Seven Drivers for Innovation in Communication Industry (@GauJ)

1 Drivers for Innovation in Communication Industry Author: Gaurav Johari (@GauJ)

Seven Drivers for Innovation in

Communication Industry

Author: Gaurav Johari

@GauJ

http://MyKx.WordPress.com


Contents

Current Investment Scenario ....................................................................................................................3

Transform Data-Centric to App-Centric Innovation ..................................................................................5

Support Open Source Innovation .............................................................................................................6

Analytics-driven Innovation ......................................................................................................................7

Hyper-Spectrum Efficiency........................................................................................................................8

Lean Service Portfolio ...............................................................................................................................9

Service Delivery Optimization ................................................................................................................ 10

Invest in R&D for Innovation-led Growth .............................................................................................. 12

Conclusion .............................................................................................................................................. 13

References ............................................................................................................................................. 14


Current Investment Scenario

For more than a decade, communication industry has been growing exceptionally both in terms

of subscriber base as well as revenues. The focus of the industry giants has been driven by huge

investments in adoption, expansion and enhancement for wireless technology to propagate

telephony services especially in data-led growth.

Global CAPEX levels in the telecommunications industry have soared from $50Bn to $325Bn, in

real terms, over the last thirty years#1. Below is the Global CAPEX Spend of Telecom Industry

Interestingly, in a recent survey#2 of Communication CEOs reveals that most CEOs will be

focusing on growing customer base, enhancing customer services and M&A. We have observed

the same in previous

years where

communication

industry focused on

customer acquisition,

geographic expansion

of network coverage

and adopting newer

cellular technologies

to enhance customer

services. At the

current levels of

industry maturity,

most operators have

hit a plateau in terms of subscriber growth, data-driven consumption and service delivery.


These pillars of hyper-growth have settled in with competitive differentiation being a luxury for

communication service providers. Therefore, the mindset of most CEOs seems fixated on the

past glory (which have yielded strong financial and shareholders’ performance). Of late, some

quarters in the industry stewards are getting worried about a wave of OTT players whom they

believe will threaten future of entire communication industry, despite OTTs’ invincible

dependency on Telecom Operator for their existence.

Given the pace at which industry and industry-dependent substitutes are evolving (Whatsapp

offering voice calls to 300+million subscriber hitting voice service revenues of Telcos#3), there

needs to be strong focus on innovation on customer services, revenue generation and

operational efficiency. The next wave of growth for Communication Industry will be enabled by

innovation and strategic investments in creating value assets for operators which will help

them grow faster, enable service differentiation and meet the growing threat from substitutes

(of traditional telephony services like voice and SMS). The story of business innovation in the

industry will be accelerated by the following drivers:


Transform Data-Centric to App-Centric Innovation

In last few years, Telecom companies have transformed itself from Voice-based to Data-centric player.

In the process, they have invested heavily in upgrading their Network, IT and Business to gear up for

higher data-driven services like

1. Upgrade to IP based Network

2. Roll-out of 4G/LTE Network across the nation

3. Transform BSS applications to meet Data-centric billing and service assurance

4. Focused marketing effort to take-on cable companies and ISPs

5. Acquisition of additional spectrum (800Mhz – 1900Mhz) for data capacity expansion

These efforts resulted in creation of huge capacity for delivering data-based services including mobile

broadband, IPTV, Telematics, VoIP, Home Networking, WiMax etc. At the same time, OTT players took

the advantage of the growing data capacity, data accessibility and lower data prices to launch customer

centric services based on the growing need for connected people, connected machines and connected

services. While OTT players filled the gap between data-as-a-service to data-as-an-enabler, Telecom

players lost the battle on riding consumer demand for service which adds value to their lives.

Having lost the first wave, lot of Telcos are coming back with concentrated effort to win-back lost

customer preferences by creating their own apps and ancillary services. India’s largest operator Airtel

has launched Whatsapp-like messaging service HIKE with

added advantage of free data used offers as well as WYNC

Music app. With the large customer base on smartphones

and data services, propagating these apps will be easier and

lucrative for consumers who can use them at either lower

priced data plans or get additional benefits like free credits

or free SMS for using them. This will open-up the doors for

App-based innovation in the World of Communication!!

Source: Hike.in


Support Open Source Innovation

For a long period of time, Communication Industry has been surviving on multiple standards and

protocols built by multiple equipment manufacturers, product vendors and software vendors. With the

growth businesses, consolidation in the industry and multi-vendor approach, this strategy is no longer

working in their favour. In fact, complexity in protocols and standard is now a major deterrent for Telco

to rationalize their vendor-dependency.

Given the complexity and high level of investments, it’s time for Telecom Industry to demand and

propagate standards across technologies, systems, tools and software to make them inter-changeable

with seamless integration, flexibility, upgrades and discards.

Once the industry adopts or defines their protocols / standards, they can further drive co-creation of

open source assets which are either crowd-sourced or proprietary with limited control for new player to

join the ecosystem. This process will help create the environment or platform for value-providers to

provide innovative solutions across the spectrum leading to better solutions for operators to adopt,

enhance and monetize.


Analytics-driven Innovation

One of the most important assets for Telecom Operator is the vast resources of customer

information collected over long period of time. Today, operators know most about their

customer demographics, behaviour, experiences, preferences, network, paying capacity, credit

history, online activities, competitive information, etc. All this enormous pool of data is

available for Analytics/Big Data-driven innovation for increasing revenues, optimizing cost or

enhancing customer experience for stronger loyalty and effective word-of-mouth.

Areas where analytics-led innovation is adding immense value to operators:

1. Monetization of customer data for alternate revenue sources

2. Know-my-Contract to Know-my-Customer

3. Effective up-selling or cross-selling

4. Location-based analytics

5. Optimization of business operations

6. Prediction of fraud or revenue leakages

7. Enhancement of QoS

8. Improvise Asset Efficiency (Track and Manage)

9. Lead management

10. Federated business intelligence


Hyper-Spectrum Efficiency

With the ever growing cost of spectrum acquisition, there is an extreme focus on increasing the

throughput within the constraints on the spectrum available. This is leading to technology-innovation

for delivering better data services within the resources. Also, tap additional resources for data services

like ‘Whitespaces’ and ‘Micro / Pico Cell-Sites’. All because of the fact that data service consumption will

increase exponentially in the coming years.

Data consumption is expected to

increase exponentially from 2010 to

2017. Data access through mobile

phoned will grow at the faster pace

over the same period. Data access

through mobile PCs and tablets will

be of equal quantum as that of data

access through mobile. Voice will be

the laggard with stagnant growth

and diminishing percentage on the

overall scale. 3G in India is expected to cross 100m by 2015 with 190% CAGR

This is leading to introduction of 5G services using a very high frequency part of the spectrum above 6

GHz. This could support a variety of new uses including holographic projections and 3D medical imaging,

with the potential to support very

high demand users in busy areas,

such as city centres. 5G mobile is

expected to deliver extremely fast

data speeds – perhaps 10 to 50

Gbit/s – compared with today’s

average 4G download speed of 15

Mbit/s. 5G services are likely to

use large blocks of spectrum to

achieve these speeds, which are

difficult to find at lower frequencies.


Global Mobile Data Consumptions Trends, 2012 - 2017

Source: Ericsson Data (June 2012)

Source: Cisco Data (2011 –12)

Lean Service Portfolio

Globally, as per the survey conducted by E&Y, most users use mobile data for browsing, social media

(through apps), IM and VoIP. App downloads, music streaming and mobile video has high potential of

uptake. Therefore, operators needs to simply their service portfolio for consumers to have flexibility as

well as value-addition to meet their needs.

Source: E&Y Customer Survey

The focus on innovation should be around browsing, apps and videos

The estimates indicate an explosion of data

consumption over the period. Mobile video

contributes the most of data consumption

which is going to increase at 66%. This is

followed by mobile web / data usage.

Interestingly, file sharing and M2M will

increase its share of data consumption.

Mobile video usage across Europe and Asia is

the highest indicating higher data

consumption. Web browsing (including app

usage) is another driver for data consumption

Source: E&YCustomer Survey


Service Delivery Optimization

Telecom operators need to transform their service delivery framework by adopting other stakeholders

to drive innovation.

Differentiated charging for data services will also help in driving service-led innovation.

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Telecom operators are trying to solve the input-output equation for data services where they can

measure the correlation between investments and value. The key is Customer Experience

Operators need to make huge investments to meet the growing demand for data services

Developer communities are thriving on the open-source phenomenon and open-APIs for developing customer-centric applications and tools

Over-the-Top (OTT) players are leveraging the growing need for connected mobility and connected services from ever exploding digital consumers

Consumers are getting hyper connected ,consuming more digital

services and demanding better experience on the more

DataIs King

O2 fixed broadband plan tiers differentiated by quality of experience customer can expect from key applications (i.e. OTT video and Bit Torrent)

Swisscom introduced a new pricing model in attempt to protect its position as the dominant national communications firm. Subscribers were offered unlimited voice, SMS and data, but presented with differing pricing options according to their desired download speed.

HKBN provides data services as commodity to subscribers looking for high-quality, cut-price broadband access Though its low-ARPU operating model, HKBN makes “decent margins” on its subscription charges which it levies as subscriptions for using specific OTT application

T-Mobile (DE)charges additional prices VoIP traffic to protect against the OTT revenue leakage with specific devices and rate plans that support VoIP services on T-Mobile network. E.g. T-Mobile minimum VoIP plan is €9.95 per month for 90 days

Vodafone (UK) have certain price plans which doesn't include VoIP service access (Skype, Gtalk...) while subscribers can add mobile data allowance for opting VoIP at £15 per month for 30 days and an option to opt out any time

Singtel offers priority data access for premium plans wherein customers can enjoy faster and reliable internet connectivity on their devices and gets priority for their data traffic when the network is heavily loaded hence ensure better experience

BT performs traffic management of time insensitive applications to smooth out usage into off-peak period

Speed based pricing

OTT Subscription based pricing

OTT specific charging

OTT specific charging

Premium charging for priority

Tiered pricing for differential exp.

Network control and optimization


Invest in R&D for Innovation-led Growth

One common thread between world’s most innovative companies is their R&D Spend as %Sales. There

is a direct correlation between innovation and R&D

spends by these companies. Interestingly, no

Telecom Operator gets a berth in the top 10. The

reason is simple; Telecom industry is one of the

lowest spenders of capital in Research and

Development. In fact, it is the lowest in most core

industry contributing to GDP. Below illustration

provide a glaring gap in the industry with respect to

R&D impacting innovation-led growth:

# Industry R&D Spend

1 Electronics and Computing 25.9% 2 Healthcare 21.1% 3 Automobile 16.2% 4 Industrial 10.7% 5 Software and Internet 9.2% 6 Chemicals and Energy 6.5% 7 Consumers 3.3% 8 Aerospace and Defence 3.3% 9 Telecom 2.1% 10 Others 1.7%

To couple with that, Telecom sector posted the steepest decline (-7.5%) in the R&D spend from last

year. To drive innovation in Telecom, CEOs need to focus in IP creation by spending more on R&D.


Conclusion

In conclusion, Communication Industry is at the cusp of innovation-led growth provided its re-aligns its

strategy toward creating an eco-system to generate value assets which are required for growth and

sustainability. In this context, Telcos needs to leap their R&D spend from current 2.1% of revenues to

20% share in order to infuse the required capital, investments and strategic focus. The important

question remains: Where these increased investments should be placed for ROI maximization.

Below is a quick assessment of the increased investment and its likely impact on shareholders' value

# Driver Impact Rationale

1 App Driven Innovation (Content Centric)

High Content and app-based approach will enhance subscriber uptake of services (data) and additional value (content)

2 Open Source Innovation (Standards)

Medium Adopting open-source standards and protocols will help reduce vendor-dependency and ops. Costs

3 Analytics Driven Innovation (Data Centric)

High Enhanced value creation from data monetization, customer experience and customer longevity

4 Hyper Spectrum Efficiency (Network Technologies)

High Increased efficiency will ease pressure on spectrum acquisition, enhance capacity (at lower CAPEX) and future readiness of advance services (healthcare)

5 Lean Service Portfolio Low-Medium

Simply service portfolio for better uptake, flexibility in billing and ease of roll-outs (faster time to market)

6 Service Delivery High-Medium

Create right ecosystem for partners, value-providers, communities to provide differentiate service offerings

Invest in R&D

App / Content Centric

Open Source Centric

Analytics Driven

Spectrum Efficiency

Lean Service Portfolio

Optimal Service Delivery


References

#1: Source: Bloomberg

#2: Source: Bloomberg

#3: Report on Telecom Companies losing revenues to OTT (Source: Fortune.com)

#4: Source: Bloomberg data, Capital IQ data, Strategy& analysis:

http://fortune.com/2014/06/23/telecom-companies-count-386-billion-in-lost-revenue-to-skype-whatsapp-others/

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