or what he calls a “thesis” about what really drives a particular market — as well as a network of connections on Sand Hill Road and other venture capital centers worldwide.
As an example of his “thesis” idea, Qwest runs its burgeoning video business on the idea that all consumers really want to watch live is sports; the rest can and will be time-shifted. That led the company to partner with sports-strong DirecTV for a satellite offering while at the same time being more open than most rivals in viewing over-the-top video providers as friends rather than enemies — not just today but down the road. Qwest is also looking at new device form factors, like Internet tablets and multimedia phones, and believes the mobile apps phenomenon is just a forerunner to a richer, more compelling broadband apps revolution yet to come.
“In my estimation, most of what we'll put on our network will be with partners,” Cox said. “It's our job to create and build this platform, not try to create the applications” that will run over it. Cox noted that his group also spends a lot of time on business model issues, ultimately “going back to the main strength that we have: We own the network. We are great combiners; I go back to what we do best: provision, maintain and bill customers of our network. There isn't one over-the-top service that will work without a network.”
While no one is confusing Qwest with Apple or Google just yet when it comes to innovation, Cox and team are following many of the paths that industry watchers say are necessary for incumbent telecom providers to become more innovative: They are being driven by big ideas, embracing outside partners and placing multiple bets then letting the market decide which path will win. In most providers, as with Qwest, there's also typically a team trying to vet new service and business model approaches.
But too often, working on innovation isn't quite the same as actually practicing innovation. HP, for instance, recently commissioned a survey of communications industry C-level executives, explicitly asking service providers about the importance of innovation, said Jeff Edlund, chief technologist responsible for communications media and solutions futures for HP. On a scale from one, the lowest, to five, the highest, 77% of respondents rated innovation a five in terms of importance to their business, and 76% rated it a five relative to returning shareholder value, Edlund said.
Yet a third question showed the distance between promise and reality. “We asked, ‘How prepared is your company to cull innovation and turn it into meaningful products and services?’” Edlund said. The answer: Just 32% said they were ready; the rest said they were not. “It was stunning and represents a huge gulf and a huge opportunity for companies to put the focus back on innovation and what is missing here,” he said.
Most importantly, service providers still face what Edlund called an “innovation delay — simply the time it takes to turn a concept into a product. Carriers are good at funding incremental product or service extensions, but they haven't set themselves up in terms of structures or processes to truly innovate.”
Indeed, the gap between conception and execution is a consistent problem for telecom operators, critics say.
“Within every carrier, there's a group that is handling innovation, usually reporting directly to the CEO; they scout the market and propose new ideas; they generally do a good job,” said Angelo Morelli, a partner in Accenture's telecom/new media practice focused on new service innovation and delivery.
“The problem,” Morelli said, “is the next step — the execution — following from concept to idea to service to selling that service. There's often very little connection between the innovation group and the people who run day-to-day operations. These people have very different agendas and are measured every day, every week, every month on network performance. A new service thrown over the wall is often just another disruption.”
Any delay or blip in the telco innovation agenda simply opens the door further to aggressive rivals that — even if they don't own a network — are ready to steal ownership of the customer from the telecom operator, added one of Morelli's peers at Accenture, Gene Reznik, global managing director for the communications industry, who works with many of the world's largest providers on just these issues.
“What we see when it comes, particularly, to service innovation is that the customer experience is increasingly moving toward Internet and consumer electronics providers — Google, Apple, Facebook, Sony, Nintendo,” Reznik said. “If anything, because these companies are global in nature and very good at creating rich customer interfaces, this trend is accelerating. Their method of investment, budgets, culture, their view of services as a ‘hits’ business — all of these things set up these sorts of companies to be best positioned to lead the service innovation agenda.”
“Innovation is really coming from new players — telecom incumbents are really struggling at the moment in terms of how they can innovate and what their role is in this new value chain,” said Martin Creaner, president of the TM Forum, who works closely with service providers on developing back-office capabilities to enable new service delivery. “Incumbents that used to rule the value chain are now seeing new services that entirely cut them out of it.”
Indeed, because it is so difficult to compete with such rivals in creating innovative new services, “business model innovation is actually much more important than [individual] service innovation,” Reznik said. “Every once in a while [a service provider] can build a better mousetrap, but what's really important is the bigger sort of innovation of figuring out exactly what is their role and what is the business model in the increasingly expanding consumer electronics and Web 2.0 ecosystems.”
Telecom consultancy STL Partners has been advocating a new business model approach for several years now in its Telco 2.0 practice. Telecom service providers have traditionally served end user customers — consumers or enterprise customers, for instance — as well as wholesale partners, reselling network access and minutes. But tomorrow, telcos may be serving altogether new types of customers in altogether new business relationships, said Chris Barraclough, analyst with STL and co-founder of its Telco 2.0 initiative.
“What we've been saying is service providers really need to explore innovating for a whole new customer group, the upstream customer,” Barraclough said (see more example Telco 2.0 use cases in the sidebar below). “It's what we call a ‘two-sided’ business model or a model in which you start charging upstream customers — like developers or advertisers or others in the value chain — for using telco assets. It's something that's worked in other industries. Google did it with search, offering free applications to end users and charging the upstream [advertiser] customer.
Microsoft bundled in the Windows platform, making it essentially free for the end user, and sent out free software kits to developers, making money off of their [original equipment manufacturer] relationships. Service providers have to be able to provide a ubiquitous platform and collaborate productively with everyone in the value chain in a way that floats all boats and in some important ways ends up cannibalizing what was formerly their core network service.”
Indeed in the end, successful value chain partnering may be the biggest key to service provider innovation. Alliance-making is an art in its own right, Creaner said, pointing to the AT&T-Apple partnership with the iPhone as perhaps the most obvious example of the pitfalls of partnering. “If you look at the deals Apple has struck with incumbent operators, I would venture to suggest those operators aren't really capitalizing on that innovation; they're more being taken for a ride,” Creaner said. “AT&T has certainly done well and generated some excitement, but in reality AT&T has had a little kick and Apple a huge kick from the iPhone.”
The key to a successful partnership is creating happy partners, not ones that feel the need to look over their shoulders. For that reason, it may not be Apple but Microsoft that's the best company to model for how to build a successful partner ecosystem, said Thomas Howe, well-known telco mashup developer now operating his namesake consulting firm.
“For both historical technical and business reasons, carriers do not practice the sort of ecosystem competence that made Microsoft great — that ecosystem allows the companies and innovators to successfully create applications worth deploying,” said Howe, who recently wrote on his personal blog that what's really needed for innovative telecom services to emerge is “a full carrier lobotomy” — or the need for service providers to provide service platforms and application programming interfaces (APIs) but leave the service innovation to those closer to real customer problems. “In short, the ‘go it alone’ attitude by carriers will fail, as they can no longer depend on knowing a single type of customer: the generic consumer,” Howe added. “They need to work in an ecosystem that reaches maximum audience and value and therefore puts the power to innovate outside” of its own four walls.
What it comes down to, then, for service providers is to clearly understand why innovation is important for the future of the business and exactly what it means to innovate. And that means breaking away from traditional industry thinking. “Communications carriers have historically been used to ‘innovating’ by taking one service and building variants on top of it — telegraph, voice, mobile, data; in each instance it's leveraging technology innovation to provide a variant of an existing service,” Accenture's Morelli said, noting that that type of “innovation” never breaks the mode to create something truly new.
“I like to quote Henry Ford, who used to ask customers what they wanted to improve transportation and they'd say, ‘faster horses,’” Morelli said. “Through the years, telecom carriers have kept on building faster horses. That's not the way innovation runs in other industries with different roots.”
Instead, you get Apple building a vastly better user experience to break out of the MP3 player pack with the iPod — and ultimately turning that into a telecom play with the iPhone — or Dell beating its PC rivals not by incrementally improving the product, but by revolutionarily innovating its supply chain and manufacturing processes, in the process reinventing its business model, Morelli said.
With this view of innovation in mind, the questions telcos must ask themselves begin to change, Accenture's Reznik added: “Who do you choose to resell? How do you bundle it? What do you bring into your retail store and what do you not? What is the proposition to the customer? How do you build a digital brand? How do you enable a digital lifestyle? When providers begin to have clarity around questions like these, it sets them up for a much bigger leap.”
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© 2013 Penton Media Inc.
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