The Telco 2.0 methodology -- Business Model Innovation
In our previous post on Telco 2.0 methodology, we described the 15 key Telco 2.0 transformation issues and how the industry currently scores against them. 'Appreciating' these issues was Step 1 in our Telco 2.0 A-C-T process to create a sustainable growth strategy. Step 2 is 'Clarifying' how to approach business model innovation, a tricky subject for any industry that we discuss below. Step 3 is 'Test', and you can find a record of all the latest developments across these steps on our constantly updated Telco 2.0 research portal here.
To start with we need a framework to guide our thinking. To help with this we've drawn inspiration from our friends at arvetica on an overall business model 'framework'. (View their slide deck, it's very good.) We find the diagram below extremely useful in getting our clients to understand what are the one or two things they do exceptionally well, and what other areas they need to make sure are considered in re-designing their business models:
How do we use this framework?
First we need to understand the components in more detail.
On the left of the chart above you have the supply-side issues, and on the right the demand-side ones. Different companies perform to different levels in each of the essential component areas of a business model. You can typically only be world-class or strategically differentiated in one (or at most two) of these areas. Here are some examples to bring the diagram to life:
- In the middle is the value proposition. The core proposition of 'mobile telephony' has been highly successful to date and is the proposition we're all looking to build on. Examples of other successful 'value propositions' from the telco world include Nextel's walkie-talkie service, Direct Connect and Motorola's TETRA public safety networks. For Media value props you could choose The Wall Street Journal (editorial independence and excellence of analysis) or The Economist (the perfect bundle of important news for important people).
- Intel has access to chip design and manufacturing technology that is only marginally differentiated from its competition. However, they have excelled at partnerships with PC manufacturers, Microsoft and retailers by embedding themselves into the value chain and in the consumer's mind. Good examples in Telco are DoCoMo (with i-mode) and the UK retailer Carphone Warehouse (with its multi-operator product offering). In Media an example is the almost limitless merchandising by Lucasfilms around the Star Wars franchise.
- Apple's design abilities are an example of capabilities that others find hard to replicate. In telecoms AT&T/Bell Labs (pre de-merger) were the leader in all things electronic and optical, and today Qualcomm's CDMA patent portfolio shows off strong 'capabilities'. In Media you could pick Pixar with its CGI animation skills. (Most of the Network Equipment Providers are very strong here, of course. Their challenge is to create skills to support their clients in the other component areas of new business model framework if they wish to truly add value and differentiated).
- Cisco is the daddy of supply-chain configuration. In telecoms Sprint PCS (with its multi-level affiliate network build-out model), Telenor (buying exclusive football rights), Nokia (with its mass-market handset efficiency), and Yahoo! in Media (acting as the aggregator and integrator) demonstrate strong 'supply chain configuration' skills.
- Wal-Mart is the master of the cost model. For example, their trucks always drive with headlights on because they've worked out that the cost of fewer accidents outweights the extra fuel consumption. They recycle boxes and palettes while others are throwing them away. You don't get to keep the hanger when you buy a t-shirt from them, as it goes straight back to the rack.
In telco, EasyMobile tried (but failed) as an MVNO with its web-only sales and support, while Vodafone reaps the benefits of scale in procurement and is driving family and workgroup plans through lower on-net call costs. Iliad in France offers a superb example of creative thinking in telco, in terms of building out its network at low cost (buying up distressed assets, eshewing the normal equipment vendors, and using open source software and developing in-house).
In Media, it's worth looking at companies like Moviebank , an automated self-service DVD rental service.
- By moving to the Web, Dell achieved a distribution model that outpaced rivals. As a by-product of build-to-order their supply chain was leaner and more agile, requiring less inventory and working capital. In telecoms, examples of creating distribution strength include Swisscom hotspots (with their exclusive deals with leading hotels) and Verizon Wireless (perceived as the coverage leader - we'll explain why this is 'distribution' at the end of this post). In media, you can look at News Corp (with content delivery via satellite) or the newspaper companies who provide free papers for commuters.
- Gillette manages to maintain a customer relationship through the razor handle/blade system (you're reaching for the Gillette brand every morning), which they then extend into adjacent markets like shaving cream and deodorant to achieve premium margins. You can only salivate at the margins on those replacement blades! Tesco Mobile has been successful by combining its MVNO service with in-store Clubcard loyalty programme. Virgin has a brand with strong cross-industry appeal. Disney (with its branding and characters) sucks you/your children in in the same way.
- By bringing together searchers and advertisers in a unique way, Google became the master of the revenue model. Like a cargo cult, others busied themselves replicating spartan design or clever matrix algebra without understanding the increasing-returns-to-scale of Google's advertising hub. In telco, we can look at Blyk (a new ad-funded mobile service) and 3 UK (with its revenue-sharing model for termination fees and user content).
- In terms of finding new customer segments, Easyjet was the great pioneer of low-cost short-haul flights in Europe. In telecoms, Amp'd (the premium MVNO in USA focused on content and entertainment with $100 ARPU), Tracfone (the Latino-centric operator in USA) and O2 in the UK (with its SMS bundles attractive to teens) are good examples, as is the BBC in the media sector (Multiple radio + TV channels covering all ABC1 sub-segments).
Having looked at the components in the business model framework, let's see how they are applied across an industry. To bring some perspective, we'll start with the airline industry and then look at telco.
Business Model change in the Airline Industry
- Some airlines in Europe attacked new customer bases and segments: Ryainair for the price-conscious, Easyjet for the frequent shorthaul business traveller, Maxjet for the aspiring intercontinental business traveller.
- Many airlines used to build reservation systems, operate catering, own travel agencies and retail stores, and have in-house maintenance. Now those capabilities are typically outsourced and they focus on narrower parts of the value chain: capacity planning, marketing and financial risk management (e.g. oil price hedging).
- They have then partnered with other airlines to offer through-ticketing and shared frequent flyer programs to enhance their network effects and customer loyalty.
- They have also increased their distribution channels by partnering with credit card companies -- offering flyer miles for purchases to extend their "reservation" model .
Airlines have also innovated in their revenue model. Many airlines, especially in the US, have been kept afloat by the credit card companies in hard times. This is because credit cards offering frequent flyer miles for purchases have been immensely successful. (Flying appears to be a not-for-profit activity compared to creating funny money!)
The trick is to sub-divide a product and re-sell it at a higher mark-up. You might have thought that an aircraft seat is hard to split up, but airlines don't just sell "A to B transport". They sell tickets, which are options to fly -- i.e. seat reservations which can be redeemed against specific flights, or any flight, or even multiple flights on different airlines with interline or partnership agreements. Airline miles are just micro-divisions of those options sold at a huge mark-up.
A broadband pipe is likewise just a sequence of options to communicate that you may or may not choose to exercise, and a phone call or text message is a very expensive way of buying sub-divided bits of connectivity. By slicing and dicing the pipe into smaller chunks and bundling them differently with applications and devices you can gain higher margins (more on this in forthcoming posts...).
Applying this Framework to Telecoms business models
For each of the 9 component parts of the business model framework we need to consider a set of telecoms-specific questions to help form a view of a.) the markets we might wish tackle and b.) the way we might tackle them. Here are examples of the questions, none of which are black or white:
* Capabilities: A key question revolves around network technology, eg. HSDPA or WiMAX?
* Supply Chain: Open-source IT tools or NEP-centric telco solutions?
* Partners: Open Platform or Controlled ecosystem?
* Cost Model: Optimise costs (eg. more efficient call centres) or Eliminate costs (web service only)?
* Value Proposition: Traditional comms or Original/Differentiated (see our 'Blue Ocean' example here)
* Customer Relationships: Personal (eg. SK Telecom asking customers to submit new feature ideas) or Impersonal (eg. pre-pay).
* Customer Segments: Should we going macro or micro? Broad market appeal or Niche?
* Revenues: Upstream (eg. advertisers) or downstream (consumers/business)?
* Distribution Channels: Centralised or distributed?
So, which of these 9 component areas is the best place to start and/or the most important?
The temptation is to start with Customer Segments, and conduct large customer research studies. Clayton Christensen, Harvard Professor and author of 'the Innovators Dilemma' recently warned us against this:
"The creation of new business models is substantially different from the innovation of new products or services. Most new products and technologies can be sold through the existing business models. In fact, the corporation will reject process or resource allocations that don't fit its business model. A powerful reason why companies aren't good at business-model innovation is because the kind of products that are required to be the seed of a new model can't get through the resource allocation process."
"Your customers will never lead you to a new business model. Customers always are important, but the ones that will value a new business model will be very different, and their significance will be different."
"A better approach [than asking customers what they want] is to understand what 'job' they are already doing, what products they currently 'hire' to do those jobs, and where are the gaps between the two."
So, this suggests starting somewhere else. Since telecoms is fundamentally a distribution business - it distributes bits and bytes from A to B - the winning approach tends to consider the Distribution area first. Verizon Wireless's 'Can You Hear Me Now?' campaign was far more effective than Sprint's PCS Vision campaign. The former was about coverage -- a form of service distribution. The latter was about a value proposition around smart features.
Now, the critical thing to recognise is that in telecoms 'Distribution Channels' should be sub-categorised into 4 distinct but interrelated elements:
- Retailing (store and web)
- Payment (Payphones, ATM top-ups, online top-up, convenience store top-ups, street vendors)
- Transport (cellular, broadband, broadcast, physical media).
In the next post we'll describe the Transport aspect of this in more detail, as this is where the big fundamental changes in the industry are occurring. Later in this blog series we'll look at some sample new business models and how they relate to the framework above.
In the meantime, let's end with a quote from Mr Christiansen again:
"Skate to where the money will be, not where it is now"
And if you'd like to know where the money will be next, check out the latest developments at our constantly updated Telco 2.0 research portal here or call us on +44 (0) 247 5003.