So the recession is over. Not that our industry seems to have done too badly in the recession - most people seem to have taken the view that their phone and their broadband connection are vital ingredients of modern life and have cut back elsewhere. That trend seems to have accelerated in the recession - smart phones are educating people that their mobile phone is the center of their universe and becoming an indispensable way of not just communicating, but getting information, having fun and doing work.
With 1.5 billion app downloads on the iPhone, service providers now see that there is a huge market for mobile content and applications. We’re finally getting to the position that we were promised in the great 3G hype that accompanied the spectrum auctions of nearly a decade ago. 3G promised us the mobile Internet, but hype got ahead of reality, and now that we have it, its speeds are rather pedestrian. Now we look to 4G for a truly global, mobile Internet with access speeds supporting the kinds of applications and services that the iPhone is letting us glimpse.
But in this emerging market of ubiquitous content, who will be making the money and who will be driving the market? Communications service providers today enjoy a vast $1.4 trillion market, but growth slows as markets saturate. The buzz and excitement is mainly happening “over-the-top,” driven from the handset and applications players with service providers largely getting cut out of the deal.
So if we are beginning to see cracks in traditional business models, where does that lead us?
If the environment about you is changing but you aren’t, you’re vulnerable to extinction. And not only do you need to evolve to survive but to thrive in existing and future environments.
It’s the thriving bit that concerns me. The innovation driver doesn’t seem to be with the communications providers, and the nightmare "dumb pipe" scenario seems a real possibility. In the 25 years since the US and the UK liberalized the communications industry, it has been transformed out of all recognition, but that transformation process needs to continue into the 4G world of the personal Internet.
More to be done
Transformation of the communications industry has not been a smooth, linear process. As market liberalization has moved eastward across the world, different waves of transformation have been noticeable. However, these waves are getting shorter, tending to break over the top of each other, presenting both management teams and market watchers a confusing, chaotic picture.
The first wave of transformation is aimed at squeezing costs out of current operating models. Very frequently, this approach leads to problems with customer service, which then causes customers to churn. There is only so far any company can go with cost optimization of its current working methodology: once the organization goes beyond a certain tipping point, the operation falls apart and people that were just fired or re-trained have to be brought back to where they were before.
The second wave of transformation focuses on a more fundamental transformation of changing the operating model—to simplify the complexity of multiple networks and operational stacks for multiple services. The consequent fragmented and "stove-piped" set of operational processes and systems creates what Hossein Eslambolchi, former CTO of AT&T, describes as “Eslambolchi’s Law of Complexity,” where the more complex the structure you are managing, the more costly and difficult it is to do so.
That’s why fixed-line incumbents, as well as longer-established mobile players, tend to be more sclerotic - operational complexity is more acute in long-established companies. But even newly established providers are not immune from the problem, as every short-term decisions taken to cut corners can be a step toward creating “spaghetti-like” infrastructure, the likes of which incumbents so desperately want to escape.
But even before many of these "second’ wave" programs are even half completed, new drivers for change are breaking, creating a third transformation wave. Paradoxically, the “third wave” is in part created by delivering fixed and mobile broadband services at ever-greater speeds. This creates an explosion of new services and new players, and an enormous opportunity for marketing and tailoring services and products to ever-changing people. Because each persona represents yet another niche to which content and services can be sold and delivered. Service providers should look at the many ways in which they can facilitate the bundling and packaging of new services.
In the face of this third wave, many service providers seem to be all at sea. Many have assumed that avoiding being reduced to a "dumb-pipe" provider means protecting their retail service businesses at all costs and regarding the “over-the-top” providers as the enemy.
That’s now beginning to change with a growing view that being a “service enabler” or “smart pipe” to third-party services could be a very interesting role for service providers. A good example of this is Amazon, which has transformed itself from an online bookstore, to an online retailer, to an online retail enabler by opening up its platform to third parties and charging for the privilege.
Transformation = Survival
The third wave of transformation is all about the virtualization and digitalization of services that were previously bought through other means. It’s really a wave dominated by rethinking business models, and the service provider’s business models are not immune. Invariably, new services involve partners in their delivery and, thus, a new competency of working in value chains is essential. Many communications players are inexperienced in this. Developing strong commercial partnerships with third parties will be an inevitable cultural and operational change.
Just as important is developing the competency to deliver a positive customer experience across services created by multiple parties at an acceptable price and at acceptable profit margins. Fragmentation and complexity is the enemy of good, profitable services.
Transformation can affect many things ranging from business models, to business culture, to business processes, systems and infrastructure, and not every service provider will succeed in managing major change programs. This is not only an issue of competency but of leadership - transformations often take much longer to execute than the market window available.
Just shaking off the habits of a lifetime is very hard- often because you are so imbued in that way of doing something that you don’t know it’s something you have to change. That’s why getting out, observing what others are doing and translating that into action is so important.
These cultural changes also become very apparent with the change in focus in the market from network-centric approaches to customer-centric strategies combined with a much increased level of innovation, producing services that make customers feel some level of “personalization.”
The “widget-ization” strategy of the iPhone has opened people’s eyes to just how many applications and services can be thought up in relatively short order. Monetization of social networking, or of mobile advertising, will depend on the ability to transform data into knowledge. Therefore, it is the service providers’ “knowledge” of the customer that will be important to innovative services. Of all stakeholders in the value chain, it is the communications service providers that truly know the customers in real time.
So what does the future hold for the communications industry? Who knows, but the effects of the changes in the market will be much more important in its future than merely surviving the recession. Cutting costs and reshaping businesses are important, but ultimately they are only stakes to play at the table for being the providers of the growing digital economy.
Keith Willetts is chairman and CEO of TM Forum.