Who's innovating now?

For the last ten years in Asia's telecom markets, innovation has been driven largely by the industry's technology companies, rather than its operators.  There are good reasons for this.  To date, operators have had a clear mandate:  to deploy capital to acquire technology, to package this technology into a service, to provide that service under license to the general public, and to charge a fee for this service that provides investors with an appropriate return on capital. Operating in a heavily regulated and fiercely competitive environment, their focus has been on making that process as efficient and effective as possible.

In short, their brief has been to operate - not to innovate.

Moreover, the strategies required to succeed in this endeavor focus on process systemization, and financial and operational discipline. Thus, operators tend to attract people with procedural expertise, whose strengths are logical, straight-line thinking and high attention to detail - not innovation and creativity. The human capital operators attract is unlikely to include the sort of people who apply for jobs as Google engineers.

In this environment, almost by definition, within Asia's telecom industry the responsibility for innovation has been transferred to the technology companies. Operators have been so busy paying attention to network deployment and growing a low user base to a respectable penetration, they haven't had time to focus on innovation.

Service, not technology

But now that penetration is maturing quickly, reaching comparable levels to some developed countries, operators must learn to innovate.  The evolution of the telecom market does not have to be driven by technology innovation - service innovation can be an equally powerful driver.  Indeed, one could argue that consumers are better served when service innovation leads the way.  

Mobile money is an excellent example. 

This service innovation has seen operators using mobile to extend mainstream financial services to the many billions of consumers worldwide who are currently excluded from the formal economy.

The equation is simple. Traditional financial services require heavy investment in infrastructure to support users who primarily carry out micro-transactions. Distribution of these same services and transactions over mobile networks and handsets reduces the required investment dramatically, thereby enabling mainstream financial services to be offered cost-effectively to previously unbanked people for the first time. This breakthrough is generating major benefits, not just for the consumers themselves, but for the local businesses and economies in the countries where they live.

But mobile commerce is also now serving as a cash replacement in developed markets. Already, in Japan, more than 50 million people, or about half of all cellphone users, carry phones capable of serving as wallets.

More importantly, in a reversal of the traditional telecom paradigm, this service-led innovation is forcing equipment manufacturers to play catch up. Technology companies are now scrambling to develop the RFID readers and other equipment to facilitate paying with cellphones in stores or on public transport.

This exception to the rule demonstrates the potential for telecom operators to drive service innovation - and, in 2010, that is exactly where they need to focus. If they don't, there is a real danger they will fall two steps behind the technology companies, which are already beginning to encroach on operator territory.

This point is not lost on telecom executives.  In Ernst & Young's soon to be published Asia CEO study, interviews with 18 industry leaders, from companies such as Bharti Airtel, BT Asia Pacific and Telstra, CEOs are highly aware of the need for service innovation. And they plan to start by innovating the customer experience.

In the face of increasing competition, operators recognize the need to develop more intimate relationships with customers.  They plan to invest in customer care and develop long-term loyalty through an enriched user experience.  They believe the battle for wallet share will not be won through a killer application, but by service quality and innovation. They don't intend to mimic Google - they plan to leverage their core asset:  customer relationships.

As one integrated operator put it: "Telcos' niche is to provide services based on our better knowledge of local customers..."

To this end, the study found operators planning to invest in business intelligence and advanced analytics to profile end-users and uncover preferences and trends that will guide service innovation. In the future, the market can expect localized services and personalization, as operators seek to deliver a differentiated customer experience.

Clearly, if operators are to get into the driving seat with service innovation culture, we can expect substantial changes in terms of increased R&D investment and moves to attract innovators. Indeed, the study found many CEOs already concerned about finding the right talent.

As one interviewee admitted: "Talent is an issue. There are good IT people; technology skills are generally available. The real issues are more on the commercial side - marketing and retail."
Many CEOs also recognized the value of partnering closely with third parties, such as technology and internet companies, content providers, media companies or retail distributors. Operators are aware they face high barriers to entry in terms of the cost of content and competitive platforms to build non-traditional services. They need the agility to launch new services to capture shifting end-user trends to capture incremental revenue. Partnerships will help them to capture the window of opportunity available for service innovation.

Cultural shift

This is not to say that operators won't have to create their own internal innovation culture. To drive service innovation, operators will also have to create organizational structures and processes that make creative thinking and challenging the status quo a way of life.

Such changes are not easy - but they are possible.

We must remember that operators have already been extremely innovative in their efforts to provide a low-cost service to an incredibly broad population base. They have proved the masters of pricing and cost structure innovation and restructuring their business models to reduce their infrastructure and people costs substantially by significant orders of magnitude.  Over the last few years they have learnt how to share infrastructure, created highly flexible cost structures via outsourcing and leveraged every possible distribution mechanism to deploy their services into previously inaccessible areas.

Thanks to their efforts, telecommunications is one of the few services available to the public that is accessible to almost everyone - reaching people who still don't have electricity or clean drinking water. 

Thus, operators have shown themselves capable of innovative thinking and moving into new business models. If they now deploy their resources decisively toward service innovation, operators have a real chance to begin to play a greater role in shaping the future of the industry.

While they still have the advantage of holding primary consumer relationships, they must invest in R&D, attract new talent and partner closely with service providers to create more compelling services that will forge a loyal customer base and allow them to control their own destiny.
Jonathan Dharmapalan is the leader of Ernst & Young's Global Telecommunications Advisory Services

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