Operator innovation centers: Searching for solutions in the sandbox

At a site in Plano, Texas, roughly 20 miles from its corporate headquarters in Dallas, AT&T (NYSE:T) today will formally open an innovation center, the first of three such facilities planned by the operator. And AT&T is not alone: Operators across the country have been opening the gleaming, multimillion-dollar facilities in partnership with vendors and other third parties at a rapid clip during the past year. The goal of of these centers is to foster never-before-seen products and services.

Innovation centers serve to showcase the promise of developing ecosystems such as machine-to-machine communications and LTE networks. Additionally, the centers give equipment vendors like Ericsson (NASDAQ:ERIC), Alcatel-Lucent (NYSE:ALU) and Nokia Siemens Networks the ability to demonstrate to carriers that they are willing and able to be strategic partners and not just companies that sell hardware.

And yet even proponents of the centers agree: These innovation centers likely won't produce many mass-market products, and that in order to be truly successful they must be partnered with open developer initiatives.

"It is a more agile way of adapting to a quickly developing marketplace, so that you can do things in a sandbox, you can leverage the community of resources that are all trying to do things in collaboration," said Jason Collins, vice president of innovation of prototyping at Alcatel-Lucent.

Centers of experimentation

"The carriers themselves are putting an emphasis on trying to pull together standardized ecosystems in order to create greater efficiencies in how they deliver these services," said Phil Marshall, an analyst at Tolaga Research.

No two innovation centers are exactly alike, and, indeed, AT&T, Verizon Wireless (NYSE:VZ) and Sprint Nextel (NYSE:S) are all taking different approaches to how they operate their respective centers. The carriers also are setting up multiple facilities for different purposes. (T-Mobile USA declined to comment on its plans for an innovation center.)

But the common theme is a desire by carriers and their vendor partners to push the envelope on new mobile ecosystems like LTE and M2M, and engage with application developers and other players on new products, services, and, ultimately, business models.

"There are so many new applications and systems that are being developed by people across the board," said Keith Shank, Ericsson's director of advanced technology labs. "We are looking for what is the best technology, the best products that we can bring into a mobile environment that people want to use."

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Sharing the benefits

Both vendors and carriers said that the centers offer an opportunity to build closer bonds.

"It gives us the opportunity to really work on opportunities that are relevant for the customer because you're both directly engaged and have a faster time to market for those applications," said David Lewis, the senior marketing manager for Nokia Siemens in North America.

"They're under such huge amounts of pressure to deliver," he added, referring to carriers. "I think this is just one of the avenues open to them to be able to deliver the applications that consumer want."

Nokia Siemens has two innovation centers of its own, including a Smart Lab to test new products and applications and a Next Generation LTE Lab, both of which are in Irving, Texas. 

There are benefits for vendors as well. "It gives them a forum and place to kind of expose their emerging technologies," said  Peter Hill, AT&T's vice president of ecosystems and innovation.  Vendors are constantly searching the market for new products and solutions, he said, and working with AT&T allows them to introduce those ideas efficiently and in a collaborative way.

Peter Jarich, an analyst with Current Analysis, said that when vendors work with carriers at these centers, it allows them to get closer to the operators on a more strategic level. "It allows them to say, ‘I'm responsive to their needs. I'm not just going to come in and sell you products, I'm going to come and help you with innovation.'" 

The nature of innovation

Still, it remains to be seen whether these centers are mere showcases or actual places of innovation.

"I can certainly understand what they're trying to do," Tolaga Research's Marshall said. "The problem that you have when you institutionalize innovation, across multiple companies with different agendas, different timelines and challenges in the market around them, the solutions tend to become suboptimum."

Marshall said that instead of focusing on the "least common denominator" solutions that localize innovation, carriers should focus on fostering developer communities akin to smartphone OS communities.

And carriers and vendors agree the centers are not the only answer. "I think the innovation center by itself is subject to that criticism if you don't couple it with a strategy of a more open developer community on top of a service provider as a platform idea," Alcatel-Lucent's Collins said. Indeed, Verizon has its Open Development Initiative for LTE and Sprint has an Open Device Initiative.

All of the parties said they expect the innovation centers to become more import in the years ahead. "With any new technology that you have and any new capability, these centers become very important," said Brian Higgins, Verizon's executive director for ecosystem development. "And I think these kinds of centers will evolve, like anything else, as new capabilities become available."

Operator innovation centers: Searching for solutions in the sandbox