WIRELESS CARRIERS INNOVATE INNOVATE OR MOVE TO THE SIDELINES. By Sangit Rawlley, incode Telecom

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1 WIRELESS CARRIERS INNOVATE WIRELESS CARRIERS INNOVATE OR MOVE TO THE SIDELINES By Sangit Rawlley, incode Telecom The wireless industry has been confronted with a period of dramatic change, driven by a number of new influences including technologies, business models and players entering the wireless arena. The consequence of these changes is a requirement for carriers to reinvent themselves or risk marginalization. Carriers have started moving in this direction. However, history has shown that the process of re-invention especially for entrenched players, is not easy. A strategy consulting unit of Ericsson

2 REINVENTION MINDSET The change for incumbent wireless carriers will require a new mindset, shifting culture, unfamiliar processes and a new approach to innovation. It s time for Constructive Destruction! So how do carriers compete in this changed world? To answer this question, it is important to understand how wireless carriers stack up against the emerging competition. One of the most glaring differences is in the level of innovation. Emerging competition such as Google and Apple are consistently ranked among the top innovative companies globally. Thus, it is imperative for carriers to develop sustainable innovation capabilities in order to continually succeed in today s changing industry landscape. Let s evaluate some of the critical changes that carriers will need to make. EMBRACE A TRULY OPEN INNOVATION MODEL Traditionally, wireless carriers have relied more on others in their value chain for innovation. A carrier s primary focus has been more operational in nature, with emphasis on expanding their subscriber and coverage base through acquisitions, upgrading networks and locking in exclusive handset deals. As opposed to most hightech oriented firms, wireless carriers don t even report R&D spend as part of their financials. This lack of specifically fostered innovation and the general dependence on other players is hurting carriers, as non-traditional companies are encroaching into their space. In a world of widely distributed knowledge, carriers need to adopt a truly open approach to innovation. TOP INNOVATIVE COMPANIES World World World Source: Business Week, 2010 Source: Fortune, 2011 Source: Fast Company,

3 Wireless carriers appear to have begun to recognize this need and have announced initiatives which indicate a move in this direction. Verizon has opened the Verizon Wireless LTE Innovation Center, and AT&T recently opened the first of its three planned innovation centers. As part of these initiatives, the carriers will open up their platform and network to equipment and device makers and application developers. All major U.S. carriers have announced partnerships with various M2M platform providers. Verizon and Qualcomm created a JV called nphase. AT&T has joined forces with Jasper, and recently announced partnerships with Sierra Wireless, Axeda and other M2M providers. The Wholesale Applications Community, a consortium of global carriers including Verizon and AT&T, recently launched a platform with the goal of allowing developers to use one platform to develop and distribute Web-based mobile applications. These are steps in the right direction. The key to success is to tie them together under a holistic innovation strategy. Proctor & Gamble (P&G) is one company that successfully transformed its traditional in-house R&D process into an innovation strategy it calls Connect and Develop (C&D). There are key lessons that the wireless carriers can take from the P&G experience. The C&D framework has four key attributes: 1. FOCUS: WHAT TO PLAY Before searching the world for ideas, it is important to clarify what you re looking for. Set clearly defined targets and criteria for types of applications, products, and services you are looking for. These criteria should be aligned with the overall company vision, strategy, customer needs and take into account the organizational and network limitations. For wireless carriers, the move into mobile data services has opened a whole new world of choices and opportunities, which is a benefit in breadth but can lead to a swirl of activity which is not equally productive or profitable. Carriers have to carefully evaluate where in the value chain they want to operate so that the focus can be applied to those activities that best support long term value creation. In general, carriers have struggled as more of a generic content or solutions provider, but have tended to succeed much better in areas that combine applications with key capabilities available to them as network providers such as location-based services. 2. NETWORK: WHERE TO PLAY Innovation networks by themselves don t provide competitive advantage any more than wireless networks do. It s how you build and use them that matters. The key is to cultivate both proprietary and open networks whose members have promising ideas and their goals are aligned. Today there are over 30 open application storefronts globally. The survivors will be the ones that create the maximum value for all stakeholders. In addition to wireless applications where most of the focus is today, some other areas where carriers can partner with the open community to innovate are in-building coverage and services (Femtocells and distributed antenna systems), network, service and device convergence (wireless, wireline, IPTV) and industry focused M2M solutions (health care and smart grid). 3

4 3. SCREEN AND DISTRIBUTE: WHEN TO PLAY, WHO SHOULD PLAY Once an idea captures attention then its alignment with the goals of the business as a whole must be assessed and it should be screened against several practical criteria. The key here is to have an effective tool that allows organization wide access to the idea. All relevant business units should have access to the ideas, and an idea s applicability should be tested for each possible scenario. Both AT&T and Verizon have announced multiple innovation initiatives. It is important that these initiatives are interlinked at the backend and there is a robust internal process that allows sharing of ideas across these initiatives. 4. ENGAGE: HOW TO PLAY Given that the transformation to an innovation organization represents something of a culture shift for carriers, there may be value in segregating some of the early parts of the discovery and development process for new innovations, to ensure speed and risk taking. That is, innovation needs to happen without the process overhead normally associated with large, mission-critical, network evolution activities at carriers. However, even when a carrier decides to create a completely separate innovation organization, there is still the need to leverage the mother ship to ensure that the vast resources of the overall organization can be brought to bear when needed (especially during commercialization). Further, the engagement process with the other parts of the carrier must be defined because innovation needs broad-based support. Walking the fine balance between limiting process overhead on the innovation process while ensuring a connection to the overall organization is difficult, getting it right is crucial. SELECTIVELY REDUCE QUALITY ACCEPTANCE LEVELS Damned if you do and damned if you don t. That s the dilemma wireless carriers find themselves in when it comes to the quality of new products and services. All innovations have traditionally had to meet rigorous carrier grade thresholds before commercial deployment. Each handset and service has had to go through extensive testing before it was released to the market. The historically closed structure of carrier networks where carriers have control of all elements in the service delivery channel facilitated this process. However, this process is not suitable in the future open model. In an environment where competition from internet players is increasing, the carrier-centric model will be a disadvantage. Most internet companies release their products to consumers while they are in the beta stage of development. In fact, changes are made to the product/ service based on the feedback received from the consumers using the beta versions. This is important for establishing an end-to-end open model where both original ideas and enhancements come from the open community. In the past, carriers were comfortable with development cycles that could last months or even years, but the dot com era has created the new paradigm of development cycles counted in days and weeks, or even hours. Making this transition will not be easy. Carriers will have to realign their quality acceptance levels on certain applications/services and establish an alternate approach for testing while maintaining high standards in other areas and managing consumer perceptions. A tough task indeed! 4

5 RAISE THE RISK APPETITE This is a corollary to the point on reducing the quality acceptance levels. Wireless carriers have a heavy reliance on business cases for prioritizing innovations. Innovation tends to be a numbers game and many innovations, especially disruptive ones, do not have a clear business case. P&G sets a target success rate for innovations at 50% to 60%. If higher, not enough risks are being taken. Google has invested billions of dollars acquiring/investing in various wireless ventures with little return to date. Wireless operators need a venture capital- like approach to succeed in this changing environment. Many carriers have announced initiatives in this direction. Verizon announced the 4G Venture Forum (4GVG) in collaboration with other venture funds, and Sprint has Sprint Ventures. The key is to tightly align the goal of these venture arms with the overall company vision. Additionally, carriers have to tolerate failure as a necessary and healthy consequence of effective innovation processes. The primary element is that innovation processes must allow for experimentation and killing projects early in evolution before they become too costly and too engrained to effectively terminate. MEASURE AND REPORT NEW METRICS From Pearson s law: That which is measured improves. That which is measured and reported improves exponentially. Wireless carriers report on many metrics beyond basic financials including ARPU, Churn, CCPU, MOU, and Net Adds, but there are no measures of innovation. A wise use of metrics can improve a carriers innovation hit rate, and help them make the right choices, faster, with less risk of failure. There are many innovation metrics that carriers can chose from such as Kill Rate, Innovation Return on Investment, Number of Patents, R&D as Percent of Sales, Number of Ideas in the Pipeline, and Percent Revenue Growth Generated from New Products. It is important for the Carrier to select a handful of truly predictive metrics upon which to report (no more than three) and align those metrics with internal organizational processes. Remember to focus on what counts and not just what can be easily counted. Metrics madness can lead to confusion, dysfunction, and less innovation, not more. To summarize, wireless carriers have started down the path toward an open innovation model with a number of different initiatives and programs. To be successful, a carrier s innovation story must contain the following chapters: Embrace the open model company-wide using several key elements to create change: Clarify and communicate focus areas Create an open environment for identifying ideas Quickly evaluate opportunities against priorities Balance the desire to segregate innovation activities to limit the impact of heavy legacy processes with the need to connect with the mother ship, especially for commercialization Selectively reduce quality acceptance levels and increase the risk appetite Measure and report select innovation metrics Making these changes is a monumental task, but not impossible. This effort in change management cannot succeed without the will and commitment of top management. Carriers have taken initial steps in this direction, but they still have a long way to go. 5

6 About the Author Sangit Rawlley is a Director with incode Telecom, an Ericsson Strategy Consulting unit ( focused on providing strategy, business planning, strategic sourcing, engineering and integration services to companies across the communications and media value chain. 6