Editor’s Note: Welcome to our weekly Reality Check column where C-level executives and advisory firms from across the mobile industry share unique insights and experiences.
From the 1990s to mid-2000s, all was in place for telecom operators to deliver substantial results for their shareholders. It was a time of innovation in the industry. Data capabilities were continually increasing, handsets were becoming cheaper and better, and new content and services were easily accessible. Operators themselves weren’t leading this innovation, but market tailwinds supported their growth by piggybacking on the technology players who were.
Over the last five years, however, this growth story has been nearing an end. Most of the developed markets are fully penetrated. Industry “net adds” are becoming harder to generate. As operators must compete for churning customers, their commercial costs skyrocket. The underlying growth in demand for data isn’t being monetized, and average revenues per user are declining. Traditional industry allies have become competitors and the advantage of scale is tipping – as global competitors emerge in adjacent areas of the value chain.
In this context, innovating has become a requirement for growth. The good news is that operators still have significant strengths on which to build: connectivity is more valuable to consumers than ever; a rich customer base is a coveted asset; the ability to reach customers anytime and anywhere is at the core of the social-local-mobile revolution; and extensive physical distribution channels are impossible for competitors to replicate.
However, having these assets isn’t enough. We believe operators should take an active approach and rethink their innovation model along six priorities:
1. Focused innovation: Over the past 20 years, the most significant changes have occurred as the innovations of global giants from adjacent industries have reshaped the communications industry. Meanwhile, smaller focused players have occupied a sliver of the industry by changing established paradigms. Our research shows that original equipment manufacturers and over-the-top companies tend to invest a higher percentage of their revenues in research and development as compared to telcos, which contributes to their leadership in industry innovations.
Winning in a global marketplace for applications and services requires global scale. Operators have sufficient scale to be relevant; the problem lies in the excessive fragmentation of their efforts. Innovating at scale requires making true strategic choices, selecting the fields to play, and aligning sufficient resources.
2. Open innovation: Openness is essential to respond to the enormous breadth, complexity and need for speed in innovation today. Operators must look outside their traditional boundaries to capture knowledge and talent. They should explore a wide range of sources for ideas – from customers and suppliers to acquiring companies with good ideas in their pipeline. Operators’ strengths – deep pockets, expertise, channels, a customer base and a wide footprint – can bring a lot of value to the table when engaging external partners. Fostering innovation within their organizations and pursuing alliances and investments with communities outside their traditional operations is enabling them to generate new innovations and revenues as a result.
3. An operating system for innovation: Open innovation models give access to new resources, improve the time-to-market and reduce strategic and investment risks. But for this access to be effective, members of the ecosystem need simple interfaces that allow them to use an operator’s distinctive resources. A possible solution is to extend the concept of APIs from the digital to the physical world, creating what we call an innovation operating system. This would be a set of interfaces that connect operators’ assets with internal and external product developers. Operators should consider investing in developing a broad set of APIs that includes not only the network, but also standard conditions for accessing distribution channels, a systematized plan for introducing products in their call centers, and incentive systems designed to make introducing new products meaningful for sales agents.
4. The “porous” organization: Creating a separate organization to focus on new services is generally accepted as a good practice. The advantages of this are agility and focus, however agility and focus it also can make it more difficult for the organisation to tap into the operators’ privileged assets that give them an edge for competing against the OTT players. Thus, operators should build a “porous” organization – an organization that both external innovators and functional groups within the company find highly permeable. This model balances the innovation processes – independent, needing a different culture to thrive – with making the best use of the current strengths of the operator.
5. Intangible asset management: Intangible assets are an ideal vehicle for safeguarding a long-term competitive advantage. And when managed correctly and proactively intangible assets can form part of a company’s strategy and can generate new revenue streams.
New assets – such as databases, know-how, and software – are being developed as a result of many routine processes, although they’re not always identified. Internal know-how – such as market knowledge and human-resources evaluation models that are within the company’s culture, but neither are identified nor protected – is another asset. Simply by identifying which of a company’s activities generate internal knowledge or brand recognition, or by creating some type of value the competition does not have, companies can identify which of their activities are able to generate intangible assets.
6. Competition in the value chain: In the long term, the ability of operators to deliver value to shareholders is more likely to depend on how the industry value chain evolves than on how a single operator performs within the boundaries of the value chain. The battle between network operators, OEMs, and OTT players will determine the health of the industry. Leading operators that can shape the industry’s behavior should also look at how their approach to innovation in their company could affect the entire industry.
