The Growing Role of Software in New Telco Business Models
This guest post by Telco 2.0 partners SAP explores the growing role of software and software vendors in enabling new multi-sided telco business models, including M2M/embedded (with healthcare examples), and new forms of distribution such as the Amazon Kindle model.
[NB We'll also be covering new telco business models, new forms of distribution, M2M, and much more at our upcoming Brainstorms in the Americas, 5-7 April, EMEA, 11-13 May, and APAC 22-23 June 2011.]
Networks & devices, meet the third member of the trinity: software
The telecom industry has undergone continuous innovation since its inception, bringing to market exciting technologies that enrich the human experience, and the pace of change has been extraordinary. Remember not so long ago on 'I Love Lucy', friends of the Ricardos asked the operator for "Murray Hill 5-9099". Now with smartphones and tablets, telecom services look more and more like the futuristic Jetsons.
Collaboration between operators and third party hardware/device companies has long been a constant as well. After all, what would a voice, video or data service be without some sort of device or CPE? What's new is the introduction of "smart" into the equation.
Smart = Software Enhanced
According to various industry reports, there may be as many as 50 billion connected devices deployed within the next decade, potentially growing thereafter to a trillion. Traditional devices however, like phones and set-top boxes, were engineered to work with the networks, switches, etc. - not with third party and over-the-top applications. And while many of the first generation M2M devices, like remote sensors, were built primarily as transmitters, many more are offering advanced processing outside of firmware and bi-directional capabilities.
While smart devices, and advanced data networks, set the stage for the hyperconnected world, software crystallizes the market even enabling "telcos" to begin thinking of themselves as "softcos". Software takes advantage of the myriad capabilities inherent in smart devices and advanced data networks. And 'smart devices' encompasses far more than smart phones; it includes smart cars, smart grids, smart TVs, smart appliances, smart machinery, smart buildings and even smart pills all of which can drive added value with software.
App stores and associations like the Wholesale Application Community (WAC) have already introduced software into the equation - call it the "apps wave" - by building developer communities focused on entertainment and "utility" apps. However, more end-to-end business, productivity, and quality of life solutions are on the way - the coming "solutions wave".
'M2M', 'Embedded' or 'Networked': a matter of perspective
The labels the various industries involved in the hyperconnected world use to describe this market illustrate the perspectives each brings to the table. The telecom industry often refers to it as M2M communications, highlighting the fact that it is a form of communication, between machines rather than between people. While this label makes sense for the telecom community, does it make sense for the rest of the ecosystem and the marketplace in general?
The hardware industry, on the other hand, uses the term embedded systems, highlighting the fact that capabilities are embedded on the device, particularly ones that control processes. This architectural perspective is largely based on the view that hardware solves problems.
For another take on this market, consider the perspective of the software industry, of which SAP is a leader. With a history in licensed, on premise software, SAP is now also delivering software on demand and on device, with orchestration. Rather than M2M or embedded, we refer to these offerings as "networked solutions". Whether it's remote meter reading or tracking the family pet, customers are looking for practical solutions, not gadgets, not access.
In the case of healthcare, society benefits when patient relationship management systems are extended to and networked with end-user devices like smartphones, but also with special purpose devices like blood glucose meters, digital scales, and yes, even smart pills. This is the promise of the hyperconnected world - real-time, unwired lifestyles and workplaces - and software brings it together.
Furthermore, whether smart or dumb, the billions of connected devices will be generating massive amounts of data. Software companies are aggressively pursuing advanced analytics capabilities and in-memory technology that make use of this data from the field. With in-memory appliances analyzing data in the cloud, data will be instantly available on any device, delivering "real real-time" analytics.
Finally, consider all the vertical software solutions that exist today. For example, SAP has more than 25 industry verticals, each with a portfolio of enabling solutions. The hyperconnected world is having a direct impact on every one of these verticals and the following are two examples. Equipped with "on-board units", cars can transmit detailed information about vehicle use and driving characteristics enabling the insurance industry to introduce "pay as you drive" insurance policies. Good drivers are rewarded with lower premiums and no longer have to subsidize poor drivers.
In the world of healthcare, medical equipment can be prohibitively expensive for hospitals and clinics. As a result, equipment manufacturers are now enabling their equipment to transmit detailed usage information so, rather than a one-time purchase of equipment, hospitals and clinics can pay on a per-use basis. This helps cash flow by moving the expense from the capital budget to the operating budget, an important step in challenging economic environments. Both the healthcare and insurance industries benefit, as do the patients and policy holders they serve, by extending their existing processes and systems to the hyperconnected world (i.e., adopt networked solutions).
By working with software and device companies, carriers can help drive the innovation that will power the networked solutions in the hyperconnected world and deliver great value to businesses and consumers alike.
Who Buys What From Whom?
In a value chain that combines devices with remote access and software, the question is "who buys what from whom?" Do network operators offer M2M-enabled services directly to end-users? While likely, this is only one of many possible retail models. The other possibilities, such as service sold by a third party VAR, require telcos to rethink their entire product portfolios and business models.
Consider the Amazon Kindle. When customers download ebooks to their Kindles, they do not choose a carrier. In this case, AT&T sold their services to Amazon who acts as a VAR or MVNO. In the hyperconnected world, this business model requires network operators to target those incorporating access into their offerings. So as connected devices propagate, telcos need to reconsider their role as retailer and, more importantly, their emerging role as a wholesaler or partner enabling new forms of trade and commerce. (For more on this, please see Telco 2.0's report New Mobile, Fixed and Wholesale Broadband Business Models.)
The full range of possible vendors is even wider than this slide represents. Other vendors of networked solutions may include physical and online retailers like Best Buy or Amazon, internet providers like Google, integrators like IBM or HP, or even others not currently on the radar. Time will tell how the new and emerging networked solutions are branded and sold, but telcos may find the greatest opportunity is becoming a networked solutions "infrastructure" provider to the myriad aspiring retailers.
The hyperconnected world will create massive opportunity for those who not only craft a vision but also craft a role and align strategically. With giants coming from the telecom, hardware, software and internet industries, each with their own strengths and agendas, the need for cooperation in the formula for success will prevail.
Looking forward, network operators should consider who their customers will be. Will it be the end-consumer who wants a home healthcare system for elders or a dog tracking service? Or will it be the company bundling access into their networked solutions? While the telcos recognize their strengths as 1) operating networks, 2) certifying devices, and 3) serving customers, they have an opportunity to take it a step further: 4) connecting software. Connecting software to devices is obvious, but connecting software to software through APIs, both their own and third parties', could deliver on the promise web services and SOA offered years ago.
If you believe network operators will be suppliers to VARs like the insurance company, or Amazon, or even SAP, then refocusing on this business is essential as the market is forecast to explode. It's no surprise many carriers like AT&T and Sprint are establishing research and collaboration centers in places like Silicon Valley. The more closely carriers align with the software industry, the greater the role they will play in defining this new market. In fact in the coming years, the relationships between telecom operators and software vendors may match or even exceed those that exist today between operators and device companies, particularly if the market values 'networked solutions'.
Author: David McNierney, SAP, Charging & Billing Center of Excellence.