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Discovery-driven planning and ecosystems as a new distribution channel

A few weeks ago in association with Ericsson we published the Telco Innovation Toolbox paper. The paper introduces ten economics and strategy frameworks that help operators to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes. Previous posts published on our blog explained the economics of telco disruption. Today’s and the following posts focus on how telcos need to respond to remain relevant and discover growth opportunities.

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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.

Today’s unpredictable mobile environment defies traditional planning methods telcos developed during the golden years of the connectivity business. As we saw previously, 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 telco’s competitive radar until it’s 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 was suggested back in a 1995 Harvard Business Review paper called “Discovery-Driven Planning” by Rita Gunther McGrath and Ian C. MacMillan.  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 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. [Tweet this]  The approach 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 new in 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 Krieger, 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 has built an HTML5 mobile web app that lets users “check into” locations, make plans and earn points for a number of social activities. By measuring how people used the app, the team discovered that photo sharing drove usage. Learning from the behaviour of real users, the company refocused on photo sharing, and built 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.

3-step cycle to turn assumptions into knowledge

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 turnaround 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-driven planning 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 to discover new markets. For targeting existing customers with an existing business model, 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 measured by 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.

Key questions telcos need to ask when evaluating innovation investments

  • Do you allow projects to become profitable before prioritising for growth?
  • Are you measuring new market innovations by the speed and cost of validating assumptions?
  • Are you sufficiently addressing new opportunities by running many innovation initiatives?

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 of tens 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 discovery methods 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. [Tweet this] 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 service providers, 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.

Developers- only way to cater to millions of users

Telco APIs will always be at a disadvantage versus players with global reach, if telco APIs are positioned in direct competition to native platforms 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 the connectivity business.

Key questions telcos need to ask when evaluating innovation investments

  • Is your API strategy designed to turn developers into value added resellers?
  • How do you value the ability of developers to experiment in discovering new user cases?
  • Is your API strategy flexible enough to attract a wide spectrum of partners, including mobile and web developers, MVNOs and M2M solution providers?

Next week I’ll talk on the following two topics from Telco Innovation Toolbox: “Ecosystem as a new distribution channel” and “Keys to successful telco API strategies”. Don’t forget to download the DOWNLOAD REPORT.

As usual, we are looking forward to your feedback!  Please click here to leave us a comment or send us an email to strategy /at/ visionmobile dot com.

- Michael
@mvakulenko

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