VisionMobile Telco Innovation Toolbox Dec 2012

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The Telco Innovation Toolbox: Economic Models for Managing Disruption and Reinventing the Telco

1 VisionMobile 2012. Some rights reserved.VisionMobile.com/Strategy


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2 VisionMobile 2012. Some rights reserved.

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 telcoexecutives to define winning innovation strategies.

Our mantra: Distilling market noise into market sense.

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operators. Over 1,000 networks in more than 180 countries

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the world's mobile traffic passes through Ericsson networks.

We are one of the few companies worldwide that can offer

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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

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Our vision is to be the prime driver in an all-communicating

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License

Licensed under Creative CommonsAttribution 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

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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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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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Key Messages

Telcos are being disrupted because thebasis ofcompetition 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 focusfrom 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 forstable 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 toconsider 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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INTRODUCTION

A new basis of competition

There are no silver-bullet solutions to telco disruption.

Rather than focusing on quick fixes, this paper introduces

a new way to think about telco innovation, with the aim of

helping operators to make the right choices in their

innovation investments.

Lets start with the basic question: What is the

nature of the telecom transformation? Is it just

about new competitors that need to be fended

off? Or are there more fundamental forces atplay? We think the latter.

Telcos are being disrupted because thebasis of

competition in mobile has fundamentally

changed. It has changed from reliability and

scale of networks to choice and flexibility of

services driven by the transition from mobile

telephony to mobile computing. The change

in the basis of competition is fundamental and

irreversible1. Enabled by smartphone platforms

and free from go-to-market bottlenecks imposed

by telcos, hundreds of thousands of appdevelopers are now able to compete for user

attention and wallet share.

Today, universal coverage, no dropped calls,

voice quality and high-speed data connectivity

are almost taken for granted in most mature

markets. For more and more users, the

availability of apps is becoming a primary

consideration when selecting the handset.

Signing up for a telco plan is increasingly viewed

as a necessary cost for services that only need to

be good enough to support the device. Its like

picking the car of our liking, knowing that once

in a while we will have to pay at the gas station.

This brings us to the conundrum the telecom

industry is facing today. Providing

undifferentiated voice, text and data services to

smartphone users leads to a competition on

price and diminishing margins. At the same

time, staying in business requires that telcos

keep up with ever-growing demand for data and

1 Analysis is based on value-chain evolution theory by HarvardBusiness School Professor Clayton Christensen

continued investments in building wireless

capacity. Investments in networks are still

necessary, but they alone are no longer sufficient

for profitable growth. Whats next?

Harvard Business School professor Clayton

Christensen recently said: I think, as a general

rule, most of us are in markets that are booming.

They are not in decline. Even the newspaper

business is in a growth industry. Its not in

decline. Its just their way of thinking about the

industry that is in decline.2

Telecom industry too can greatly benefit from

looking at familiar challenges from a new

perspective. Telecom is a booming industry with

ever-growing demand for mobile data and rising

numbers of subscribers. But the basis of

competition in mobile has changed putting

pressure on legacy telecom business models.

Wireless networks alone can no longer

guarantee profitable growth for telecom

operators.

Competing head-on with asymmetric business

models of OTT players wont help either.

Instead, seizing the full potential of this booming

industry means leveraging mobile digital

ecosystems to create meaningfuldifferentiation and lock-in to telco

services, as well as incremental revenues.

This requires an understanding of ecosystem

economics, development of new organisational

capabilities and resetting the KPIs for digital

initiatives.

2 http://www.niemanlab.org/2012/10/clay-christensen-on-

the-news-industry-we-didnt-quite-understand-how-quickly-things-fall-off-the-cliff/


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The economic and strategy tools introduced here

will guide telcos in their choices onwhat

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

The superiority of ecosystem economics

What gives ecosystems their superior growth economics,

and what can telcos do about it?

Telcos used to be the center of gravity in the

mobile value chain, but no longer. In the new

basis of competition, ecosystems like Apple iOS

or Google Android have become the focal point

for service creation and distribution, ironically

with help from telcos in the form of device

subsidies. In the space of five years, ecosystems

have mushroomed to take control of what took

telcos nearly 30 years to build.

What gives ecosystems their superior growth

economics, and what can telcos do about it?

Apple, Google, Facebook, Amazon and many

other Internet players are in the center of value

networks connecting the core business of the

platform owner (e.g., hardware sales for Apple)

with an array of complements, such as

developers, media, brands and telcos. As such,

they are carefully designed to drive the corebusiness of the ecosystem owner. Complements

are products that are consumed with and add

value to the core product of the ecosystem

owner. Ecosystem economics describe how the

core product (e.g., iDevices or Google ads)

becomes more and more valuable, as the

numbers of developers and users around it grow.

Ecosystem economics are driven by network

effects and lock-in. iPhone apps attract Apple

users, who in turn attract more developers, who

make more apps, which attract even more users,

and so on. This network effect between

developers and users drives the explosive growth

of the iOS platform. Lock-in creates natural

walled gardens, as users develop habits around

apps, while developers are locked-in by high

switching costs created by their investments into

the platform.

Ecosystem economics are often misperceived as

simple two-sided business models, where the

telco needs to profit not only from users, but also

from developers. This couldn't be further from

the truth. Developers, much like anycomplement, drive sales of the core product, and

as such need to be viewed as partners, not as a

source of direct profit.

For example, Apple runs a very successful

consumer electronics business. About 80% of

Apples profits in Q3 2012 derived from products

running its iOS operating system. Flexibility andchoice underpin the iOS value proposition --

There is an app for that, in the words of Apple

advertising. Today, the company lists more than

700,000 apps in the Apple App Store.

Given that the app economy has become a multi-

billion dollar business, it is tempting to believe

that apps are now a lucrative multi-billion dollar

content business for Apple. In reality, the

company runs the App Store at just above break-

even, according to Apple CFO Peter

Oppenheimer and CEO Tim Cook.

The App Store revenue share is an elegant

solution to recover the high costs of running a

thriving developer ecosystem. Given 30%

revenue and the fact that Apple has paid

developers $5.5B dollars, these costs amount to

over $2.3B over the lifetime of the Apple App

Store3.

App Store revenues are used by Apple to

subsidise testing and hosting of hundreds

thousands of free apps and billions of free app

downloads -- Over 80% of app downloads arefree4 (including Facebook, Instagram, and many

other apps). In other words, the App Store is not

designed to generate profits from content sales,

but rather is a key enabler for the app economy

that produces critically important complements

3 As of July 2012

4 http://tabtimes.com/news/ittech-stats-

research/2012/09/11/gartner-says-9-10-downloaded-apps-are-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 ofsmartphones, 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 isM2M. 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 thenetwork 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 aparallel 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 mobiletelecommunications. 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 APIs6with managed fragmentation and a toolset

for

creating apps

2. Community of developers writing to thesame set of APIs to spur innovation and

cater

to diverse use cases

5 Also called computing platforms

6 API - Application Programming Interface

3. Distribution (reach) across handsets,operators and regions

4. A means of monetization, such as ads ormicropayments

5. 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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ambition, but is further behind in terms of its


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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 ecosystemsare 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.



Is your innovation initiative aimed atcreating an ecosystem? If so, what

ecosystem ingredients will it need tosucceed?

How can technology-led innovationplay atop of existing ecosystems to

create a competitive advantage for

telcos?

Are all of your current innovationprojects designed with the key

ingredients for ecosystem success?


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CHAPTER THREE

The modular telco

Contrary to Internet players, most telecom operators

evolved as all-in-one businesses. To better understand

the impact of the market disruption to telcos, it helps to

visualise mobile operators as an entity comprised of three

business layers: connectivity, services and distribution.

Each of these business layers is 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.

Contrary to Internet players, 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). Vertical integration

was necessary to provide these services with

five nines reliability for tens or even hundredsof millions of subscribers. The all-in-one telco

spans network operations, telephony,

messaging, data access, user identity

management, authentication and billing, as well

as distribution and retail.

As the basis of competition changed to choice

and flexibility, vertical integration lost its

advantage. Moreover, the lack of flexibility

inherent to vertical integration has often slowed

telco attempts to adjust to new market

conditions. It explains why telcos lost out to

smartphone and Internet platforms in the areas

of location services, authentication, single sign-

on, user identity, and billing.

To better understand the impact of this market

shift on telcos, it helps to visualise mobile

operators as an entity comprised of three

business layers:

1. Connectivity business: high-speed mobileInternet access and wide area connectivity

2. Services: telephony, SMS, content portalsand other value-added services

3. Distribution: physical and digital retailpresence, consumer intelligence, customer

care, telco own apps, web portals and more

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 ever-

growing need for anywhere, anytime

connectivity to billions of devices. It will remain

an important part of the digital ecosystem value-

chain 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 diminishingprofitability.

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 dayand Tango, a video-calling app, grew to 23

million subscribers in 190 countries. No less


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important, the business models of these


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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.



In which business layers do our digitalinitiatives operate?

Are the right processes and KPIs inplace to compete within this/these

business layer(s)? Do the KPIs complywith 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 therespective business layers?


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CHAPTER FOUR

Asymmetric business models

As OTT players put increasing pressure on traditional telco

profit centers, it is tempting to see them as direct

competitors. Yet they dont compete for profits, but for

control of the value chain.

Mobile Internet has become an integral part of

the digital services and content ecosystem. In

that context, mobile operators, Internet

companies, handset makers, software vendors

and content providers are part of the same valuenetwork.

As OTT players put increasing pressure on

traditional telco profit centers, it is tempting to

see them as direct competitors. Yet, 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 not symmetrical, because unlike

carriers, OTTs do not bear the burden of

providing mobile Internet service. Connectivity

may be as important to their business model asgas to a car; yet, its the telcos who supply it, not

the OTTs themselves. This asymmetry makes it

difficult for telcos to protect the profitability of

some legacy business models.

In economic terms, telco connectivity

complements OTT business. A complement is a

product that is consumed together with another

product (see Chapter 1). Demand for a product


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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 aresold, 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 sufferingas 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 subscriberacquisition. 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.



How does the asymmetry of businessmodels affect your project? Does the project

drive the telco core business or does itattempt to compete with OTT players head-

on?

Does the project incorporate unique aspectsof value that OTT players cannot match

(e.g., localization, user targeting, privacy

controls, or MVNO service customization)?

What are the complements to the telco corebusiness (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

The true value of innovation and the cost of

doing nothing

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.

Traditional financial tools work well when

evaluating investments in capital-intensive

telecom infrastructure. In such investments,future costs and revenues can be predicted fairly

accurately by using traditional financial

forecasting tools like discounted cash flow (DCF)

or net present value (NPV).

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, as explained in Harvard

Business Review article Innovation Killers, How

Financial Tools Destroy Your Capacity to Do

New Things by Clayton M. Christensen,

Stephen P. Kaufman, and Willy C. Shih.

There are two costs of doing nothing for telco

that escape the attention of traditional financial

tools: The risk of non-linear deterioration of the

telco business and the missed opportunity to

develop new capabilities necessary for the

future.

Traditional telco financial tools implicitly

assume that business is stable and its present

state will persist into the future. In other words,

if an innovation investment is not made, things

will be at least as good as they are today. This is

definitely not the case for telcos trying to adapt

to the new basis of competition. The

commoditization of core telco services and the

entry of disruptive OTT players will inevitably

result in the decline of the telco business.

Therefore, the true value on innovation is not in

improving on the status quo, but in preventing

future deterioration of the telco business.

The second cost of doing nothing is the missed

opportunity to develop new capabilities critical

for future telco competitiveness.

Its a common practice to evaluate investments

based on marginal costs and revenues while

ignoring sunk and fixed costs. I.e., investments

are valued based on their potential to produce

valuable goods or services based on current

assets. That only makes sense when the market

conditions are stable and the current telco assets

are expected to retain their competitive value in

the future.

Lets take the example of Rich Communication

Services--enhanced (RCS-e), which leveragesexpensive IMS infrastructure. Marginal cost

analysis makes it an attractive choice for new

presence and messaging services designed

according to traditional telco service models.

However, according to the new basis for

competition, the scalability and interoperability

offered by IMS are less important than

flexibility. Telcos could be better off investing in

new, more flexible infrastructure better suited

for experimentation with new services, use cases

and business models.

Due to the changing basis of competition, future

success requires new capabilities that telecom

operators are missing today. Marginal cost

analysis, however, will systematically undervalue

investment in creating such new capabilities.

Incremental investments into the existing assets,

such as network expansion, will always seem

more attractive compared to the full costs of

creating new competitive capabilities. For

example, Blockbuster saw Netflix developing

new models for movie delivery. Marginal cost

analysis, however, could not justify building new

capabilities, and instead Blockbuster continued

investing in its current assets, which soon will


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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 towarddeveloping new capabilities relevant for the new

basis of competition.

Telcos need to consider the costs of doing

nothing and invest in innovation wellbefore

traditional financial analysis shows

attractive returns. They must adopt

discovery-driven planning methods suited for

the prevailing conditions of high uncertainty. We

7 http://hbswk.hbs.edu/item/7007.html

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.



How often do you use NPV/DCF financialtools for evaluating investments in telcoinnovation?

Are you investing enough in developingcapabilities relevant for the new basis of

competition?

How would you build new products for thenew basis of competition, if you were a

startup starting from scratch today?


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CHAPTER SIX

Dealing with uncertainty: Discovery-driven

planning

High levels of uncertainty require radically different

planning methods. Instead of treating blue-sky

assumptions as facts, discovery-based planning

systematically converts assumptions into knowledge.

Todays unpredictable mobile environment

defies traditional planning methods telcos

developed during the golden years of theconnectivity business. As we saw in Chapter 5,

conventional planning methods assume that

companies can reliably predict the future

outcome of investments based on past

experience. That worked well for infrastructure

investments, for example when upgrading from

2G to 3G and now to LTE, where the focus is on

managing execution risks. But since the basis of

competition changed, telcos face a totally new

competitive environment where they lack

reliable knowledge about new economics and

business models.

Competition in the age of ecosystems is shaped

by the interaction of a diverse number of players.

It is not just uncertain, but fundamentally

unpredictable. Often the new players are too

small to show up on a telcos competitive radar

until its too late. Whatsapp, Viber, Tango,

KakaoTalk, and textPlus are just a few examples

of the numerous startups disrupting telco

services.

High levels of uncertainty require radically

different planning methods. An alternative wassuggested in a 1995 Harvard Business Review

paper called Discovery-Driven Planning by

Rita Gunther McGrath and Ian C. MacMillan 8.

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. This is achieved by proactively

testing assumptions with minimal costs and as

8 http://hbr.org/1995/07/discovery-driven-planning/

early as possible in the process, while constantly

adjusting the action plan based on the new

knowledge gained from the market.

In other words, conventional planning

methods are optimised for dealing with

execution risks, while discovery driven

planning is optimised for dealing with

market uncertainty. The management tool

works according to a Learn, Build, Measure

cycle. This approach is also promoted by the

Lean Startup movement, which today has

become the role model for building a successful

startup.

The need to deal with uncertainty might be newin telecoms, but is well understood in other

business circles. As shown by Amar Bhide in his

book, Origin and Evolution of new Business,

93% of companies that became successful

abandoned their original strategy.

For example, Instagram, a well-known success

story, began life as a very different kind of

company. In the words of co-founder Mike

Krieger9, Instagram was an app that only took 8

weeks to build and ship, but was a result of over

a year of work.

The project started with an investment of

$500K, and the initial idea to build a location-

based HTML5 app. The team hasbuilt an

HTML5 mobile web app that lets users check

into locations, make plans and earn points for a

number of social activities. Bymeasuring how

people used the app, the team discovered that

photo sharing drove usage. Learning from the

behaviour of real users, the company refocused

9 http://www.iitstories.com/2012/04/12/story-of-instagram/


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on photo sharing, andbuilt an iOS app, instead

of continuing with HTML5 technology. The

company continued to iterate on this build-

measure-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 discovery-

driven 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-drivenplanning 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 todiscover 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 measuredby 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.



Do you allow projects to becomeprofitable before prioritising for

growth? Are you measuring new market

innovations by the speed and cost of

validating assumptions?

Are you sufficiently addressing newopportunities by running many

innovation initiatives?


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CHAPTER SEVEN

Ecosystems as a new distribution channel

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.

Direct distribution networks made perfect sense

when operators competed based on the

reliability and scale of a small set of services.

Competing on choice and flexibility requires

solutions that address thousands of user needs

for each walk of life. Moreover, user expectations

constantly continually evolve, making it

practically impossible for a single company to

predict and satisfy a wide spectrum of user

needs.

In the previous two decades, mobile phone users

expected four basic "apps": voice, text, contacts

and camera. Now, they expect availability of

hundreds of thousands of apps. Companies like

Google, Netflix, Facebook, Amazon and even

FedEx realize that the only way to compete on

choice and flexibility is to create an ecosystem oftens of thousands of partners around their core

product.

For example, Netflix started as a direct mail

DVD rental company and expanded into video

streaming services. To compete based on choice

and flexibility, Netflix created an ecosystem of

device partners and developers around its video

streaming service. This ecosystem takes Netflix

services into over 800 device types and allows

80,000 Netflix Open API developers to add

value by experimenting with new discoverymethods and use cases.

In effect, 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.

The key advantages of this newfound

distribution channel are the ability to create

solutions for many small user niches

customization, as well as engage in

experimentation to discover new needs and

opportunities.

Building an ecosystem amounts to offloading

many of the costs and risks of entrepreneurship

to value-added resellers. By doing that, the value

of the ecosystem as a whole can grow far beyond

what a telco could create on its own. In effect,

external partners, be it developers or serviceproviders, become investors in the ecosystem,

subsidizing the expansion of the telco business.

Telco APIs are the key technology enablers of

this new distribution channel. The goal of telco

API programs is to allow developers to take telco

services into new niches and use cases, and scale

from hundreds to thousands of partners. Some

of these new use cases will result in

supplemental telco revenue streams, some will

facilitate customer acquisition, while others will

subsidise ecosystem creation costs.


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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 nativeplatforms 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 machine-

to-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 theconnectivity business.



Is your API strategy designed to turndevelopers into value added resellers?

How do you value the ability of developersto experiment in discovering new user

cases?

Is your API strategy flexible enough toattract a wide spectrum of partners,

including mobile and web developers,

MVNOs and M2M solution providers?


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CHAPTER EIGHT

Keys to successful telco API strategies

It is common for telcos to see developers and content

providers as a source of direct revenues, or even push for

redistribution of profits from OTT companies to telcos.

These strategies are destined to fail because of

fundamental conflicts with developers business models.

For example, Internet business models usually

assume free or almost-free distribution: the last-

mile bandwidth is paid by the user, and is free to

the service provider. Attempts to ask developerspay for the wireless data will not only be faced

with natural resistance, but have the potential to

render the business models of many mobile and

Internet companies unsustainable. Faced with

such challenges, developers will quickly find

alternatives, as happened with location and

authentication, which were once only provided

by telcos at a mass scale.

To be successful in API initiatives, telcos need to

consider developers as value-added resellers,

and therefore design their API propositions forwin-win outcomes. In other words, the business

models of telco APIs need to be aligned with the

business models of developers.

But what is a developer? The reality is that the

developer ecosystem is a complex mosaic of

large and small companies, communities and

individuals. VisionMobiles developer

segmentation model classifies developers into

eight categories that differ according to

developer motivations and commercial drivers.

Some developers are after direct monetisation

(e.g. ZeptoLab, the author of popular Cut the

Rope game), some are after user reach (e.g.

Facebook), and yet others are looking to extend

their non-mobile products and services (e.g.

Nike, DropBox or FedEx).

There is no such thing as an average developer.

Telco API business models therefore need to be

designed to target one or more specific

developer segments. A one size fits all

approach to telco API business models can

severely limit the available market.

Many entrepreneurs, development companies

and individual developers operate according to

the principles of discovery-driven planning

described in Chapter 6. Meanwhile, high barriers

to experimentation result from many telco API

practices, like up-front payment, extensive legalarrangements, demanding certification

requirements or long-term contracts. To reduce

friction and help developers discover new user

needs and opportunities, telco API business

models need to subsidize experimentation and

be designed for the ability to fail and retry

cheaply.

More specifically, if developers are charged

based on telco API usage, the app's business

model must have a stable, usage-based income

stream. This is rarely the case. By allowing free,small-scale usage of the API, telcos permit

developers to experiment with multiple business

models, including free, until a sustainable,

workable business model can be found.

Developers should be offered assistance to scale

and deepen their business, by using the correct

business model polarity, as shown in the next

page. Instead of charging developers upfront and

creating unnecessary friction to experimentation

and API adoption, telcos need to align the

business model of the API with those of

developers. For example, Facebook and

LinkedIn are both social networks. The two,

however, are driven by rather different business

models. The alignment of API business model

with Facebook will mean helping Facebook drive

user acquisition and user engagement. The

alignment of API business model with LinkedIn

will mean helping users make valuable business

connections.

Most developers face fierce competition in the

platform app stores, and are in dire need of

differentiation and competitive advantage.Telcos can attract developers by affording them


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access to local audiences, through innovation


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realized by telco APIs in their three business

layers: access, services and distribution.



Which developer segments are youtargeting with your API strategy?

Are the business models of your telcoAPIs aligned with the target developer

segments? I.e. how the target developer

segments build a sustainable business.

How are you exposing telco assets suchas distribution, retailing and voice to

help developers cater to new markets

and niches?


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CHAPTER NINE

Freeing voice from telephony

Telephony, as a model for human communications, is

essentially based in 19th century technology and user

needs. Freeing voice from telephony can be achieved by

questioning the deeply ingrained assumptions of the

telephony communications model, and experimenting to

find use cases and business models that work.

Telephony is considered a declining business,

despite globally increasing dependence on

communications. There are two reasons for that.

First, in many markets, telephony has become

good enough for most users; i.e., users are not

willing to pay significantly more for

improvements to voice quality or reliability. This

makes telephony a commodity service with little

differentiation value beyond price. Second,

telephony is a rigid, one-size-fits-all service that

does not have the flexibility to cater to

thousands of user needs. That makes it less and

less competitive with new models of

communications, which better suit the new basis

of competition: choice and flexibility.

While telephony revenues are in stagnation or

decline, people are not speaking less. They just

attribute less and less value to telephony. Phones

used to be the only way to remotely catch up

with a friend, engage a sales prospect, get

information about a product, or just flirt. Not

any more. Today, many everyday

communication needs are better served by

innovative alternatives that dont fall within the

narrow definition of telephony.

Telephony, as a model for human

communications, is essentially based in 19th

century technology and user needs. Significant

technological advances made telephony more

efficient, accessible and inexpensive, but little

was done to challenge the deeply rooted

assumptions of this legacy communication

model: Dedicated communication links,

expensive centralized switching, synchronous

communications, dial-talk-hangup cycle,

intrusive etiquette (caller decides on the time of

the call), and more.

Freeing voice from telephony can grow voice

traffic by taking voice services into new

communication modes and use cases, creating

great value to users, telcos and developers alike.

Freeing voice from telephony can be achieved by

questioning the deeply ingrained assumptions of

the telephony communications model, and

experimenting to find use cases and business

models that work. Many successful OTT

companies do just that -- unlocking the value of

voice by innovating around all the components

of a voice session, as show in the next figure.

Notwithstanding the buzz around new OTT

services, telcos are still considered the primaryproviders 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.

Replicating OTT solutions under the telco roof,

or focusing on improving telephony using

VoLTE or HD voice will not suffice. Telcos need

to create unique value to users by taking voice

into diverse sets areas of new cases and contextssuch as web telephony, anonymous calling,

permission based calls, group calling, voice

messaging, dynamic call routing, do-it-yourself

IVRs, call referral tracking, and more). Creating

healthy developer ecosystems around voice

services that are anchored by telecom operators

is the best way to achieve this.

WebRTC is a technology that promises to bring

voice and video into the web browser. At the

same time, it offers an excellent opportunity for

telcos to innovate by extending telecom services

into the open web and freeing voice from closed

telecom networks. The focus of WebRTC


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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.



What voice (not just telephony) use casescan 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 freevoice from telephony by challenging

telephony assumptions?

How can you structure your voice APIs andservices to enable developer ecosystems to

uncover more use cases?


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CHAPTER TEN

Turning openness into a competitive

advantage

Open can mean different things to different people.

Standardization and interoperability (a form of openness)

were among the key factors that allowed mobile telephony

and SMS to scale and achieve ubiquitous cross-carrier

capabilities.

As long as telephony and SMS were tightly

integrated with telecom networks,interoperability of services between telecom

operators meant interoperability of networks.

For example, for SMS and MMS to work across

operator boundaries, networks of different

operators must interoperate at the service layer.

The transition to IP made services independent

of networks and changed this fundamental

assumption. IP has become a universal

interoperability layer between transport

networks, while interoperability at the service

layer took on a totally new meaning. For

example, Whatsapp could displace much of SMSand MMS traffic and achieve huge global reach

without the need for interoperability at the

service layer between different networks.

Openness is a fundamental characteristic of

multi-sided platforms (see Chapter 1). Such

platforms are designed with open APIs to lower

barriers to entry and drive acquisition of diverse

ranges of partners that produce valuable apps,

hardware accessories and other complements to

the platform. Successful platforms at the same

time are closed (integrated) around corebusinesses of their owners. In other words,

openness is needed to create the ecosystem of

complements. Integration or closed-ness is

needed to capture value by the ecosystem

owners.

For example, Apple is open towards app

developers, but very closed around its core

business of consumer electronics. Google is open

to web developers, but closed around their

computing infrastructure and search ranking

algorithm. The same holds true for companies

like Facebook, Amazon, Netflix, Microsoft, and

many other ecosystem owners.

Clear understanding which parts of the value-

chain need to be open, and which closed, is animportant source of competitive advantage.

Companies that make the mistake of being open

around their core business end up surrendering

their ability for meaningful differentiation, and

are forced to compete on price. For example, all

the noble speak about openness did not help

Nokia to make Symbian a viable alternative to

iOS and Android. This is because Nokia made

Symbian open at the level of the core platform,

exactly where Nokia as an OEM needed to be

integrated (closed). Nokia needed to focus on

making Symbian open and attractive todevelopers, not to other handset makers.

Lack of integration around an ecosystem owners

core business leads to what Michael Porter calls

competition to the best10, or the granddaddy of

all strategy mistakes: going down the same path

as everybody else, and thinking that somehow

you can achieve better results. This is a hard race

to win. Every advantage over competitors is

bound to be short-lived.

Integration around the core business is

necessary to deliver unique value, elevate

barriers to entry and achieve sustained

profitability. For example, telco API initiatives

better be focused on creating unique value to the

telcos subscribers, thus establishing lock-in and

barriers to entry around core telco services.

10 http://hbswk.hbs.edu/item/6737.html


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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 corebusiness of voice data and texting in order

to extract value from the ecosystem?

Which regulations, standards or alliancesare 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, willaggressively 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 beforemaking safe decisions. The time to act is now.

11 http://www.businessweek.com/articles/2012-05-

14/message-to-managers-your-strategy-is-not-what-you-say-

it-is

12 http://www.niemanlab.org/2012/10/clay-christensen-on-

the-news-industry-we-didnt-quite-understand-how-quickly-things-fall-off-the-cliff/


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VisionMobile Telco Innovation Toolbox Dec 2012

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