Tuesday, July 9, 2013

"Law of Big Numbers" is a Key Telco Innovation Challenge

Innovation is critical to telco survival, most observers would tend to agree. If key legacy revenues are declining, new revenue sources must be found. Where to look for such new revenues is a key issue, though.

Nor is it easy to find big new revenue sources, in the communications or any other big business, where the law of large numbers is at work. Basically, a firm generating large revenues cannot easily find big new revenue sources that significantly impact total revenue.

After looking at 3,500 new service launches since 2009, Ovum concludes that “many operators miss the big picture, exaggerate the threat from over-the-top (OTT) players, and misunderstand the broader benefits of innovation,” says Emeka Obiodu, Ovum principal analyst.

Some executives might disagree with some of those conclusions. In four years' time, telco text messaging revenue will decline on average by around 40 percent across Europe and the Middle East, according to senior execs surveyed by STL Partners.

Mobile voice isn't that far behind, with a 20 percent decline predicted. That hardly qualifies as “an exaggeration,” one might argue.

Ovum implies that telcos were too selective when choosing partners and overburdened their partners with unrealistic revenue expectations. That is largely a structural problem.

A service provider with $20 billion to $100 billion annual revenues is not helped much by new lines of business that throw off annual revenues less than $500 million to $1 billion. The “unrealistic” revenue expectations largely are driven by the fact that organizations with large revenues cannot “move the revenue needle” with large new revenue streams.

Ovum also emphasizes the importance of prioritizing innovations that exploit the centrality of operators’ networks. Whatever service provider executives might have thought in the past, the advice to look for new services that build on the network and its users seems a generally accepted point of view at the moment.

“No matter how much telcos try to diversify, their primary role will always be as carriers of voice, messaging, and data traffic,” says Obiodu. Doubtless most service provider executives in the telco world would agree. It perhaps is not so clear that cable TV operators or satellite providers necessarily agree so much.

Other studies suggest telcos already have gotten that message. The approach currently pursued by the majority of respondents (64 percent) to an Accenture survey can be defined as renovation, or a more limited, incremental approach based on line extensions.

As one example, AT&T post paid customers are paying a new 61 cent a month “administration fee” that will raise $512 million a year in revenue ($7.32 per year per post paid customer), on a base of roughly 70 million customers.

To be sure, that is what most people would consider a consumer-facing innovation, but does make the point.

The amount of money AT&T makes from that 61-cent charge will be roughly equal, every month, to the amount of gross revenue Verizon Communications fixed network operations makes from all small business customer operations every month.

That is a practical example of the ways large telcos most easily can create new $1 billion annual revenue streams, namely by building off things they already do.

Generating $1 a month in incremental revenue from 70 million customers creates $840 million a year in incremental revenue.

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