By Emeka Obiodu, principal analyst, Industry, Communications, and Broadband at Ovum
Contrary to popular opinion, most telcos are innovative when it comes to their businesses. While their core products of voice and data have not changed much over the past 30 years, telcos have innovated in their network infrastructure, business models, tariff strategies and approach to marketing.
Sadly, these are typically ignored when compared to the innovation activities of the major OTT players.
The continued narrow interpretation of telco innovation is exacerbated by the absence of a metric to evaluate or measure innovation activities.
Since 2009, Ovum has collated more than 3,500 telco service innovations and analysed the innovation activities of nine leading global telcos. What is clear from this research is that most telcos use metrics that focus disproportionately on direct new revenues earned.
This is not necessarily bad, but it is dangerous. Every innovation – whether it is a new product, service, tariff, or business model – can generate new revenues, but it can also cannibalise existing revenues.
For example, when telcos design innovative tariff plans that offer unlimited or “abundance” voice minutes, they hope that it will generate new revenues. However, this is accompanied by the fear that the new tariff will cannibalise the telco’s voice and SMS revenues.
While this may be the case, failure to offer the tariff plan at all will expose the telco to even more dramatic revenue cannibalisation by OTT players.
We believe that telcos should use the “net innovation benefit” metric – which is made up of net new revenues, net cost savings, and net non-monetary benefits – to evaluate their innovation activities.
The advantage of this metric is that it unifies the traditional measurements used for new products, processes, and marketing initiatives. By using such a comprehensive approach to evaluating new ideas, telcos will be able to avoid the short-sightedness and misunderstandings that have underpinned some of their previous innovation activities.
More widely, telcos need to embrace a holistic approach to innovation that recognises and integrates their different activities.
A credible structure and organisational process for innovation must recognise the different roles that innovation plays in creating new products, business models and marketing ideas. Telcos must also ensure that the structure balances creativity with value capture, strives to prevent internal inertia and creates suitable channels for engaging in partnerships.
This sort of holistic approach is often absent because telcos’ structures and processes are only geared towards supporting innovation in new products and services. This means that telcos fail to sufficiently recognise the importance of innovation in their networks, business models, marketing initiatives and tariff strategies.
However, this perception is beginning to change. As telcos such as Deutsche Telekom, Orange, Telefonica and Telenor demonstrate, telcos have recognised the need to integrate network improvement, cost reduction, and optimisation processes with their innovation functions. This approach is giving these operations a greater profile by elevating their strategic importance.
A better organised structure for innovation simplifies the reporting lines and makes it easier for support to come from the very top of the organisation. Indeed, every telco needs its top management to provide leadership, vision, strategy, and resources for innovation. Such support provides the impetus for successful execution and positions the telco appropriately to identify and plug capability gaps.
Collaborate more, compete less
The days when a telco can expect to go it alone on innovation are over as the fast pace of developments in the industry often require several stakeholders to work together. Telcos will never have the resources to create or incubate all of the additional new ideas and so must effectuate a credible partnership agenda through which they can scout for new ideas, engage with partners, assimilate ideas and capture value.
Most telcos approach partnerships, especially with small companies, as domineering benefactors. Historically, telcos have demanded a large proportion of the revenues from content providers, with several telcos still demanding more than a 60 percent share of revenues from their partnership agreements.
It is not surprising that content providers have swiftly abandoned the telco platform to move to the Android and iOS platforms, where they are treated more like co-innovators. This is a major reason why Apple and Google have nurtured a multi-billion dollar app economy, which is something that the telco’s underlying culture has not allowed to happen.
This feature is an abridged version of Ovum’s Understanding How Telcos Innovate research report.