Opening up How R&D is changing in the telecommunications sector today An Economist Intelligence Unit report sponsored by Opening up How R&D is changing in the telecommunications sector today Preface Opening up: How R&D is changing in the telecommunications sector today investigates how technology and telecommunications firms are dealing with the process of innovation The report was commissioned by SAS The Economist Intelligence Unit bears sole responsibility for the content of this report The Economist Intelligence Unit’s editorial team executed the online survey, conducted the interviews and wrote the report The findings and views expressed in this report not necessarily reflect the views of the sponsor The research drew on two main initiatives: ● The Economist Intelligence Unit conducted a wideranging online survey of senior technology and telecoms executives worldwide during February 2008 In total, 327 executives took part ● To supplement the survey results, the Economist Intelligence Unit also conducted in-depth interviews with senior executives from a range of technology and telecoms companies globally Duncan Campbell-Smith was the author of the report and James Watson was the editor We would like to thank all the executives who participated in the survey and interviews for their time and insights April 2008 © The Economist Intelligence Unit 2008 Opening up How R&D is changing in the telecommunications sector today Executive summary F ew industries can rival the rate of innovation seen within the telecommunications sector over the past decade In 1998, mobile phone companies such as Nokia boasted of high-end models with built-in FM radio and infrared connectivity By 2007, many phones offered digital cameras and music players, video conferencing, wireless networking and the capability to browse the Internet and respond to e-mails Accordingly, phone networks have been upgraded to handle rising volumes of voice, video and data traffic, even as users increasingly route their calls over the Internet instead Less than five years ago, a start-up company released the first version of its software that allowed users to make free phone calls between any two computers Today, Skype is used by some 276m people to make voice or video calls, share files and send money It has been a busy decade to keep up with This is especially true for the thousands of companies responsible for these breakthroughs—or for those aiming to enter the telecoms market As the rate of innovation has increased, so have the pressures and demands placed on those responsible for this R&D effort Inevitably, this has forced them to change the way they work This report from the Economist Intelligence Unit, sponsored by SAS, aims to explore these changes in greater detail and the overall impact on the innovation process Some of the key findings within the report include: Open Innovation, The new imperative for creating and profiting from technology, Henry Chesbrough, Harvard Business School Press, 2003 ● Telecoms firms are increasingly embracing Open Innovation The traditional R&D model in telecoms, as in other industries, was to keep research tightly under wraps as companies developed new products or services But this approach is giving way to a more open one, dubbed Open Innovation (OI) by business © The Economist Intelligence Unit 2008 professor Henry Chesbrough1, which instead seeks to engage suppliers, corporate partners, academia and customers in the R&D process This extends to intellectual property (IP), where companies profit from others use of their own ideas, while also licensing ideas from elsewhere The majority (74%) of telecoms companies polled for this report agree that the way they innovate today is significantly different from how they approached innovation a decade ago ● Open Innovation involves closer links with a growing number of external partners Shifting to an OI model will typically mean fostering more of a venture-capital environment internally, while cultivating stronger links with start-up firms, academic researchers and commercial partners Over the past two years, companies typically partnered with two to five other organisations, although about one in four tied up with just one or none at all Looking ahead, the number of those who won’t partner will decline (from 10% to less than 6%), while the proportion of those partnering with more than five other organisations will increase (from 23% to 35%) However, survey respondents also expect this to prove more expensive and labour-intensive ● …but most of all with customers Perhaps most important of all will be the expansion of the role played by customers in OI More respondents to this survey (63%) say they have involved customers in the innovation process than any other of ten suggested approaches, including partnering with other firms, acquiring new technologies or financing a start-up Previous liberalisations of the telecoms marketplace saw first equipment manufacturing and then network services transformed by new entrants The impact of Opening up How R&D is changing in the telecommunications sector today customers on the innovation process may prove to be equally transformational ● But opening up the R&D process often requires organisational upheaval Large companies with a long history in the industry will need to revise their organisational structures and processes significantly if they are to pursue OI successfully Years of upheaval have prepared many of them for this next big change But newer, smaller companies with less of an organisational legacy may yet prove—like newly modernising countries with less of a legacy infrastructure—to be keen competitors at the innovation game R&D managers will have their work cut out for them ● Most telecoms firms have already had new rivals enter their market through new innovations— or expect this to happen soon Within the communications sector as a whole, the boundaries between telecoms and computer software have been steadily eroding About two-thirds (64%) of firms polled say that a new rival has entered their market through a new innovation over the past five years, with most of the balance expecting this to happen in the next five years Just 8% don’t believe this will happen In this environment, companies are looking to OI as a key resource—helping them to identify future revenue streams, speed up their response to technological change and come up with ideas for new products and services Over the coming decade, technological developments in the telecoms market will continue their rapid evolution Companies seeking a source of innovation will look to tap into ideas from all over the world Indeed, today’s emerging markets look likely to be a major source of tomorrow’s ideas Take Indiabased Spice, for example The telecoms firm recently introduced a mobile phone costing just US$20, in response to local customer demand Expect more innovations from unexpected places © The Economist Intelligence Unit 2008 Opening up How R&D is changing in the telecommunications sector today Introduction T en years ago, with projected sales for mobile phones and anything connected with the Internet already pointing vertiginously upwards, it was still possible for leading companies in the telecommunications industry to see topsecret laboratories as their ticket to the future New products were generally being kept behind closed doors, as ever, until the marketing people were ready to unleash them Senior research executives might attend industry conferences for a welcome change of scene and some dutiful networking But they needed to be wary of disclosing any proprietary information When Nicolas Demassieux left the academic world to join Motorola in 1997, he was surprised to find that in some cases its employees were discouraged from attending conferences at all: the risk of leaking valuable titbits, in the view of his US-based seniors, far outweighed the chances of learning anything that Motorola did not already know Today, as director of its broadband wireless research, Mr Demassieux is one of the key figures shaping Motorola’s whole approach to technology and innovation He looks back at the late 1990s as the end of the road for the big R&D laboratories that dominated the global telecoms industry through most of the second half of the 20th century Ten years on, he and his industry peers around the world must now work within a completely different paradigm It is universally known as Open Innovation (OI) and has been winning converts rapidly in recent years Adapting to it is now prompting changes in the telecoms industry that are transforming the R&D process out of all recognition—and reaching beyond it into every aspect of the business The essence of OI is an acceptance of the need to collaborate with other parties—suppliers, academic © The Economist Intelligence Unit 2008 researchers, industry partners and perhaps above all customers—on the development of new products and services How this collaboration will work differs from one project to the next and needs constant reappraisal But the objective in every case is to harness ideas and expertise across a wider horizon than even the largest company could contemplate on its own Matt Bross, BT Group’s chief technology officer, talks about seeking innovation “beyond the boundaries of our payroll” And where this can be fused with internal innovation, the result will be waves of successive innovations that catch up with customers’ constantly changing needs almost as soon as they appear (or, indeed, rather sooner if needs can be anticipated) Mr Bross likes to call it “innovation at the speed of life, not the speed of technology” To the extent that this means innovation is led by incremental, pragmatic adjustments rather than blockbuster inventions, the phenomenon is nothing new But OI has lifted the concept to a new level, by bringing some of the most advanced ideas in the world’s applied research laboratories into direct and two-way contact with mass-market consumerism In a world of universal access to computers and the Internet, millions of mobile handset-users have ideas about innovation and ways of sharing them The OI phenomenon is not unique to the telecoms business, but few others exemplify its impact so dramatically In a sense it marks a third, climactic stage in the long-drawn-out liberalisation of the old global marketplace run by state-owned telecoms monopolies In the first, it was opened up to outside equipment manufacturers, who transformed the hardware In the second, its networks and international cables were opened up to outside service providers, who helped to ensure that, when the time came, the blessings of Opening up How R&D is changing in the telecommunications sector today Over the next two years, how you expect the pace, cost and complexity of researching and developing new products/services to change? (% respondents) Increase significantly Increase moderately No change Complexity of R&D 40 44 11 Pace of R&D 34 49 14 Cost of R&D 21 56 15 Source: Economist Intelligence Unit survey the worldwide web were quickly made available via broadband to millions of ordinary customers And now, in the third stage, it is wide open to the new ideas and vaulting demands of those same customers The broad consequence for industry executives is a quantum step-up in the pace of change, bringing increased complexity (and some additional spending) in its wake In our survey of more than 320 executives, 74% of the respondents agree that their approach to innovation is already significantly different from the way they handled it five to ten years ago When asked about their expectations of change in the next two years, there was roughly an 80/20 split among respondents regarding pace, cost and complexity: around 80% think change will be increasing either moderately or significantly under all of these three headings © The Economist Intelligence Unit 2008 Opening up How R&D is changing in the telecommunications sector today From telco to softco T raditional telephone companies were large organisations dominated by linear processes and silo-bound structures Adapting them to the world of OI is taking time: there are many internal barriers that need dismantling before colleagues can pool their work together and lift the boundaries between themselves and the outside world “Everyone in the company really has to believe that the OI model is going to work,” says Mr Demassieux Most of the world’s large telecoms groups, both equipment manufacturers and service providers, have set off in search of new and better R&D models, with real momentum since about 2004 More than 40% of our survey respondents estimate that over 10% of their employees are engaged on innovative projects, and a sizable minority, 23%, think the numbers Which of the following approaches has your company primarily taken to develop new products/services over the past two years? Select up to two stretch to over one-fifth of the workforce A new breed of “innovation directors” has emerged at corporate level, charged with remoulding the old structures and processes Theirs is a challenging task, however, and it has really only just begun Whatever the new familiarity of OI as a popular buzz phrase, traditional attitudes will be hard to dislodge Our survey invited respondents to indicate the extent of their R&D collaboration with outside partners across a range of seven categories Nearly 30% chose an alternative: continuing to develop new products and services entirely in-house Leaving behind this model in favour of OI is described by Mr Bross at BT as “turning telco into softco” It is not widely expected to save on R&D costs: one-half of respondents say that they have increased R&D spending over the past two years and even more (59%) expect it to rise over the next two years, with many anticipating an increase of more than 10% Some of the conspicuous features of the process include: (% respondents) Developing new products/services partly in-house, but relying on partners for some parts of this process 53 Developing new products/services entirely in-house 28 Developing new products/services in partnership/ collaboration with other firms 24 Developing new products/services in partnership/ collaboration with our customers 18 Focusing on developing concepts/architectures, while relying on partners for the rest 15 Relying on mergers and acquisitions to bring in new products/services 13 Licensing intellectual property from third parties 10 Outsourcing all/most of our R&D to third parties Other Source: Economist Intelligence Unit survey © The Economist Intelligence Unit 2008 ● Setting up internal “incubation units” to pursue new ideas within a kind of venture-capital environment This will provide access to funding and technical support, even though senior management knows that barely a quarter or so of the ideas, at best, will ever be carried through into commercial launches ● Being alert to start-up businesses, not just in telecoms but anywhere that a promising idea has taken off with a possible future application in telecoms Their funding needs will invariably present opportunities for an enterprising telco to step in as an investor or perhaps assume full ownership Opening up How R&D is changing in the telecommunications sector today ● Entering mutually supportive relationships with applied research teams at the top universities around the world These typically used to be sponsorship deals for blue-sky thinking that carried a “long-term” tag, but they are now just as likely to be jointly managed investigations targeted at specific problems and (or so management will be hoping) a short-cut to clever solutions in the near to medium term Around one-half of our survey’s respondents acknowledge active links with academic research ● Forming strategic partnerships with other large companies, not just from the telecoms industry but from adjacent sectors such as television, computer games and publishing Our survey indicates a big drop in the proportion of firms showing no Case study: Telefónica’s Internet laboratory Young people in particular—armed with laptop computers, mobile phones, the power of the web and plenty of time at their disposal—have become a potent ingredient of any successful R&D effort One striking reminder of this has been an extraordinary event held annually since 2000 in the Spanish city of Valencia and known as the Campus Party Around the clock for seven days, thousands of (mostly young) participants exchange ideas on the latest crazes in computer simulation, communications software and all things digital The Valencia event is sponsored these days by Telefónica, the giant Spanish group with telecoms businesses across Europe and Latin America Russ Shaw was appointed as Telefónica’s first director of innovation in 2007 Sizing up the assorted interest in partnerships or acquisitions over the next two years, compared with the past two years Also, rather than ignoring intellectual property (IP) being developed by others, companies are encouraged to draw on it Equally, internal patents can be licensed to other firms as a source of revenue (rather than, as is often the case, using it as a defence mechanism against another firm developing the same IP) Above all, perhaps, the process involves a readiness to accept that individuals, coming together from disparate corporate and non-corporate backgrounds, may now hold the key to the most successful brainstorming sessions BT talks about “agile working” groups—drawing on technical, development, marketing and sales skills all in one techno-heads attracted to the Campus Party from companies, consultancies, universities and bedroom start-ups, he thinks it “encapsulates the essence of Open Innovation” He originally worked for O2, a UK mobile operator that was acquired by Telefónica in March 2006 Since then, and still branded as O2, the business has been able to harness customer feedback for OI projects over the Internet, in ways that have often surprised Mr Shaw At the start of 2007, for example, O2 squirreled away on its website the prototype of a proposed new mass-market product called Blue Book It has been designed to straddle mobile phones and the internet, allowing users to copy information (including photographs) off their handsets and onto their websites at the touch of a key or two Within weeks, despite being quite hard to locate, the service attracted thousands of experimental users By December 2007, it had 40,000 subscribers Their comments, says Mr Shaw, have assisted O2 in numerous ways—helping, for example, to iron out some of the initial security concerns among users, which the company might otherwise have seriously underestimated in the promotion of the product (finally launched in March 2008) Another example has involved a much more structured approach to customers: in November 2007 a ring-fenced development team put “O2 Wallet” into the London market for a trial period with 500 users It is a mobile service that includes a travel card capability for the city (under the Oyster card aegis) and a Barclaycard component The trial will last six months, and customer feedback via the internet is already prompting significant refinements Mr Shaw sees the process as the kind of internal incubation that suits OI perfectly: “it is all about setting up an environment in which managers can get away from the dayto-day operating business while remaining extremely close to their customers” © The Economist Intelligence Unit 2008 Opening up How R&D is changing in the telecommunications sector today How many new products/services did your firm bring to market over the past two years—and how many does it plan to introduce in the next two years? (% respondents) None Less than 3 to to 20 More than 20 Don’t know Past two years 27 30 22 15 Next two years 18 28 34 13 Source: Economist Intelligence Unit survey room—that can bring a new dimension of flexibility to its development programmes, delivering a better end-product faster and more cheaply that in the past As recently as 2005, agile working accounted for less than 15% of the development prospects inside BT By January 2008, the corresponding figure was 70% The company also taps external expertise with “hothouse” discussions—and in deference to some of the most knowledgeable customers in the market, the company has not been slow to invite the participation of teenagers at schools in the vicinity of its main UK research laboratories More broadly, every teenager with a view now has the power to share it with a million of his or her peers (see box: Telefónica’s Internet laboratory) © The Economist Intelligence Unit 2008 The Internet has left the telecoms industry with no option but to treat customers as an integral part of the innovation process Almost two-thirds of the respondents to the survey confirm that they have involved customers in the innovation process over the past two years As this suggests, Internet feedback is playing a steadily greater role in new product launches everywhere, and there is going to be no shortage of these The number of new products headed for the marketplace looks set to rise inexorably Among the survey respondents, about one in three expect to launch between seven and 20 new products in the next two years, up from about one in five over the past two years This increase exactly matches a drop among those anticipating few or no launches Opening up How R&D is changing in the telecommunications sector today Raising the bar O f course, people across the industry know that OI is about much more than lastminute market trials for emerging products To really prove its worth, OI must help telecoms companies to meet three principal objectives: help find new ideas; accelerate new product development; and create stronger links with customers ● First, it needs to stimulate fresh thinking about future sources of revenue for an industry that has seen the profitability of its traditional services worn to a thread by competition: in many markets, including the US, basic voice and data services are now increasingly free to the end-user Telecoms firms must find ways of linking remarkable new digital technologies to their mass-market customer bases, through partnerships where appropriate, or risk losing their customers to breakthrough ideas from their rivals, which include some of the most innovative companies on the planet The danger is evident already in the extent to which the boundaries of the traditional telco sector are being blurred In the survey, about two-thirds (64%) of respondents say that, within the past five years, they have seen firms entering their marketplace for the first time on the back of a new innovation, and the survey garnered plenty of examples, such as Apple’s entry into the mobile handset market underlying today’s leading-edge products often dates back decades For example, the coding technology at the core of the mobile communications standard, CDMA, was originally a military technology designed during the second world war Contrast this with the range of life cycles assigned by survey respondents to their average product: a bell-curve distribution runs from less than three months to over three years, with the median cycle lasting 12-18 months When asked about the future trend, one-half expect to see life cycles shorten further in the next two years and one-fifth of respondents think that they will shrink by at least 30% Mr Demassieux at Motorola says it is hard to see how the time needed to establish a basic communications standard like 3G could ever be compressed to much less than ten years “But we must learn as an industry how to use OI to help us reduce the gestation period on new product ideas from 10-15 years down to three years or less.” What is the average amount of time it takes for your firm’s products/services to reach the maturity phase of their lifecycle in their particular market? (% respondents) Less than months to months to months 16 to 12 months ● A second main objective of OI is to accelerate the whole business of turning blue-sky thinking into marketable products and services The rationale for good old-fashioned joint ventures has always included a sharing of costs and a pooling of ideas, but an added dimension of OI is the way that non-linear processes might be used to move the whole R&D effort along much more quickly The fundamental research 16 12 to 18 months 21 18 to 24 months 14 24 to 36 months More than 36 months Don’t know/Not applicable Source: Economist Intelligence Unit survey © The Economist Intelligence Unit 2008 Opening up How R&D is changing in the telecommunications sector today Today new technology, tomorrow a new organisation A dopting OI with these goals in mind, however, is simply not compatible with the risk-averse culture that characterised the old telecoms industry when so much of it was berthed alongside national post offices For many managers, perhaps most, the learning process is only just beginning They will need, for instance, to contend with the difficulties of handling far more partners at the same time, juggling different timelines and conflicting priorities They will face HR problems in the workplace, where younger engineers will inevitably adjust to an outward-facing (and heavily Internet-influenced) culture rather more easily than will most of the greybeards And in place of the old assumption that nothing would be sourced externally that could be made in-house, they will have to confront some tricky make/buy decisions over the R&D budget—not least in persuading in-house engineers to part with money for research by third parties In fact, novel make/buy decisions will crop up at every point of the value chain as the switch to OI gathers pace The essence of a more open approach is that successive collaborative projects will need handling in different ways Every corporate function from finance and marketing to the management of intellectual rights and corporate communications will therefore need continuous reassessment This prompts many people in the industry to observe that “innovation” is not just about the introduction of new technology As Mr Bross at BT puts it, “the innovation genie is out of the bottle” In the survey, respondents were asked how far innovation would actually amount over the next two years to a refinement of existing business processes Almost 50% see it being “strongly focused” in this direction, a notable shift from the 29% who think the same is true of the past two years Accordingly, there is strong endorsement for the view that business-process innovation would be increasingly important over the next two years But then, standard business practices have been under pressure from all sides and not just from a need to rethink R&D methodologies With a rising portion of income derived from mobile advertising, for example, many firms have needed to revise their basic revenue model: 58% of respondents agree that they have done so in the past two years or would be doing so in the next two In short, no industry is more exposed than telecoms to the need for that fundamental break with past organisational norms that is now being so much discussed in management circles As the strategy guru, Gary Hamel, puts it in the first 2008 edition of The McKinsey Quarterly2, “The Internet is making it possible to amplify and aggregate human capabilities in ways never before possible … [so] we’re going to have to turn a lot of our legacy management beliefs on their head.” But does this mean that younger To what extent is innovation at your firm focused on refining existing business processes (eg, enhanced billing process) or developing new business processes? (% respondents) Strongly focused on refining business processes Somewhat focused on refining business processes Little or not at all focused on refining business processes Don’t know/ Not applicable Past two years 29 46 20 Next two years 48 33 12 Source: Economist Intelligence Unit survey © The Economist Intelligence Unit 2008 The McKinsey Quarterly, McKinsey & Company, 2008 11 Opening up How R&D is changing in the telecommunications sector today Has your company revised its revenue model over the past two years, or does it plan to so within the next two years, to reflect the rapidly changing telecommunications landscape (eg, switching to an ad-based revenue model)? (% respondents) We already did so more than two years ago Yes, we did so in the past two years 31 Yes, we plan to so within the next two years 27 We are considering this, but have no plans to so right now 14 We have not changed our model and don’t plan to so right now Source: Economist Intelligence Unit survey companies with less of a legacy to worry about might enjoy a lasting advantage? Given the heavily structured nature of the traditional telco and the appearance of so many sprightly new competitors since the 1990s, it is a potent question for the industry 12 © The Economist Intelligence Unit 2008 Those inside the biggest global groups can make a fair case that the fixed-line business model has been under threat for so long that their teams are now well and truly open to new ideas Some smaller mobile operators, by contrast, have yet to see their core voice and SMS traffic volumes peaking: their businesses, it is implied, are less flexible than some outsiders might suppose And along with their legacy management beliefs, most of the big groups have of course inherited plenty of cash They can use it to speed the realignment of their organisations, not least by purchasing successful mobile operators No doubt acquisitions will go on being used to perk up the innovation score sheet, especially where they might bring direct benefits to the bottom line as well as bright ideas As Mr Shaw confirms, “If, in the process of looking for venture-capital targets, I come across a company that has a more efficient way of delivering an existing service, I’m certainly going to take a closer look.” Opening up How R&D is changing in the telecommunications sector today Strategy before structure W ithin more than one successful upstart company, however, there is an evident conviction that their lack of past baggage can be a powerful source of advantage No upstart has grown faster than Skype, the Internet-borne communications company that was launched in 2003 and then bought by eBay for US$2.6bn in 2005: it had 276m subscribers at the last count Stefan Öberg heads up the development of its telecoms and business products and sees OI as a critical part of the company’s DNA: “Openness was built in from the beginning.” With no central infrastructure of its own and a complete reliance on the Internet, management knows the business will live or die depending on its ability to keep up with its customers Thus, it was quick to take note when a surprisingly large proportion of its subscribers wanted to use a web-cam device to make video telephone calls Early in 2006, it launched a prototype service, Video Calling, and then worked closely with a network of 1,500 or so customers on addressing the early flaws Their feedback—and a close partnership with an external hardware developer, Logitech—led directly to the launch late last year of High Quality Video, a much refined service with a new and far superior camera Skype managers think video conferencing has enormous potential They can pursue successive rounds of innovation without needing to invest heavily each time in a fresh infrastructure, and they can work within a culture wholly committed to the next big change As Mr Öberg points out, “We don’t have to deal with the risks of cannibalisation.” He and his colleagues are inclined to compare current trends in the telecoms industry with the evolution of the railways In the beginning was total vertical integration: those who built the track also ran the trains But maintaining the infrastructure and looking after the passengers came eventually to be recognised as different businesses Integration was left behind, so that modern customer-facing travel companies could offer their services on a safe network owned and operated by others as a basic utility The parallel outcome in telecoms will see software-driven companies (like Skype) developing ever better applications for the end-user, while the big telco groups settle down to making good money as guardians of the cable networks Open Innovation will be critical to the first group, much less so to the second, and different aptitudes at OI will have much to with sorting out the one group from the other “Many of the big global groups are struggling with this emerging divide,” comments Mr Öberg “They need to change their business model.” The notion that time is fast running out for the old vertically integrated telecoms industry is readily endorsed by Anastassia Lauterbach She is the head of strategy at T-Mobile International, a subsidiary of Deutsche Telekom The introduction of new networks based on Internet protocols has led, she says, “to a whole new eco-system”—a horizontal marketplace, that might indeed be teeming one day with new applications from every household name in the software business But to envisage an industry polarised between infrastructure companies and consumer-led providers is to predict a future with a fundamental flaw Those who operate the networks, she says, will also run the customer call centres And why would a T-Mobile centre be interested in taking calls from irate customers of third-party services? Or to put the problem in a wider context, why would a network operator with billions invested in its infrastructure be happy to let asset-light rivals steal © The Economist Intelligence Unit 2008 13 Opening up How R&D is changing in the telecommunications sector today a march on it in building hugely valuable consumer brands? Ms Lauterbach sees it as one of the biggest strategic issues facing her peers, and one of the least understood “Its importance is being hugely underestimated within the industry itself as well as within the broader marketplace.” Like her counterpart at Skype, she thinks business models are therefore in urgent need of reappraisal Unsurprisingly, however, she draws a different conclusion The biggest network operators, like T-Mobile’s own parent group, must sustain the competitive position derived from their core knowledge of the networks—their accumulated 14 © The Economist Intelligence Unit 2008 expertise in the “middleware” of enabling devices, as well as the hardware of cables and relay stations—and then learn to focus on the portfolio of selected applications that underpin their brand with end-users This will mean making difficult choices Ms Lauterbach believes that most of the leading operators have only begun to think seriously about this in the past year or two But no amount of innovation, open or otherwise, will compensate the operators in the long run for a lack of strategic direction First they must decide on their focus, before turning their resources to building the innovative operating systems and services that their customers will expect from them Opening up How R&D is changing in the telecommunications sector today Conclusion T he Internet has transformed the process of innovation in telecoms This is quickening the pace of technological change, putting traditional organisational structures under great pressure and raising some fundamental strategic issues for the industry It is also, of course, speeding along its globalisation, but it is worth noting here that national markets can still retain unique characteristics And as with companies, so with countries: some have moved much more quickly than others to ensure that their telecoms markets are open to innovation Those with the least to lose have been among the first to ditch the old ways It is no coincidence that the software engineers behind Skype were based in Tallinn, the capital of Estonia (population: 1.3m) The company’s development centre is still located there, in a country that abandoned much of its decrepit fixed-line network in the immediate aftermath of the Soviet empire’s collapse and now boasts one of the most sophisticated wireless telecoms marketplaces in the world Perhaps the same kind of leap-frog phenomenon will recur now in other places, from Latin America to southern Asia So where, among the largest countries, should leading telecoms operators be looking hardest at consumer behaviour for a clue to future trends? Not to continental Europe, according to our survey The US and Japan are seen as the best bellwether markets, followed by China, South Korea and India But whatever the trends, senior executives in the telecoms industry seem universally agreed that the companies best placed to keep up with them are very likely over time to be those that can genuinely embrace Open Innovation Less clear is the extent to which they have yet taken to heart the organisational and strategic implications—and without a doubt the transformation that many anticipate on the back of OI has only just begun “Our industry has a long way to go,” says Telefónica’s Mr Shaw “We are only on the cusp of this.” © The Economist Intelligence Unit 2008 15 Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today Appendix In February 2008, The Economist Intelligence Unit surveyed 327 senior technology and telecoms executives from around the world Our sincere thanks go to all those who took part in the survey Please note that not all answers add up to 100%, because of rounding or because respondents were able to provide multiple answers to some questions What is your company’s main line of business? (% respondents) Full-service integrated telecommunications provider 24 IT services provider What percentage of your workforce is currently involved in an innovation project (eg, spending at least half of their time working on a relevant project aimed at identifying a new product/service, or upgrading a current product/service or process, or a combination of both)? (% respondents) 14 None IT software provider 14 Less than 3% Telecommunications equipment manufacturer 21 11 3% to 4% Telecommunications software provider (eg, billing, inventory management) 14 5% to 9% IT hardware provider 18 10% to 19% Mobile-only telecommunications provider 20 20% to 50% Value-added services provider (eg, billing, customer care) 14 More than 50% Fixed-line telecommunications provider only Don’t know Consumer electronics manufacturer 3 Cable operator Satellite provider Which of the following most closely describes your firm’s efforts to conduct basic (eg, fundamental or theoretical) scientific research, if any? Other (% respondents) We don’t engage in basic scientific research at any level All our innovation is based on existing technologies (eg, applied research) Approximately what is your company’s total R&D spending as a proportion of its annual revenue? 38 We support mixed teams of researchers, including both in-house corporate researchers and also external academic researchers (% respondents) Less than 1% 11 1% to 2% 13 3% to 4% 17 5% to 6% 12 7% to 9% 10% or more Don’t know 16 © The Economist Intelligence Unit 2008 33 22 We don’t directly invest in basic research, but we closely monitor ongoing research within the academic community and seek to acquire/ license relevant technologies/start-ups emerging from them 18 We conduct basic scientific research in-house 14 We sponsor academic laboratories conducting basic scientific research Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today How has the proportion of revenue your company spends on R&D changed over the past two years, and how is it expected to change in the next two years? (% respondents) Increase by more than 10% Increase 1% to 10% No change Decrease 1% to 10% Decrease by more than 10% Don’t know Past two years 18 32 35 Next two years 22 37 25 How many new products/services did your firm bring to market over the past two years—and how many does it plan to introduce in the next two years? (% respondents) None Less than 3 to to 10 11 to 15 16 to 20 More than 20 Don’t know Past two years 27 30 15 10 15 Next two years 18 28 Which of the following approaches has your company primarily taken to develop new products/services over the past two years? Select up to two 19 13 And what will it focus on over the next two years? Select up to two (% respondents) (% respondents) Developing new products/services partly in-house, but relying on partners for some parts of this process Developing new products/services partly in-house, but relying on partners for some parts of this process 45 53 Developing new products/services entirely in-house Developing new products/services entirely in-house 28 Developing new products/services in partnership/ collaboration with other firms 24 Developing new products/services in partnership/ collaboration with our customers 18 Focusing on developing concepts/architectures, while relying on partners for the rest 15 29 Developing new products/services in partnership/ collaboration with other firms 24 Developing new products/services in partnership/ collaboration with our customers 23 Focusing on developing concepts/architectures, while relying on partners for the rest 17 Relying on mergers and acquisitions to bring in new products/services Relying on mergers and acquisitions to bring in new products/services 13 15 Licensing intellectual property from third parties Licensing intellectual property from third parties 10 Outsourcing all/most of our R&D to third parties Outsourcing all/most of our R&D to third parties Other Don’t know Other Don’t know 1 © The Economist Intelligence Unit 2008 17 Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today How many companies did your firm either acquire or partner with in the past two years, with the primary intention of bringing new technologies, products or services on board? And how many does it intend to acquire and partner with over the next two years? (% respondents) None to to 10 to 20 More than 20 Don’t know Acquire Past two years 46 17 27 3 Next two years 30 14 27 17 Partner with Past two years 10 15 50 10 Next two years 41 16 7 16 Which of the following approaches has your company carried out in its pursuit of innovation over the past two years? Select all that apply Which of the following metrics does your firm’s senior management primarily use to account for or measure R&D progress? Select up to three (% respondents) (% respondents) Involving customers in the innovation process ROI from new products/services launched 63 Collaborating with third parties to develop new products/services 46 Proportion of revenue derived from new products/services 54 Working with third parties to turn an innovation process into working products/services 34 Identifying a specific technology/innovation process and then acquiring or licensing it 25 Providing a significant internal bonus for employees developing a successful product/service 23 Sharing an internal innovation process with third parties to help deliver new breakthroughs 16 Financing third party start-up companies or academic institutions 13 Giving employees a certain percentage of work time to pursue their innovations of their own choice 12 Investing in a highly speculative technology/innovation process in the hope of a major breakthrough 12 Launching a specific technology incubator to develop start-ups Providing a prize of some sort to spur innovation from outside the company Other 18 © The Economist Intelligence Unit 2008 37 Total number of products/services currently under development 23 Feedback on new products/services from internal or external review groups and/or customers 18 Total spending on R&D 16 Ratio of ideas that are developed into commercial products/services 16 Total time taken for an innovation to generate revenue 16 Number of patents filed 15 Number of proposals created for new products/services 14 Time taken from inception to launch for new products/services 14 None; we don’t seek to measure R&D in a quantifiable way Total headcount in R&D function Don’t know/Not applicable Other Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today In your view, has your company’s strategy of acquisition and/or partnership been broadly successful, in terms of developing new innovations? (% respondents) Highly successful Somewhat successful Neutral Somewhat unsuccessful Highly unsuccessful Not applicable Acquisitions strategy 11 31 18 29 Partnerships strategy 20 46 17 To what extent is innovation at your firm focused on refining existing business processes (eg, enhanced billing process) or developing new business processes? (% respondents) Strongly focused on refining business processes Somewhat focused on refining business processes Little or not at all focused on refining business processes Don’t know/ Not applicable Past two years 29 46 20 Next two years 48 33 12 How would you rate your company’s overall performance with the new products/services it introduced over the past two years, in terms of commercial success, customer satisfaction and technological breakthroughs? (% respondents) Highly successful Somewhat successful Not at all successful Commercially 30 63 Customer satisfaction 42 55 Technological breakthroughs 28 58 14 Has your company revised its revenue model over the past two years, or does it plan to so within the next two years, to reflect the rapidly changing telecommunications landscape (eg, switching to an ad-based revenue model)? Which of the following metrics does your firm track? Select all that apply (% respondents) Percentage of capital invested in innovation-related activities We already did so more than two years ago Number of employees in an innovation or entrepreneur-related role (% respondents) 51 36 Percentage of time that employees spend on innovation-related projects Yes, we did so in the past two years 29 31 Percentage of employees for whom innovation is one of their key goals Yes, we plan to so within the next two years 27 We are considering this, but have no plans to so right now 14 20 Percentage of executives’ time spent on innovation-related issues, rather than day-to-day operations 18 We have not changed our model and don’t plan to so right now Don’t know/Not applicable Percentage of managers with an innovation-related background and/or training 10 Other Don't know/Not applicable 22 © The Economist Intelligence Unit 2008 19 Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today Has your company had a new competitor from outside your traditional sector enter your market through a new innovation (eg, a software firm entering the voice communications business)? Has your firm entered a new market through the same mechanism? (% respondents) Yes, this has happened in the past five years Yes, this has happened in the past two years No, but we expect this to happen within the next two years No, but we expect this to happen within the next five years No, and not expect it to happen Don’t know Another firm entering our market through a new innovation 23 38 17 10 My firm entering a new market through a new innovation 15 35 26 9 To what extent you agree or disagree with the following? (% respondents) Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree Don’t know/ Not applicable The way we innovate today is significantly different from how we approached it five to ten years ago 30 44 15 Customers have a much greater impact on our innovation process today than in the past 31 47 16 11 Innovation costs us a lot more today than it did five or ten years ago 15 31 23 21 Our company only has a vague sense of how effective any particular innovation initiative is 31 25 25 10 Business process innovation is increasingly important for our company’s future success 38 45 12 Innovative marketing is where we put most of our attention (eg, new ways of promoting products/services), rather than actual product or process innovation 15 30 26 22 Over the next two years, how you expect the pace, cost and complexity of researching and developing new products/services to change? (% respondents) Increase significantly Increase moderately No change Decrease moderately Decrease significantly Don’t know Pace of R&D 34 49 14 Cost of R&D 21 56 15 71 Complexity of R&D 40 20 © The Economist Intelligence Unit 2008 44 11 Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today How long is the average lifecycle of your firm’s products/services today, compared with what it was two years ago? And how you expect it to change in two years’ time? (% respondents) Much longer A little longer (at least 30%) (10%-29%) About the same (+/- 10%) A little shorter (10%-29%) Much shorter (at least 30%) Don’t know/ Not applicable Today, compared to two years ago 19 28 29 11 20 In two years’ time, compared to today 10 26 30 What you see as the most significant innovation challenges facing firms in the telecommunications industry today? Select up to three What is the average amount of time it takes for your firm’s products/services to reach the maturity phase of their lifecycle in their particular market? (% respondents) (% respondents) Pace of technological change in the industry Less than months 46 Dealing with disruptive technologies (eg, WiMax, VoIP) to months 44 Determining an appropriate business model for new products/services to months 34 Distinguishing breakthrough new technologies from over-hyped innovation 16 to 12 months 32 Constant downward pressure from customers on pricing 16 12 to 18 months 24 Choosing which companies to partner/collaborate with 21 18 to 24 months 24 Sustaining R&D investment through a business/economic downturn 14 24 to 36 months 19 Dealing with the shortage and/or cost of talent More than 36 months 19 Collaborating with multiple industry stakeholders (eg, operators, handset makers) Don’t know/Not applicable 11 Understanding how to integrate content appropriately Knowing when to “fail” and switch R&D direction Meeting regulatory requirements Ensuring that new products/services are not infringing on existing patent rights Other In your opinion, which of the following countries you think provides the strongest indicator of what future consumer trends might look like for the telecommunications industry? (% respondents) US 20 Japan 19 South Korea 14 China 14 India 12 UK 10 France Germany Canada Other Don’t know © The Economist Intelligence Unit 2008 21 Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today About the respondents What are your main functional roles? Please choose no more than three functions In which region are you personally based? (% respondents) (% respondents) Asia-Pacific 33 Strategy and business development 45 Western Europe General management 31 39 North America Marketing and sales 16 29 Eastern Europe IT 17 Middle East and Africa R&D 16 Latin America Operations and production 16 Finance 14 What is your title? Information and research (% respondents) 13 Customer service Board member Risk CEO/President/Managing director 23 Procurement CFO/Treasurer/Comptroller Legal CIO/Technology director Human resources Other C-level executive 11 Supply-chain management SVP/VP/Director 23 Head of Business Unit Head of Department 19 22 Other © The Economist Intelligence Unit 2008 Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today What are your company’s annual global revenues in US dollars? How has your company’s EBITDA changed each year, on average, over the past three years? (% respondents) (% respondents) Decrease 12 $500m or less 51 $500m to $1bn 10 $1bn to $5bn 18 1% to 5% increase $5bn to $10bn 5% to 10% increase $10bn or more 16 No change 10 19 21 10% to 20% increase 11 Over 20% increase 12 Don’t know 14 How has your organisation’s share price changed over the past three years, if applicable? (% respondents) Over 100% increase 51% to 100% increase 31% to 50% increase 10 11% to 30% increase 12 Less than 10% increase No change Less than 10% decrease 11% to 20% decrease Over 20% decrease Don’t know/Not applicable 38 © The Economist Intelligence Unit 2008 23 Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper 24 © The Economist Intelligence Unit 2008 LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com [...].. .Opening up How R&D is changing in the telecommunications sector today To what extent do you agree or disagree with the following? (% respondents) Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree Customers have a much greater impact on our innovation process today than in the past 31 47 16 4 1 Source: The Economist Intelligence Unit survey ● The third main objective is that... Opening up How R&D is changing in the telecommunications sector today Today new technology, tomorrow a new organisation A dopting OI with these goals in mind, however, is simply not compatible with the risk-averse culture that characterised the old telecoms industry when so much of it was berthed alongside national post offices For many managers, perhaps most, the learning process is only just beginning... Source: Economist Intelligence Unit survey © The Economist Intelligence Unit 2008 2 The McKinsey Quarterly, McKinsey & Company, 2008 11 Opening up How R&D is changing in the telecommunications sector today Has your company revised its revenue model over the past two years, or does it plan to do so within the next two years, to reflect the rapidly changing telecommunications landscape (eg, switching to an... up How R&D is changing in the telecommunications sector today Conclusion T he Internet has transformed the process of innovation in telecoms This is quickening the pace of technological change, putting traditional organisational structures under great pressure and raising some fundamental strategic issues for the industry It is also, of course, speeding along its globalisation, but it is worth noting... 15 Licensing intellectual property from third parties Licensing intellectual property from third parties 10 8 Outsourcing all/most of our R&D to third parties Outsourcing all/most of our R&D to third parties 4 Other 1 Don’t know 6 Other 0 Don’t know 1 1 © The Economist Intelligence Unit 2008 17 Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today How many... asked how far innovation would actually amount over the next two years to a refinement of existing business processes Almost 50% see it being “strongly focused” in this direction, a notable shift from the 29% who think the same is true of the past two years Accordingly, there is strong endorsement for the view that business-process innovation would be increasingly important over the next two years But then,... where they might bring direct benefits to the bottom line as well as bright ideas As Mr Shaw confirms, “If, in the process of looking for venture-capital targets, I come across a company that has a more efficient way of delivering an existing service, I’m certainly going to take a closer look.” Opening up How R&D is changing in the telecommunications sector today Strategy before structure W ithin more... the leading operators have only begun to think seriously about this in the past year or two But no amount of innovation, open or otherwise, will compensate the operators in the long run for a lack of strategic direction First they must decide on their focus, before turning their resources to building the innovative operating systems and services that their customers will expect from them Opening up. .. technologies/start-ups emerging from them 18 We conduct basic scientific research in- house 14 We sponsor academic laboratories conducting basic scientific research 7 Appendix: Survey results Opening up: How R&D is changing in the telecommunications sector today How has the proportion of revenue your company spends on R&D changed over the past two years, and how is it expected to change in the next two years?... customers of third-party services? Or to put the problem in a wider context, why would a network operator with billions invested in its infrastructure be happy to let asset-light rivals steal © The Economist Intelligence Unit 2008 13 Opening up How R&D is changing in the telecommunications sector today a march on it in building hugely valuable consumer brands? Ms Lauterbach sees it as one of the biggest .. .Opening up How R&D is changing in the telecommunications sector today Preface Opening up: How R&D is changing in the telecommunications sector today investigates how technology and telecommunications. .. from the dayto-day operating business while remaining extremely close to their customers” © The Economist Intelligence Unit 2008 Opening up How R&D is changing in the telecommunications sector today. .. to this kind of breakthrough Opening up How R&D is changing in the telecommunications sector today Today new technology, tomorrow a new organisation A dopting OI with these goals in mind, however,