Telecom Operators’ Innovation Dilemma

Professor Clayton Christensen, the world’s foremost authority on disruptive innovation, believes many large companies pay too much attention to their customers’ perceived needs, but are slow to catch-up with new technology and business models. A successful innovator of an earlier era would agree. “If I had asked people what they wanted, they would have said faster horses,” is a quote attributed to Henry Ford, founder of the mass-market automobile.

The problem facing mobile operators was shaped by GSM, the dominant digital mobile second-generation (2G) technology. Starting in Europe in 1987, with the full support of EU governments and mobile operators, it went on to take most of the world by storm with its quality, low-cost voice and groundbreaking short messaging service (SMS). Operators using GSM compete on price packages, marketing strategy, and quality of customer care—but the services are very much standard and thus so is the business model.

GSM reflects the way large European companies and governments deal with technology innovation: you tackle the future by planning it. This involves creating detailed standards, defining the basis of competition including the services to be provided, creating economies of scale, and managing the impact of disruption.

The migration from GSM to 3G HSPA merged the competing GSM and CDMA mobile technologies, and moved mobile one step closer to full Internet Protocol (IP) networks, enabling Internet access on the move. The very rapid migration to LTE (now more than 300 networks worldwide) is accelerating the move to an entirely IP world. But this has let in the wolves, the disruptive innovators of Silicon Valley who are competing with mobile operators using the operators’ own network capabilities. And the operators’ business model did not prepare them for that.

Over the past 20 years Silicon Valley entrepreneurs have taken on board just how hard it is to sell innovation to telecoms, and particularly mobile, operators. The roots of telecoms are not in IP, but in fixed-line switching technology, and it shows.

Start-ups developing innovative services to sell (to operators not prepared to buy) initially hit the wall. So it made business sense to bypass telecoms operators entirely by providing new services directly to their subscribers using first fixed and then wireless broadband connectivity. The OTT (over the top) companies were born: Google, Facebook and many others spread their wings from fixed line to mobile, and new mobile-only products like Whatsapp and Facetime also arose.

Thus the dilemma for mobile operators is: deploy mobile broadband and see your old revenue base erode. So how can operators cash in on mobile broadband themselves?

Their current business model is past its use-by date, but they are still collectively generating $1 trillion per year (mobile revenues). Some of this must be invested wisely to develop a new business model. They must get to grips with OTT, and where they cannot compete they must forge partnerships. It’s a Brave New World out there and risk, trial and error will be required for operators to find their place in it. There is no standardized map for that.