Innovators - You Can't Beat Them... So You Might As Well Just Join Them!

By Sophie Papasavva, Partner at EMFC Loan Syndications LLP

Conference, after conference, press release after press release, European telecom operators boast discoveries of how best to mitigate their voice revenue declines. After years of giving away broadband for next to nothing, today the very same telcos are fighting tooth and nail, backpedalling even, to reverse the irreversible. There is not a single one that in hindsight justifies their actions in the early days of broadband. As hard as it may be, telcos must accept the reality of their own wrong-doing and look elsewhere to drive growth. In today’s technology-hungry world, innovation comes in many forms and serves to improve many lives; including the lives of telcos. But rather than painstakingly re-invent the wheel each and every time, telcos should partner with experts who can implement their Value Added Services strategy at low cost and with fast go to market results. Enter the innovators.

The Dumb Telco

Whereas almost all telcos have a clear Value Added Services (“VAS”) strategy and some vision as to product roadmap, to-date very few have successfully deployed any VAS other than SMS. Harsh? In search of mobile TV: a long and frustrating 28 minutes spent trawling through a smartphone menu, telco website and customer care. With some determination and super-human patience, the discovery was made after 6 additional minutes spent with a customer care representative: that having mobile TV on your mobile phone will set you back £8 per month. A VAS that can add £8 of ARPU per month per user, actively sought by a consumer! Surely this is exactly the type of service all consumers should be aware of and have easy access to. Surely it should not be so hard to find. But in the UK, one of our top four mobile operators certainly doesn’t think so.

Dumb Telco No. 1 - spends time and money on deploying VAS but then makes no effort to sell it

Whether it is the ‘techies’ running the show rather than the consumer-facing marketers, or whether it is VAS number 63 of 128 on offer that is merely lost in a crowded arena, no one actually knows. Whilst the connectivity is most definitely there, VAS has been slow to hit the market primarily due to focus on network build-out. However, the reason is irrelevant - it is a great disappointment that in today’s world of declining voice ARPU, telcos are still incapable of successfully monetising data.

A second fundamental flaw in the current business model of many telcos, is wanting to do it all on their own – something akin to re-inventing the wheel. A significant number of Western European telcos have spent tens of millions of euros and an extraordinary number of man-hours developing specialist services and applications in-house. From product inception to commercial launch and all that lie between: trial after trial, committee after committee, budget and re-budget, approval after approval and still they persevere.

Dumb Telco No. 2 - spends time and money on reinventing the wheel rather than partnering with specialist experts

Several costs may be associated with deploying any new VAS, that could likely impede the wide implementation and successful monetisation by a telco:

  • the capital investment associated with building the platform;
  • the cost of platform deployment versus short term uptake of service;
  • the time of platform deployment (on average 9 to 18 months) versus services time to market; and
  • the costs associated with launching VAS to market in a timely manner;
  • an inability to achieve volumes required to drive economies of scale;
  • the focus on technology deployment rather than time to market.

Let us take the example of deploying a simple cloud strategy. A hosted e-mail platform provisioning for 10,000 users implemented in-house by a telco is said to bear a capital investment of approximately €2.25 million. In addition, there are overheads to facilitate the external provision of services (in-house IT is geared for internal service delivery, not for external subscribers); additional headcount would be required, perhaps even a complete replica of internal IT messaging staff. Other impediments to fast commercial success lie in the 9-18 months of internal preparation for commercial launch. Further go-to-market challenges include a primary focus on technology versus product development and marketing and as identified above, extremely low success with respect to market penetration.

Staying with the same example of cloud services, whilst US$14 billion was spent by telcos on cloud pursuits in 2011, only a handful are said to generate more than 5% of revenues from their cloud offering[1]. A report by Informa Telecoms & Media recommends that through strategic partnership with expert cloud enablers who can offer a lifecycle of services to them, telcos can absolutely expedite their success in the cloud. Indeed, as many telcos may not be able to develop their own VAS due to a lack of the requisite budget, skills and other resources, so innovative technology partners have an important part to play in enabling VAS to market.

The Innovative Telco

Partnering with innovators offers telcos the ability to address each of the above impediments to success, at the same time leaving the core business untouched, until the VAS is ready for launch. Partnering, permits the telco to integrate VAS into its core systems, at the same time benefiting from seamless customization for the end user, something only a small, expert innovator can provide effectively.

A global study conducted by IBM several years ago on CEO decision making, exposed certain myths about the pursuit of innovation;[2] these myths continue to be relevant today:

Myth 1:

Innovation is the responsibility of brand and product managers

Reality:

Innovation must be orchestrated from the top

Myth 2:

Innovation happens from within - most often generated by product developers and research groups

Reality:

External collaboration is indispensable

Myth 3:

Innovation means coming up with new or better products and services

Reality:

Business model and operations innovation matter

The same survey by IBM identified certain benefits of collaboration in the pursuit of innovation, as cited by CEOs. The benefits of partnership are clear: lower capital commitments, access to specialist skills and knowledge, faster time to market and overall, much reduced risk.

Collaboration and partnering benefits cited by CEOs

(% of respondents)

Collaboration and partnering benefits cited by CEOs

Few telcos seem to have taken the above on board, but those that have, are reaping the benefits of success. Even fewer are the telcos that have conducted a cost-benefit analysis of developing in-house versus partnering with a specialist expert. Whilst not all VAS require a telco running to technology partners, certain most definitely do.

Small, innovative companies bring several benefits to their larger telco partners. Firstly, they specialise on a small number of key products and services, often relying on in-house intellectual property, and thus giving rise to experts in their field. Secondly, having multiple telcos as partners, they are able to apply economies of scale to significantly reduce infrastructure costs by sharing a common platform. Thirdly, these companies are able to deploy IT solutions extremely quickly and often manage, maintain, patch and upgrade VAS software remotely. Fourthly and possibly most importantly, such innovators are able to easily and quickly create customer environments with minimal disruption to the telco’s main operations.

Swisscom is a great example of an innovative telco; indeed, the incumbent Swiss operator enters into partnerships with innovators like no other telco. Unlike some of its neighbouring incumbents that have long expanded operations abroad, Swisscom remains for now a single-market player. Yet the telco has taken the view that in a highly competitive market, it would be a risky strategy to disrupt the core business operations by taking chances with experimental VAS. Instead, a subsidiary, Swisscom Participations acts as the telco’s buffer to all things innovative; it acts as test bed for a number of VAS solutions that the incumbent has an opportunity to test prior to commercial launch and incorporation into the core business. But unlike the ‘venture capital’ arms of several European telcos, who invest in start-ups and acquire innovators, Swisscom Participations appreciates that it does not always know better. The value identified by its management lies in partnering with small technology companies to test VAS within a controlled environment, where the specific expertise of the innovator is given the opportunity to shape even the go-to-market campaign. Swisscom Participations might even be given the chance to fail fast, but crucially, without having impeded on the core telco business one iota. Acquiring such innovators often defeats the purpose as the benefits of their small and flexible structure becomes absorbed by the larger, monolithic organisation. Partnering is key.

Conclusion

In the current economic environment, Europe’s telcos are unlikely to offer the same focus or budget for VAS as in previous years. Even where budget is made available, it may be vulnerable to being withdrawn if the new VAS does not show early success. Telcos therefore need to demonstrate quick wins if they are to help build momentum in this space and partnering, rather than internal development, is certainly the quicker, more efficient route to market.

The right innovator partner assists the telco to monetise VAS by implementing the best solution and launching white-labelled services in an effective and timely manner. Partnership with innovators offers the advantage of tried-and-tested solutions with fast deployment, even when bespoke configuration is required. No large organization with thousands of employees, especially ones spread across multiple jurisdictions can expect to be as malleable, as flexible or as fast-acting as smaller, leanly-staffed, innovative technology companies.

Few telcos have effectively captured a significant portion of the data revenues that market analysts insist are there to be made. Perhaps this is because consumers are too spoilt with ‘all you can eat’ data plans, or perhaps it is because telcos simply don’t have the track record in successfully deploying and monetising data VAS on their own. It might finally be time therefore, to accept that a smaller, leaner, meaner partner might be able to succeed at lower cost and with much faster results. It might finally be time to accept that externally generated innovation has a crucial contribution to make in helping monetise those elusive data profits that every single telco has been chasing for years.

 

[1]Navigating the Telco Cloud” Informa Telecoms & Media, May 2012

[2]Expanding the Innovation Horizon: The Global CEO Study 2006” IBM Corporation, March 2006

Sophie Papasavva

Sophie Papasavva

Sophie Papasavva is the Founding Partner of EMFC Loan Syndications (“EMFC”), a boutique firm assisting companies seeking to raise bank debt. EMFC offers Loan Execution Support, acting as an additional ‘in-house’ resource to time-constrained finance teams. Prior to establishing EMFC, Sophie was a loans banker for 12 years, first as telecoms, media & technology relationship manager and later in loan syndications and sales, where she gained experience in multiple sectors such as oil & gas, mining, infrastructure, agribusiness and others. Sophie has originated, structured, executed, sold, restructured and syndicated loan financings ranging from simple bespoke bilaterals to complex multi-billion dollar, multi-currency syndicated transactions. Her expertise lies in arranging structured, bespoke financings for corporate borrowers operating in the emerging markets. To contact Sophie, please e-mail her directly at sophie@emfc-loans.com or follow her on Twitter at @Sophie_EMFC.