Telcos that invest in innovation and collaborate reap the returns

16 January 2017 7 min. read
More news on

Telcos, while continuing to do well on core business offerings, are facing the heat of innovation – a new report finds. Innovation, or a lack of it, is correlated with lower business financials, potentially heralding a slow decline and fall of incumbent players. Leveraging startups, many of whom are keen to join with telcos, may provide a means of increasing relevant innovation.

Digital enabling technologies, such as the internet and smartphone proliferation, have created a hotbed for rapid innovation. Startups are able to, from humble beginnings, quickly scale operations, to disrupt industries – syphoning off market share from incumbents or quickly capturing newly developed market spaces. 

The effect of innovative companies on traditional telecommunications companies has not been without effect, for instance, startups like Skype and Whatsapp have been able to pick off potential customers from calling and texting.

In a report from Arthur D. Little, Match Maker Ventures and the TelecomCouncil Silicon Valley, titled ‘Innovation Quest for Telecom Operators: the heat is on’, the partners explore the prevalence and effects of innovation within the telco industry, as well as the relationship the industry is building with startups. The report involved two surveys, one focused on the traditional industry, involving 128 responses from 86 corporates representing 82% of the worldwide telecom revenues, while the other focused on the startup scene, involving 108 responses of which 32% were from start-ups at an “early stage” and 38% at the “growth stage”.

Innovation priority and satisfaction level

The research asked telco respondents to identify where innovation stood within their wider set of business priorities; 67% of all participating telcos ranked innovation as the top or a top-three priority among their main strategic objectives. 

However, the firm notes that strategic intent and the practice of implementation can, and in this case do, stand relatively far from each other. Of the two thirds that place innovation in their top 3 priority list, 4% say that they are highly satisfied with the results, 35% say that they are satisfied, 46% say that they are somewhat satisfied, while 15% say that they are not satisfied with efforts.

When it comes to telcos that place innovation among the top five, or not in the top five, satisfaction with on the ground efforts were revealed to be generally lower – highlighting that strategic planning, does have some impact. 24% of respondents say that they are satisfied with efforts, 56% say that they are somewhat satisfied, while 20% are not satisfied.

Innovation’s impact on financials correlation

The research also found that telcos face considerable challenges in greenlighting, or creating impetus for, innovation efforts. Shareholders, focused on driving short-term profitability, tend to see the current core business of telcos as cash cows – unwilling to take a longer term perspective on the sustainability of the business. 

In a bid to better understand the implication of short-termism, in relation to not investing in innovation, the firm considered the correlation of innovation priority on key business metrics. Revenues CAGR 2012-15 for companies with innovation in their top three priorities saw a median increase in revenues of 1.9%, compared to a median revenue loss of 1.8% for companies with innovation in their top five priories or lower. EBITDA CAGR for the same period stood at a median 3% for companies with innovation in their top three priorities, compared to a 0.5% decrease for companies with innovation in their top five priories or lower. Companies with innovation in their top three priorities did see a smaller availability in free cash flow generation, at -3.8% and 1.1% CAGR respectively.

According to the authors, shareholders and telcos risk losing out in the long term (slowly dying) unless more focus is placed on innovation (transformation).

Telcos’ top 5 key innovation challenges

The reports also considers some of the barriers that telcos face, in their innovation journeys. One key problem is ‘identifying the “right” topics’, cited by 84% of respondents, followed by ‘having the “right” team’ in place (79%). A ‘long-term adherence to strategy’ came in as a problem cited by 76% of respondents, while ‘ensuring alignment between innovation activities’ was cited as problematic by 73% of respondents.

The problems faced by organisations in developing innovation, according to the firm’s analysis, reflect that they tend to be focused on short-term targets, and lack a strategic vision for where the market as a whole is heading.

VC and CVC investments per sector

One way forward is by partnering, supporting or integrating startups. Such moves provide telcos with a way of leveraging up-to-date trends, from often highly skilled individuals with entrepreneurial mindsets. Many telcos have seen the effects of successful startups on their businesses, including the likes of Skype, Whatsapp, Google and Facebook. Current market trends see organisations increase their focus on courting potential upstarts, by providing, among others, corporate backed venture capital. The number of startups seeking to compete with telcos’ core business propositions has been on the increase, with VC and CVC backed startups in the mobile and telecommunications game – as well as internet – rising sharply between 2014 and 2015. 

The report notes that collaboration with such entities, whether through financial backing or different partnership models, remains an open possibility for many of the startups surveyed. 36% of all responding start-ups have stated that collaboration with telcos is “essential” and 41% assess it as “helpful”. The research also found that, in general, there is alignment between the innovation activity of the telcos themselves and that of startups, reflecting considerable scope for collaborative engagement.

Startup vehicles used by biggest 26 telcos

The report notes that activity in the collaborative space has been on the increase at the 26 largest telcos surveyed. 'One-off events' jumped from an average of 1 in 2014 to an average of 2 in 2016, with a similar increase in 'corp-up activity'. The leveraging of 'incubator/accelerator' too has seen relatively stable use over the past two years at 2, while 'CVC' has stayed steady at an average of 0.5.