Turning openness into a competitive advantage

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 post focuses on how telcos need to respond to remain relevant and discover growth opportunities.

You can download the full PDF report here.

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. [Tweet this] 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 SMS and 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, as explained in our previous blog post, which described the success recipe of digital ecosystems. 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 core businesses 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. [Tweet this]

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 an important 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 to developers, not to other handset makers.

Lack of integration around an ecosystem owner’s core business leads to what Michael Porter calls “competition to the best”, 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 telco’s subscribers, thus establishing lock-in and barriers to entry around core telco services.

Key questions telcos need to ask when evaluating innovation investments

• 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 core business of voice data and texting in order to extract value from the ecosystem?
• Which regulations, standards or alliances are forcing you into “competition to the best” scenarios? Therefore, which innovation efforts are likely to lead only to short-term competitive advantages?

 

Closing thoughts

To succeed, telcos need to learn to play by the rules of the ecosystems.

Reinventing the 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, will aggressively 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 Is”, 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. [Tweet this] 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 Christensen says. Telcos cannot afford to wait for data before making safe decisions. The time to act is now.

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. Don’t forget to download the full Telco Innovation Toolbox report

.- Michael
@mvakulenko

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