Distilling market noise into market sense
The VisionMobile blog is a space where VisionMobile analysts and industry insiders exchange views on the fast-changing mobile market and the trends that define the future direction of telecoms.
Ecosystem engineering and the modular telco
Just before the end of 2012 in association with Ericsson we published Telco Innovation Toolbox paper. It introduces ten economics and strategy frameworks that will help operators to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes. The first two chapters of the paper were published last week on our blog. Today we are publishing “Ecosystem Engineering” and “The modular telco” chapters.
“Asymmetric business models” and “The true value of innovation and the cost of doing nothing” will follow next week. The list of chapters can be found here. Full paper in PDF format can be downloaded Free – here.
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 mobile telecommunications. 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 platforms have five key ingredients:
- Software foundations: a rich set of APIs with managed fragmentation and a toolset for creating apps
- Community of developers writing to the same set of APIs to spur innovation and cater to diverse use cases
- Distribution (reach) across handsets, operators and regions
- A means of monetization, such as ads or micropayments
- 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. Mozilla’s Firefox OS (Boot2Gecko), which has the support of telcos, might have the same ambition, but is further behind in terms of its 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 ecosystems are 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.
Key questions telcos need to ask when evaluating innovation investments
- Is your innovation initiative aimed at creating an ecosystem? If so, what ecosystem ingredients will it need to succeed?
- How can technology-led innovation play atop of existing ecosystems to create a competitive advantage for telcos?
- Are all of your current innovation projects designed with the key ingredients for ecosystem success?
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 hundreds of 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:
- Connectivity business: high-speed mobile Internet access and wide area connectivity
- Services: telephony, SMS, content portals and other value-added services
- Distribution: physical and digital retail presence, 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 diminishing profitability.
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 day and Tango, a video-calling app, grew to 23 million subscribers in 190 countries. No less important, the business models of these 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.
Key questions telcos need to ask when evaluating innovation investments
- In which business layers do our digital initiatives operate?
- Are the right processes and KPIs in place to compete within this/these business layer(s)? Do the KPIs comply with 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 the respective business layers?
“Asymmetric business models” and “The true value of innovation and the cost of doing nothing” chapters will follow next week. Don’t forget to download the Free – full report.
As usual, we are looking forward to your feedback! Please leave a comment below or send us an email to strategy /at/ visionmobile dot com.