Innovation is a high-risk activity. You invest in something with the only certainty that you know (some of) your costs and none of your future revenues. Traditional wisdom tells managers to focus on a business case. If the business case is more positive than the other alternatives and gives a good return-on-investment, then you should invest. However this approach is flawed when dealing with innovative projects. There is not reference to calculate future revenues. Yes you can “guestimate” and make nice assumptions. However no business case would have indicated that you should invest in a 23-year-old that has put photo’s of his fellow students online. Some years later that photo page is worth many billions. For every positive example unfortunately there are a long list of failures.
The solution: focus on incremental innovation. Or not?
Nokia would be the best example of this strategy. You make the best hardware platform, a relatively easy software and make sure people can reliably make calls and send messages. Every investment decision had a positive ROI and positive margins. Unfortunately Nokia’s stock is close to becoming junk.
Can you make a business case for highly innovative projects?
Yes you can make a business case. Especially costs can be estimated and some high-level revenue estimates can be made. As long as this business case is used to validate if the project is economically viable, then there is no problem. The major problem is when this business case is compared with incremental innovation projects or investments in the core business. The outcome will be always negative. Disruptive innovations tend to go for lower margin business with inferior offerings that often cannibalize the core business. Over time the disruptive innovation will move up the value ladder and will be able to substitute the core business. Unfortunately the Innovator Dilemma in which you attack your core business and substitute it with an inferior margin business is difficult to accept by conventional managers. There are some companies that have excelled at this. The best example is Amazon that is seeing its core business of book sales being threatened by electronic books. The answer has been to provide e-book readers and tablets below the hardware costs with the idea to dominate the electronic book market by offering a total solution to easily buy books.
The technique used by most companies when faced with disruptive innovation attacks is to consider them inferior and to ignore them. Unfortunately over time these solutions will substitute the existing offerings. This process is currently happening: e.g. SMS versus Whatsapp, LBS versus Mobile Phone location, calls versus Skype or Voxtrot, etc.
Unlike incremental innovation, being first in the market for disruptive innovation is key because the winner takes most of market. Number two can still take some market share but number three is no longer profitable. Examples: Google Search/Adwords/Youtube, Facebook, Linkedin, Twitter, etc.
The worst strategy for operators is the ostrich technique because implementing LTE will offer disruptive innovators all the tools they need to offer voice services over the top.
Discovery-driven planning versus business cases
In 1995 Harvard Business Review came up with discovery-driven planning. The idea has been successfully implemented by venture capitalists. You do not give money to a new venture to develop a new product, launch it and expand globally. You give money to develop a prototype in a few months. If this goal is met, you give money to validate the prototype with early adopters, etc.
Operators should start using discovery-driven planning to introduce disruptive innovations. Employees, partners, customers, etc. can “complain” about inefficiencies in the current offerings. The most urgent “inefficiencies” are selected, for instance via voting. Afterwards small innovation groups, made up out of experts in different domains, are formed to find solutions on paper for these “inefficiencies”. These paper-based solutions are presented to selected early adopters. Via continuous feedback the solution can be designed, the future price can be determined, the costs can be estimated and a high-level business case can be made. Early adopters are asked to find beta users. If a certain number of beta users express interest in the solution then the team will receive funding for a prototype.
Beta users are able to see the prototype come to live and to give continuous feedback. The prototype should evolve from paper to a real service in as few months as possible, 2-6. Afterwards the beta users get a limited amount of time to start subscribing to the real service and to extend the number of beta users. If a certain limit is reached within a certain time frame, then the beta product will get a next investment round. This investment round will bring the product from closed beta to a public launch. The last stage is expansion. If the public launch is successful then the last round of funding is provided that allows the service to expand, e.g. within all markets of the operator.
Any idea/service that does not make a stage gets killed. The complete disruptive innovation program should get a budget and should be initially independent from the core business. Direct support from the CEO and other senior executives is a must. Business cases are used to set prices, etc. but not to compare disruptive innovations with core business investments.
In a recent article on Gigaom, the author is saying that it’s the end of the line for telco. Several arguments are brought to the table to explain that the industry as we know it today has seen its best days. Similar to postal services and railways.
What if the article is true?
What if the complex telecom standards no longer live up to the dotcom flexibility? What if communication is so much more than calls and SMS? How can an industry that seems so alive on the Mobile World Congress be like a dinosaur just before the ice age?
Assuming the industry will only get worse. What are your options?
1) Denial – deny the end of the world is near and focus on daily business. Once the recession is over things will pick up again. Tomorrow an operator will find the solution…
2) Survival – accept the industry is going to get worse so try to focus on those things that still continue: 4G networks for sure but what else:
3) Surrender – move to the winners (Apple, Google, Amazon, etc.). However, what if they are not hiring?
4) Move on – change industry. Where? Hiring freezes are general in most industries. Where do they need SS7 specialists?
Since the list ran out of options, there is only one more thing you can do: revolution.
The current model has failed. Let’s try to focus on the next model.
What if calls and SMS are free? What if monthly mobile subscription charges are €10 max? Where will the money come from in this case?
I have some ideas. They might be good or bad. However for sure there are millions of people that will have ideas. The challenge will be how to test millions of ideas without spending billions on useless ideas.
This challenge sounds very much like the same challenge venture capitalists and business angels have. So why not use their techniques to solve the same problem?
Instead of investing in yet another useless large scale OSS or BSS transformation project, why not set-up a telecom venture capitalist business with this money? There are several companies that use a similar set-up to do product innovation. They allow the crowd to suggest ideas, rank them, complement them, etc. They set-up a team of internals and externals to build prototypes for the best ideas. They allow the crowd and social tools to make publicity and a darwin-like experience to get to a certain level of profits or get killed. External companies could even be willing to participate in some of the ventures.
The best way to motivate is to create a challenge. Every approved idea will get €250K for 6 months. Who can successfully launch a telecom product or service that makes €1M profit within 6 months after idea approval? The team that does, gets €1M investment and stock options. Next challenge €10M in 6 months.
To cater for these telco startups, operators would need to set up separate legal structures, innovation platforms and expert guidance teams. Startups should be owned partially by the operator but also by their founders. Innovation platforms should avoid re-inventing the wheel continuously. Expert guidance teams should help startups with technical, business, legal, marketing, etc. support.
The idea should not be to invent the next SMS but to invent a whole portfolio of profitable new services because the industry should no longer be built around two or three killer apps…
When you ask a company about innovation, they talk about how their product manager asks customers what they want and how their R&D delivers new features or new products. Lots of companies are following the pain points to solution approach and engage in evolutionary innovation. Although evolutionary innovation is the best way to grow revenue from an existing customer base in the short run, there are several disadvantages that most underestimate.
Evolution means assuming the status quo will never change
Evolving products based on customer feedback assumes that the current solution is the best possible solution for the customer and only some features are missing. Showing status-quo-breaking innovations, a.k.a. disruptive innovation, to customers will often yield a negative response.
Whoever went to the postal service to try to sell email servers as the next generation letter [letter 2.0], will have had a very negative reply. The postal service would not understand why they would want to offer free-of-charge instant delivery to their customers because it canabilizes their existing business. Instead if you would offer a sorting machine that can sort double the amount of letters in half the time for half the cost, you are a lot closer to a sale.
Whoever read “the innovator’s dilemma“, will understand that disruptive innovation is often rejected by the current customers because it either canabilizes their business or is not resolving their specific pain points.
World-leading companies focus at most 90% on evolution and at least 10% on disruptive innovation. Some like Amazon and Apple seem to invert the equation.
Companies that do not focus on disruptive innovation will sooner then later run into problems. Disruptive innovations are becoming more common place and occur more frequently. Whole industries are being transformed as we speak. Existing players can disappear in a few years:
- Books versus Kindle and eBooks
- CD, DVD and Blu-ray versus P2P, mp3 and DIVX
- Harddisks versus memory cards
- Data center per company versus Cloud IaaS
- PC with Windows versus Tablet with Android
- Physical PBX versus Cloud-based PBX
- Roaming versus VoIP
- Nokia feature phone versus iPhone and Android
- Circuit networks with pay per minute versus flat fee data traffic
- Physical routers, firewalls, loadbalancers versus virtual networks and Openflow
- High priced spectrum licensed versus white spaces
Towards a world of demand creation
Companies that want to innovate disruptively should focus on demand creation. Demand creation is about understanding customers hassles. Customers hassles are different from their pain points in the sense that customers do not always understand their own hassles, and even less tell you.
People never told Nokia that their phones were such a hassle to navigate the internet and to install applications on. Customers will not tell you that you need to build a touchscreen phone and app store to solve the hassles.
Disruptive innovators find those activities that customers waste a lot of time with, think are ackward, cost a lot but deliver few value, etc. by questioning, observating, networking and experimenting.
Disruptive innovators at the same time focus on developing technology capabilities in innovations that have a potential to change industries, e.g. VoIP, cloud computing, big data, collective intelligence, etc.
Disruptive innovators work together with early adopters to map out their hassles into hassle maps. To understand if solutions for these hassles are like painkillers [big market] or just vitamines [no or small market]. They propose the simplest solutions possible. Those that do not require a user manual. First on paper and only when everything is validated [technical solution, business model, distribution, purchasing stakeholders, marketing] do they build a real prototype. Ideally customers can personalize the new solution towards their individual needs. Listening to customers is key. Being able to add features frequently and validating in a statistical manner which one contribute to the bottom line, allows innovators to rapidly go from an early beta to a ground-breaking product.
Disruptive innovations do not need to cost millions to launch. Good books on the matter are: Nail it then scale it, Demand: creating what people love before they know they want it, the lean startup, etc.
Why can Facebook, Google, Salesforce and Twitter role out new features every day and regular telecom operators only every 6 months? Although they are dotcoms, they have thousands of employees and a lot of legacy systems as well. However they are able to roll out a new feature every day, if not every hour or minute and large new systems every so many months, weeks or even days.
How do they do it and how can the telecom industry learn from it?
On highscalability, you will find a lot of information on the architectures of large dotcoms. However if you look at different articles you see that each of the larger dotcoms has an architecture that is shared among different products and services, e.g. scaling messages at facebook.
This is the secret sause of the dotcoms. They have built and continuously improved a highly distributed architecture that can handle millions of users and peta bytes of information. On top of this “shared architecture” go the services. New employees are able to quickly create new services because they do not have to worry about scaling data, monitoring the service, deploying/upgrading versions, backing up data, versioning code, etc.
On the other hands operators have no standardized shared architecture. Instead there is a puzzle of different solutions that often use totally different technologies, hardware, etc. Maintenance and upgrades are a nightmare.
Trying to launch any new service requires a massive amount of planning, lots of different skills, expensive investments in third-party licenses and hardware, etc.
How can you do it differently?
Building a private cloud with virtual servers and storage will not resolve operator’s problems. Just virtualizing the puzzle of solutions is not going to do away with complex integrations.
Operators need to make a more bolt move. They need to separate the new from the old. Legacy systems should be kept and isolated. However a new architecture should be built that works in parallel with the legacy systems. This new architecture should focus on launching new services and partner services at dotcom speeds. Everything should be handled as an independent service. Each service should get its own API. A storage services, a billing service, a monitoring service, a provisioning service, an identity service, a datawarehouse service, a deployment service, a mobile shop service, an inventory service, a support service, etc.
All APIs should use a common technology. APIs for third-parties could use REST. APIs for internal high-load usage could use Thrift or Protobuffers. Each API should have two versions, the easy and the low-level version. The easy API offers the most used but in general basic functionality, e.g. sendSMS(from, to, message). The low-level API offers a complete feature set, e.g. sendBinarySMS, sendSMSWithDeliveryConfirmation, etc. This will allow most services to use the easy API but to have access to the advanced functionality when needed.
Loadbalancing when using the services is key. The loadbalancer is the secret for many rolling upgrades in the dotcom world. An application that uses a certain service will use client-based loadbalancing. By having the loadbalancing be able to receive events, it is possible to dynamically add/remove instances of an API, gradually move requests to a new version of the API, etc.
New service developers will now have to focus on building the business logic for the new service and not on data migrations, scaling, monitoring, backups, etc. The service can have completely new ways of billing and charging, a complex deployment workflow, advanced monitoring requirements, large data storage requirements, etc. However it is not the billing or charging system that has to be extended. Neither a centralized EAI. Nor the monitoring system. Instead it is the service that decides what is best for the service via the use of the easy or low-level APIs. By moving the peculiarities of every service into the service and not into generic OSS and BSS systems, these support systems can be drastically simplified.
Operators should try to focus on launching a lot more niche services and opening up their infrastructure to a long-tail of service suppliers. Instead of general services like PBX for SME, operators should think about hotel reservation services, doctor scheduling services, etc. The value of the operator should be in offering a reliable back-office architecture, assuring service quality and managing the support eco-system. The long-tail of service suppliers should be put to work to launch competing niche offerings and let customers decide which one will survive or not.
- European television will become Cloud-based. Netflix, Apple, Google, etc. will launch all-you-can-eat video on-demand in Europe and change the current industry.
- M2M will become successful in the consumer & SME space but with moderate successes in the Corporate space. Some disruptive players will become market leaders. Due to lack of standards corporate adoption will have to wait till 2013.
- Telecom cloud solution providers will change the European telecom landscape. Twilio is a potential game changer.
- One or more major telecom operators will fail. With the crisis continuing some major telecom operator will get into trouble due to the high costs of LTE licenses and the abrupt drop in ARPU.
- Consolidation in the telecom provider domain. Either ALU or NSN will be losing its independence or Chinese players will merge.
- Nokia and RIM will lose their independence. Microsoft will absorb Nokia.
Let’s hope my negative predictions are wrong and a lot more positive things happen.
An introduction for telecom professionals on Cloud Computing and how to use the Cloud to generate new revenues…