The challenges for telco CEOs have never been more daunting. The only way out of dumb-pipe hell is differentiation, which requires innovation - something operators haven't been known for. Last month Telecom Asia surveyed a handful of consultants, equipment suppliers and operators about the obstacles and opportunities for service providers to innovate.
Analysts have pointed out for years that operators are not organized for innovation. Their primary strength is operational efficiency.
Guillaume Sachet, Accenture's communications, media and high-tech ASEAN strategy lead, said telcos are not employee-centered and do not stimulate creativity. "Telcos traditionally have not been talent-oriented but process-oriented, with a culture driven by traditional services, limiting creativity and speed."
The result is that the innovation process lacks speed, flexibility, user involvement and is cost driven. "The time-to-market is too high at 1.5 to two years, with an inflexible development process due to silos between IT and the technical infrastructure," he explained.
Nokia Siemens Networks' head of technology for Asia Pacific Michael Murphy agreed that culture is a huge obstacle. "Most operators have people, processes and systems based on 120-year-old telephony practices, largely aimed at optimizing voice and SMS. To innovate, many of these things must be changed," he said.
While the culture of an organization is important in how it encourages people to innovate, Frost & Sullivan managing director for Asia Pacific Manoj Menon said it's impossible for any company to keep pace with outside innovation.
Not developed here
"Telcos need to leverage the innovation happening outside and make it available for their customers. They need to focus their innovation on business models, customer intimacy and integrating the multitude of communication applications," he said.
Softbank Mobile senior executive VP Tetsuzo Matsumoto pointed to another cause: government regulation and unfair competition.
He noted that Softbank Mobile is more focused on developing new business models rather than technical development. Echoing Menon, he said technology can be bought from the third parties.
"In this context, flexible organizational structure and culture to support it is most important. We buy technology from outside, which make us very different from our competitors."
Murphy also said innovation comes from a mindset and a culture that endorses it and rewards it.
"If you need 12 levels of management approval to implement a simple innovative idea, people generally give up. It needs to be fundamentally built in to the how the company runs."
He said that with voice and SMS remaining strong revenue generators, with data playing a larger role day by day but with few major disruptions, this has lulled most operators into a sense of complacency.
Yet another constraint, Accenture's Sachet said, is that traditionally telcos have been aligned by products.
"Each product line has found relatively interesting ways to maximize its own portion of wallet share without taking into consideration customer overall value proposition or changing needs."
He said this is slowly shifting as customers become the focus.
Beyond culture and structure, Celcom Axiata CEO Dato' Sri Shazalli Ramly said that financial resources as well as having the right people with knowledge and technical expertise all are potential obstacles to innovation.
City Telecom (HK) CFO Niq Lai said innovation is about having the vision to see things that others don't see and having the resources and authority to execute on that vision.
He noted that it took 10 years and $400 million for City Telecom become the largest end-to-end fiber network in Hong Kong and now is the fastest growing. "It took us seven years to reach positive free cash flow, and even today we have not yet achieved payback."
All companies encourage improvements, Lai said, "but we regularly change whatever can be changed... even though we may not foresee any gain at the moment. We encourage change for the stake of change. We believe it is only through consistent change that we can discover unexpected improvements."
Signs of change
Sachet said that over the last two years, Accenture has seen a shift with operators trying to focus on innovation and adopt new operating models. To encourage innovation, he said operators are getting closer to users and not guessing want they want and finally working with third parties and creating new business models directed at them.
He also said some are creating a separate service innovation organization to nurture an innovative culture, set incentives to reward innovation creation and fight the war for talent.
Menon from Frost & Sullivan argued that the industry has seen a good deal of innovation in the areas of business models and pricing schemes. He pointed to Bharti's approach to leveraging outsourcing and the strengths of its partners as an outstanding example of innovation.
"Building low-cost business models to reach out to the masses with an ability to have an ARPU of just $3 per month and still be profitable is an innovation."
Where telcos have struggled, he said, is in the area of customer intimacy. "They have yet to be able to offer a differentiated level of customer experience based on knowing the customer and his needs. This is where we will see innovation coming in the next 10 years."
Dato' Sri Shazalli concurred, saying operators need to customize their products and services based on customers' ever-changing needs and desires.
He gave the example of mobile broadband, where its pricing strategy has been dynamic from the start.
"We keep a close eye on developments at a global level and are aware of new business models such as free voice calls paid for by advertising or hybrid prepaid-postpaid plans. But the reality is these tend to appeal to a small niche, whereas as a large and established telco we need to find what appeals and is easily understood by the masses. Innovation will be unprofitable if it fails to attract new business."
He said Celcom fuels innovation by "carefully selecting the right business partners that have common goals and are able to work to develop services that will enrich customers' mobile experience."
This approach also gives application developers and young innovators the chance to bring their ideas to the next stage.
Looking at why more examples of innovation from Korea and Japan aren't exported to other Asian markets, Menon said they have a "complete ecosystem" with local vendors, local application developers and operators that are able work together to develop innovative services.
He pointed to two other important factors. "There is sufficient scale in the number of customers and strong development of the content and applications in local language. Global over-the-top players cannot easily attack the market and this provides some level of cushion and competitive advantage for the local companies."
NSN's Murphy said sometimes innovation needs the population to follow and also pointed to the ecosystem.
"The Korean and Japanese are gadget cultures. They endorse innovation. They are also generally economically better off and are able to pay for innovation if it requires payment. As such, the public welcomes innovation from the operators. And there is also a mindset in the operators to win through innovation."
Sachet said it's a matter of the maturity of the markets. Korea and Japan are mature markets, with over 100% mobile penetration and high-speed broadband available to most of the population.
"Because of this, the focus has shifted to a model of innovation to encourage higher share of wallet through value-added services and as a way to reduce churn."
In less developed markets telcos are still working on acquiring customers, and price reductions are used to lure new customers. As these markets mature, he said there is no doubt that they will innovate beyond what Korea and Japan are doing now.
A lack of scale
Asked what are the dangers in trying to mimic the internet players, Menon said players like Google operate on a global scale, serving some six billion customers.
Telcos are limited by the geography they provide the service in. "This is a big competitive disadvantage, and a telco would be foolhardy to try and mimic the global internet players. Telcos will never be able to keep pace with the innovation that is happening outside."
Murphy also said scale was the issue and such players have an internet culture by definition, which an operator does not. "It is unlikely operators can compete on equal footing here. But operators have other advantages like physical presence, trust and a billing relationship, so they need to ride on these advantages and compete less on things Google can do better. Finding this niche is the challenge."
Emeka Obiodu, a senior analyst for Ovum based in London, said the danger in trying to compete is they'll divert resources and capital from key projects, such as network upgrades and returning dividends to investors in the search of illusive revenue growth that they have little knowledge or perspective to really be able to capture.
"Return on investment will be poor at best, and all that money and effort could have been better spent transforming the network and corporate structure to better leverage their position in the future value chain," Obiodu noted.
Softbank Mobile's Matsumoto agreed. "We cannot beat Google if we fight in their field. We should seek synergies with them. However, we are a bit different from the other mobile operators. We came from internet world and own Yahoo! Japan."
Celcom's Dato' Sri Shazalii said Google's model is completely different from telcos'. "They are not encumbered by the large capital expenditure required to rollout physical network infrastructure.
"As an innovator at the application and interface layers, we see Google as very much complementary to our core business of providing mobile access. They provide the applications along with their global economies of scale while we provide efficient and affordable access to their applications for our domestic consumers."
Menon sees an opportunity for operators to leverage their infrastructure and grow by enabling applications like e-health and m-commerce. "The value a telco will play is in reducing the complexity and providing the integration capabilities of communication into the existing applications," he said.
"There will be many areas such as e-readers, music and possibly video content that they may not have the opportunity to monetize the value of the content passing through their network. However, there will be many areas where the telco will play an integral role. We will see an explosive growth in communication enabling significant number of devices and that will provide a new avenue for growth," Menon said.
Addressing vertical markets is one obvious expansion area for operators, Murphy said. One issue with vertical markets is the need for domain knowledge.
"You can't satisfy a hospital or doctor's needs if you don't know what they are. So for each vertical an operator enters, they need to develop the skills and knowledge necessary to even know what is a desirable product offering for them. It just takes time and a concentrated effort. The question is which verticals the operators want to address, and then if they put the investment into those areas, they can make an entry."
They'll no doubt get a share of these markets, said Ovum's Obiodu, but the key question is how much? In emerging markets they can gain more because internet players aren't as present and billing is a key advantage where credit card penetration is low.
"Large global players may have more of an opportunity too," he said, "The reality in developed markets is further exacerbated by the ongoing spat between operators and internet players. Faced with such reality, the internet players are more likely to continue to bypass operators, with things like LBS, navigation, content and apps."