Open service innovation in telecom industry case study of partnership models enabling 3 rd party development of novel mobile services

Transcription

1 Open service innovation in telecom industry case study of partnership models enabling 3 rd party development of novel mobile services Per J. Nesse Telenor Research & Innovation, Service Innovation Group per-jonny.nesse@telenor.com Phone: , Fax: Abstract Selecting, developing and commercializing successful products and service innovations are a risky business. A growing number of companies therefore choose an open innovation strategy collaborating with external partners reducing cost and risk as well as increasing speed and commercial output. The need for faster and less costly ways of performing innovation together with the decoupling of the closed value creation logic within the telecommunications industry, have made it more important than ever for Telco s to look outside the company boundaries for technology and services and develop new business models in order to achieve future service innovation success. The intention of the paper is to present examples on open innovation in action within the telco industry. The models presented, CPA and Playground, both facilitate development of novel mobile service innovations through collaboration with 3 rd party developers. The models are operated by Telenor, a Norwegian based telco with affiliates (OpCo s) both in Europe and throughout Asia. The successful CPA (Content Provider Access) has been in practice over a decade mainly directed towards domestic content based mobile services like ringtones and logos, while Playground was launched early this year intending to serve the international OpCo s with a wide array of mobile utility and entertainment services. Both models represent a novel and open approach to innovation of mobile services in Telenor and adds valuable contribution to the open innovation paradigm. Open innovation Growing attention has been devoted to the concept of "Open Innovation" both in practice as well as in academia. Chesbrough (2006a) introduced open innovation as a new paradigm for innovation compared to the old one advocating a more internally driven and closed innovation process. He defines the paradigm as follows: the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. Open innovation is a paradigm that assumes that firms can and should use external ideas, as well as internal ideas, and external and internal paths to market, as they look to advance to technology (Chesbrough et. al. 2006c, pp.1) The concept of open innovation is not entirely new. Similar concepts like 3 rd party involvement, codevelopment, collaborative innovation, joint ventures, innovation clusters and networks etc. have been around for many decades. What differs open innovation from these prior theories are several according to Chesbrough et al (2006c): the equal importance given to external knowledge in comparison to internal knowledge, the centrality of the business model in converting R&D into commercial value, the proactive nuance of IP management, the rise of innovation intermediaries and need for new metrics assessing innovation capability and performance are some points of difference. From Chesbroughs definition at least two ways of understanding the paradigm is found; Outside In: Searching outside the company for ideas and input from other companies (including competitors) as well as from customers, vendors, universities and other 3 rd parties is favourable compared to holding R&D closely within firm s boundaries. Access to new research, technology and products opening new market segments, lowering development and product cost by leveraging R&D developed on someone else s budget, increasing the competitiveness of the company together with risk reduction by lowering the failure rates of new products and increase the number and variety of new ideas are major benefits from this approach (Davis, 2006). The business model plays a crucial role here. How and when external knowledge is required and used is determined by the companies business model which describes how value can be created from innovations and which elements have to be sourced internally and externally. Building a better business model can in fact be better than getting to market first which is one of the principles from the closed innovation paradigm (Chesbrough, 2006a). Inside Out: Capturing value from an innovation by using the technology inside the existing company or launching a new venture that uses the technology. Hence licensing the technology to other companies resulting in that the technology may be commercialized and applied through partners operating in different markets that the company in question traditionally has served. Accelerating time to market and increasing revenue from others using, buying or licensing or spinning off the company s underutilized on the shelf ideas are major benefits from this approach (Davis, 2006).

2 In addition one can also view open innovation as a strategy within a large company facilitating the flow of information between departments. Not all ideas necessarily originate from the R&D department; hence the challenge becomes to motivate these ideas being brought forward and mapped with complementary knowledge located elsewhere in the company (Herstad et al., 2008). The open innovation model has a dynamic and less linear approach to innovation management. In open models companies look outside-in and insideout across the three major innovation process phases (Docherty, 2006): Fuzzy front end: Looking externally for problems to be solved, inventors, start-ups and other sources of available technologies that can be used as basis for internal and joint development. Development: Acquiring external innovations already productized or even commercialized, offering the opportunity to develop new generations of the technology for scale-up by these larger players. Companies may also spinout technologies and intellectual property that was internally developed but is determined to be outside the core business, and better developed and commercialized by others. Commercialization: Spinning out already commercialized technologies were more value can be realized elsewhere, or acquire already commercialized product lines or businesses that can provide immediate sources of new growth for the company. According to Chesbrough companies like IBM, Intel, Eli Lilly and Proctor & Gamble (P&G) have deployed open innovation management processes. Shell, DSM and Qinetiq are other world leading companies where open innovation is put in action (Gaule, 2006). P&G s Connect and Develop process has proved to be highly successful and have changed their mind set from not invented here to proudly found elsewhere. Their reasons for developing a new innovation process were multiple: Lacking capability to sustaining high levels of top line growth, ability to talent markets throughout the world through Internet and their global Intranet together with the growing interest from universities, government labs as well as SME s and individuals to license and sell their intellectual propriety for ways of monetizing their research. Today more than 35% of P&G s new products in markets have elements originated from outside, up from 15% in 2000, and 45% of the initiatives in the product development portfolio have key elements discovered externally. These results are achieved while decreasing R&D spending as a percentage of sales from 4.8 in 2000 to 3.5% in 2005 (Huston and Sakkab 2006). The Connect and Develop model also facilitate an avenue for spin offs and licensing as well. In the Press n Seal case P&G leverages the value of a patent licensed to a joint venture with Clorox whose Glad brand was already a leader in the category (P&G Develop and Connect Success Stories). Service innovations in the telco industry So far the literature on open innovation rarely includes service innovations as opposed to physical product innovations. This is maybe partly due to slow adoption of systematic and effective processes for innovations in this sector. However, in some areas of the sector, e.g telecommunication sector, one discovers best practices that can match the performance from companies developing tangible product innovations. Moreover, the telco s are examples of a value creation logic that differ from the traditional ones for physical products (Stabell and Fjeldstad, 1998) which makes it even more interesting to study this type of innovations. As one of the major mobile telco s worldwide Telenor has for some time recognized the value of collaborations with external partners. With regard to mobile services 3 rd party partnerships are already established within several industries, M2M, Transport, Public etc. Here a Telenor inside solution has been applied enabling the partners to develop industry specified solutions applying different Telenor assets, like GSM, GPRS, EDGE UMTS, MDA (Mobile Data Access) etc. Internally the flow of ideas across the units and geographical markets are improved. The Seed 2008 business idea competition generated a large number of ideas from employees across the 12 operating companies throughout Europe and Asia. Establishing a new R&I office in Malaysia furthermore provides the company with the necessary local understanding of doing innovation in these emerging markets. The telecom industry are currently facing several industry challenges that emphasize the focus on open innovation and partnership collaboration: need for shorten time to market, need for lower cost of integration, converging industries and dropping margins on existing services. Furthermore the industry has stopped looking for killer-applications and thus frequently has to rely on the creativity and technology from outside partners. In this paper two examples on open innovation models operated by Telenor are presented: Content Provider Access (CPA) and Playground. Both models facilitate development of novel mobile service innovations through collaboration with 3 rd party developers. Moreover the two models represent an outside-in approach to open innovation. Inside-out examples will not be discusses here, although one find several cases of this present in the company as well.

3 CPA model Mobile phone related services in Telenor were until year 2000 based on the network operator playing all the major roles: production and marketing of content services, transportation of the services to the consumers as well as performing the billing transactions. The content based services (stock quotes, weather forecast, and phone directories) were developed for their own mobile phone subscribers only. Moreover the content was priced regardless of the content and simply NOK 3 per transaction. Even if less utility based content were introduced over time the market stagnated. The cost of marketing and advertising combined with concerns about relying on Telenors brand on nonutility services, made the internal innovation approach a costly and unsuccessful endeavour. Introducing CPA resulted in a break up of vertical integration and opened up for the 3 rd party content providers to start their own content services and build their own market brand within Telenor business area. Since 2000 the content market has experienced an enormous growth and expectations are high in a huge and profitable mobile market. One now has family of CPA services developed by more than rd party partners nationally: CPA SMS (Short message Services) with popular services such as alerts, ring tones and logos and CPA MMS (Multi Media Services (MMS) which can be a photo or picture-postcard with text or audio clip, a synchronized playback or audio, with or without a personal text or video. CPA MMS was launched in 2002 and builds on the success of CPA SMS. CPA POS is an agreement between Telenor and the content provider that makes the latter capable of offering location based services though SMS or WAP (Wireless Application Protocol). The CPA model provides the access to the services to all mobile phone end users in Norway due to a horizontal cooperation with NetCom (the other major national mobile network operator) increasing the amount of customers and value for 3 rd party developers cooperation respectvely with the telco s. Another reason for the CPA success is the coordinating of four digit short code (e.g 1881), coordinated price classes and advanced end users for all developers. Hence the content providers can deliver identical service to all the mobile subscribers connected to the two mobile network operators in Norway through the use of the same short code [1]. Furthermore, as the subscriber already is registered with the mobile operator and the billing solution is available (regular mobile phone bill), there is no need for a cumbersome registration of personal data, credit card number etc. and further time consuming credit check. Important principles for CPA are that the delivered content based services must be within the CPA guidelines and according to the Norwegian law. The administrative guidelines developed by Telenor and Netcom guidelines describing which services that cannot be provided over CPA as well as how the content provider should market the services in a consumer friendly manner. The aim is to reduce the risk of services being provided and/or the CPA model being regulated by the authorities. Hence the document refers extensively to different resolutions or regulations from the authorities, i.e. the personal data act guarding against the protection of individuals privacy being invaded through the processing of personal data. Furthermore the marketing control act is included i.e. carrying out actions that are unreasonable in relation to consumers or otherwise contrary to good marketing practice. A service execution platform, application programming interface (API) [2], and a transparent incentive based business model, enables 3 rd parties to develop innovative services for the network operator s mobile phone subscribers. This is a novel and open innovation approach compared to traditional products. The way the platform works in the case of CPA SMS is presented in figure 1: (adapted from Nielsen, 2004) End user/ Subscriber 7 1 NetCom Telenor SMSC CPA 2 SMSC CPA SMSC SMSC 6 CPA CPA 3 Billling 5 Billling system system 4 Billling system Billling system 3 rd party provider Figur 1:Illustration of how Telenor Content Provider Access (CPA) model works 1) The subscriber sends an SMS message to the SMSC[3], using a four digit short code identifying the 3 rd party content provider to which the message should be sent 2) The SMSC routes the SMS message to the CPA platform 3) The CPA platform sends the SMS message (via TCP/IP) transparently through to the appropriate 3 rd party content provider. The content provider is responsible for the content of the service and for processing the message. 4) The content provider sends a response back to the CPA platform including the price of the content service and the customer's account (phone number in most cases) 5) The CPA platform will then send a request to the billing system to bill the subscriber for the

4 message before the message is sent to the customer. If the message by any reasons cannot be sent to the customer, the billing of the customer is cancelled. 6) The CPA platform sends the message to the SMSC 7) Finally the SMSC sends the content service to the subscriber, and the revenue is split between the content provider and Telenor (network operator). For more details, see table 2. The figure illustrates that the CPA platform is transparent for the two mobile operators in Norway and indirectly also the mobile virtual operators which has agreements with Telenor or Netcom using their mobile networks. This is transparent for all mobile phone subscribers in Norway with the same short code and the same price classes. However, the revenue split for each price class can differ between the two network operators. Beyond the network operator and content provider the ecosystem includes the following types of actors: Application houses and integrators: Company s that specialize in developing gateways to the network operator together with new service concepts. Aggregator: Collecting a large variety of content and integrating these in larger service concepts. Furthermore they manage the relationship and interface with the network providers. They manage to decrease the time to market and leverage up front cost from small content providers Media windows: Usually department of media houses i.e. newspapers, magazines, and TV broadcasters providing space to content providers and aggregators for marketing of their services and short numbers In addition to the actors described there are forums where CPA related issues are discussed. Member companies of the Teleforum organization (Norwegian Service Providers Association) has agreed upon a set of rules for consumer protection related to CPA in order to avoid formal regulation of this sector by the authorities. The content providers have also established an organization called Innholdsnett where they discuss the market and new possibilities or ventures. Both organizations contribute together with the network operators with CPA information to the market. Furthermore Telenor also arranges yearly meetings with their content providers. Here Telenor presents new platform features or billing improvements scheduled for launch in near future. These meetings give genuine possibilities for the network provider to collect information and requests from their collaborating 3 rd party partners based on market trends they foresee among their end user, and usually these meetings foster next step CPA actions for Telenor. CPA is based on the network operators providing a standardized business model for content services to the content providers. Through these nonnegotiable revenue sharing models and agreements the providers are offered public market access as well as billing. The model and all the guidelines for different group of service are presented on the web: The content provider is basically offered the same functionality and service level by the operators. A sample of different price classes (far left column) the 3 rd party content based service provider (SP) can choose between and revenue split with network operator is presented in table 1 in the case of CPA SMS, Table 2: Revenue split between NO and SP NOK, NOK NOK to % incl. VAT ex.vat SP to SP 1 0,80 0,36 45,2 1,5 1,20 0,65 53,8 3 2,40 1,50 62, ,47 68, ,83 70, ,87 70, ,00 80,0 From NOK 1 until NOK 30 the intervals for the price classes for the end user are NOK 1. For an SMS priced NOK 1 the content provider receives 45% of the end user price (ex. VAT). However, as the content based SMS service becomes more valuable the revenue split is getting more and more in favour of the content provider. The maximum price for a content based SMS service developed by a 3 rd party content provider is 100 NOK. Here the content provider receives as much as 80% of the end user price (ex. VAT). In order to connect to the CPA platform and take use of Telenor platform infrastructure each partner has to pay a set-up fee in addition to monthly fee. The size of the set up fee is NOK for the first short code and NOK for a subsequent short code. The monthly fee is NOK 3000 for the first short code and NOK 1000 for a subsequent short code. For the CPA position based services the fee is included in the price. Marketing of the service and short codes in media channels is the responsibility of the 3 rd party content provider based service developers and can be an expensive task, but the upside is getting a brand in the market. Training of users is also an important responsibility for the content providers. As mentioned earlier billing of the service received is performed by the network operator having the information available for measuring customer s use of network capacity both in volume and time.

5 Playground model Managing service innovation within an organisation including 12 operating companies (OpCo s) throughout Europe and Asia serving more than 150 mill. subscribers, Telenor envisaged a new and open innovation model including partnerships with external developers in order to develop a portfolio of future mobile services and solutions for an international market with increasingly demanding customers. Playground TM was launched last year and an internal coordination team is devoted to managing this model and facilitaiting the OpCo s with their service innovation work. More precisely Playground is created as a virtual meeting place and a collaborative network of Telenor mobile operators and partners. It facilitates an environment for future growth through demonstrating and testing mobile services from 3 rd party partners together with operator controlled services built on Telenors enablers. The benefits for the Telenor playground partners are multiple: promoting the company and their services to all Telenor OpCo s, getting access to a live telco environment to pilot and enrich the 3 rd party partners services, and getting insight to Telenor s strategy and direction within services innovation and development. Two key features in Telenor Playground are: Showroom: A portal for partners to showcase their mobile services to the showroom audience who are primarily key decision makers in Telenors operational companies. After the introduction in 2007 more than 30 partners are demonstrating their services in the showroom, see Lab: Live telecom service enablers are accessed by the 3 rd party developers through simple and standardized APIs with the possibility of piloting services and for OpCo s to test, evaluate and choose services and partners relevant for their customer. Moreover the Toolbox provides all necessary information for internal and external partners to connect to the lab and use Playground assets to enable and enrich their services, e.g tutorials and API descriptions. Telenor can also host mobile services and let test users play with the partners application in case of a OpCo test. In figure 2 the service areas Playground focus on is illustrated. Community, Games, Advertising, Search, Mobile TVand PIM (Personal Information Management). User Generated Content (UCG), Connected Objects, Music, mcommerce and Business services are service areas that are include as well. Common for all service areas is that they are based on a combination of local OpCo roadmaps and global strategic guidelines and include services beyond the content based ones present in the CPA model. Figure 2: Telenor Playground service focus areas and assets for 3'rd party developers to innovate on Figure 2 also illustrate the major telco assets that can be provided to the partners enabling them to further develop their application into a Playground service. The assets available today are: Call control: to set up calls between two parties, to change call routing based on incoming call events and to receive notifications about the same call events Messaging: to compose and send SMS and MMS to any mobile phone or device that supports these services. Moreover to receive and process SMS and MMS from any mobile phone or device that support these services Charging: to charge and invoice a mobile subscriber for any content or service delivered to a mobile handset (simulator) Customer data: to retrieve and utilize information about the subscribers (simulator) Positioning: to receive and process positioning information from the telecom network Assets like Presence, i.e to receive and process subscriber presence information (on/off and busy information) over the network, Streaming, i.e. to process and stream audio and video to the mobile subscriber over the network, Data access, i.e to transfer data over the mobile network, e.g 3G and EDGE as well as Device Management, i.e to remotely update software on the subscribers mobile phone, are potential lab extensions for the partners. The process of including partners is essential for the success of Playground. It is a systematic, stage gate look a like process including three stages or phases: Partner and service monitoring: Monitoring relevant environments ensuring input of potentially attractive partners. Beyond service

6 providers the ecosystem monitored also include actors like handset vendors, system integrators, creative designers, developer communities and network equipment providers. Partners contacting the Playground portal, ref showroom, are asked to fill-in an application form presenting the company, their services and key benefits for Telenors end users. Based on assessing the initial value propostion GO or NOGO for next stage is decided Partner and service screening: Based on predefined criterias and a long list from partner monitoring it is concluded which partners to invite to Playground. This desision is made after face to face follow up meeting with the partner and evaluation of a more detailed value proposition assessing the business potential, spesific services, partner contribution, partner requirements, partnership plans etc. Partner acceptance and service piloting: After screening the partners they are put in predefined categories, partnerships are set up and connectivity to lab is ensured. Moreover initial partnership workshops are performed discussing objectives, investments and business plans together with governance and reporting with the partner. Connecting the partner to the live telco lab for running proof of concept test on potential services is also conducted here. There is no standard business model applied in Playgroud like the CPA model. The final business plan will be developed in the bilateral cooperation that will take place after the OpCo s uptake of the service from the Playground showroom or after favourable test results from the telco lab. Depending on the stage of developement of the service the intellectual property will also become an issue of discussion between the partner and the different OpCo s. Conclusion The intention of this paper was to emphasize the lack of focus on open innovation models in the service innovation sector, expecially in the telco industry, but also to provide insigth into how best practices on open innovation actually is executed within this industry. This empirical setting is to our knowledge covered insufficiently in literature so far. The successful experience from Telenor CPA model involving 3 rd party content based service developers in the development activities from idea to launch indicates a win-win solution for partners involved deriving $100 million a year in revenue from CPA in Norway alone for Telenor. Another outside-in approach to open innovation is the Telenor playground model which offers a more broader set of assets togehter with a telco lab environment enabling the 3 rd party service providers to develop a wider array of services and solutions in an international context compared with the CPA model. The latter is recently launched, and the former has been a great success since the launch adding valuable insight into next generation service innovation models for the Telenor company. Referencies Chesbrough, H. "Open Innovation: The New Imperative for Creating and Profiting from Technology" Harvard Business School Press, 2006a. Chesbrough, H.,Vanhaverbeke, W. and West J. (eds): Open Innovation Researching a New Paradigm, Oxford University Press, 2006b Davis, R.M. How to make Open Innovation work in your company: PDMA Vision, Des Dorcherty, M. Primer on open innvation: Principles and practice, PDMA Vision, April 2006 Gaule, A: Open innovation in action How to be strategic in the search for new sources of value, H-I Network, Herstad, S.J., Bloch, C,.Ebersberger B, and van de Velde,E.: Open Innovation and globalisation. Theory, evidence and Implications, Vision era-net. April 2008 Huston, L. and Sakkab, N.: Connect and Develop: Innside Proctor and Gamble s New Model for Innovation, Harvard Business Review, Vol. 84, No. 3, March 2006 Nielsen, P.: A conceptual framework of information infrastructure building: A case study of the development of a content service platform for mobile phones in Norway, Ph.D thesis, Univeristy of Oslo, 2006 P&G Connect and Develop Success Stories July 2008 Stabell, C.B. and Fjeldstad, Ø.D: Configuring value shops for competitive advantages: On chains, Shops and networks, Strategic Management Journal, Vol, 19, p , 1998 Notes [1] In Sweden eight digit mobile numbers were used and only one content service was connected to this number. If introduction a new service a new number needed to be developed making difficulties in remembering and marketing for the consumers [2] API (Application Programming Interface) is a source code interface that a computer system or program library provides in order to support requests for services to be made of it by a computer program [3] Short Message Service Center (SMSC) is a network element in the mobile telephone network which delivers SMS messages. When Telenor Mobiles subscriber sends an SMS the message is gets stored in the SMSC which delivers it to the destination user when they are available