McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale

8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale

1/76

Telecommunications

Innovation@Scale

RECALL No3


2/76


3/76

3RECALL No 3 Innovation@Scale

Welcome ...... to the third issue of Recal l, the publication by

McKinsey that provides marketing and sales insights

for executives and board members in the

telecommunications industry.

This issue focuses on Innovation@Scale a proven

approach for building new, scalable platforms for

economic value creation driven by the introduction and

rollout of new products, services, processes, or business

models. Innovation@Scale implies that managers break

with the key conventions or orthodoxies that have been

instrumental to the historical success of big companies

or institutions. As a result, it leads to sustainable and

financially meaningful improvements in performance.

Historically, telecoms operators have not been the

innovating driving force. Many innovations in the

telecoms industry have been developed by equipment

manufacturers, while operators have focused on

integration and rollout. We strongly believe that operators

can do much better and leverage their unique assets,

e.g., their customer insights, integration, and rollout

capabilities to identify the right products for their

clients. This would al low them to evolve into an

industry-shaping role and to drive Innovation@Scale.

Discussions regarding innovation typically center on

new features or technologies innovation in the

telecoms industry is a key success factor and one which

most industry players spend much time contemplating.As you might expect, this issue of Recall does not

disappoint in this crucial area. In fact, we have collected

99 ideas innovative new services that have been or

are about to be launched worldwide and have collated

them on an attractive poster for your convenience.

(For more ideas of the day, visit McKinseys Telecoms

Extranet at http://telecoms.mckinsey.com).

Innovation@Scale goes beyond features or technologies

it is a system that allows companies to create value on a

continued basis. In addition to the what of innovation,

we also discuss how industry players can best achieve

Innovation@Scale. We argue that the innovation paradigm

needs to be changed. The industry has historically

viewed innovation as a process that moves linearly from

research through development to commercialization.

We believe this perspective to be far too narrow and that

telcos risk rapid commoditization if they fail to turn

this process into an integrated, complete approach that

includes technology insight and foresight, awareness of

customer needs, and industry dynamics.

In this issue of Recall, we explore a number of different

facets of innovation. Part one, Our Digital Future,

introduces eight key trends of how digital technologies

will continue to shape the future of business and society

in both conventional and novel ways. We then provide

a deep-dive into the driving force currently animating

the industry virtualization in part two, Making the

Unreal Real. In part three, Turning Insights Out,

we describe a five-step approach to systematic, successful

product development while mastering the dual challenge

of efficiency and effect iveness. The next part, Moving

Beyond, reveals how incumbent telcos can capture

opportunities beyond their core business.

Part f ive, Making Giants Move, demonstrates the

pivotal role a corporate business development unit can

play in nurturing potentially disruptive innovations.

Successful innovators differentiate themselves in multiple

ways, part six, Cracking the Code Benchmarking

Results, provides an overview of results from our large-

scale innovation benchmarking survey. In Start it Up,

part seven, we then show how to overcome the innovation

dilemma by providing a four-step approach. This

Recall issue concludes with an interview with Nokias Headof Strategy, How Nokia Does it - What it Takes

to Innovate@Scale Year after Year Between chapters,

we provide a number of vignettes on the what of

innovat ion: the B2B crossroads challenge in ICT (infor-

mation and communications technology) services;

the rise of Telecom 2.0; the prospects for both instant

messaging and the third screen; developments in

mobile search; and advances in digital marketing.

Our thanks go to our innovation expert Fabian Billing

who was the driving force in putting this issue together.

We are confident you will find this issue of Recall

compelling and that it will provide unique insights and

ideas relevant to your daily work. We look forward to

your feedback and any thoughts you may have regarding

topics that you would like us to cover in the future.


4/76

Jrgen Meffert

European Leader of McKinseys

Telecommunications Practice

Thomas Barta

Leader of European Telecoms Branding /

ROI, Editor Recall

Pedro Mendona

Leader of McKinseys Marketing

in Telecommunications Practice

Boris Maurer

Leader of McKinseys

Telecommunications Extranet

4


5/76


6/76


7/76


Contents01 Our Digital Future 9

02 Making the Unreal Real 17

03 Turning Insights Out 25

04 Moving Beyond 33

05 Making Giants Move 41

06 Cracking the Code Benchmarking Results 49

07 Start it Up Four Steps to Overcoming the Innovation Dilemmas of the Industry 57

08 Innovate@Scale How Nokia Does it 61

Appendix


8/76


9/76


Our Digital Future

01 Our Digital Future

We are strongly convinced that digital technologies

will continue to shape the future of business and

societies not only in ways we have observed in recent

years, but also in novel ways as a driver for

Innovation@Scale. Based on our client experience as

well as on research we have done within the

McKinsey Technology Initiative (MTI), we propose

eight key trends for our digital future.

After the boom and bust of the Internet bubble, there

has been a heated debate about the real impact of ICT on

businesses and society. Looking at the way information

technology has changed businesses in recent decades,

it is clear that it is an industry-shaping technology; not

more than but definitely not less than electricity

or even steam power were before. The ways of workingin industries such as banking have fundamentally

changed thanks to back-office automation and workflow

support. Even more visible have been the comprehensive

upgrades to the customer experience customers today

can expect to interact with businesses through a

multitude of channels in a more or less integrated manner.

Information and communication technology(ICT) will drive virtualization and will continueto have a transformational impact on businessand societies

Superior use of ICT is a discriminating factor in many

industries. As stated by Professor McAfee of the Harvard

Business School, more IT-intensive industries are much

more Schumpeterian than less IT-intensive ones.

In other words, ICT accelerates and amplifies the forces

that lead to creative destruction and the resurrection

of an industry. It is also an opportunity for Innovation@

Scale in the industry.

The bursting of the bubble had a healthy and sobering

effect. The adoption of ICT brings with it a fundamental

shift in the way people work and interact with each other

it drives virtualization of interaction and transact

ion. Such shifts do not occur over night, but take years or

even decades. In many respects, however, such shifts

in behavior and mindsets have already taken place

and there is a lot of room for the dif fusion and leverage

of technology. Today, there is still a large disparity in

technology use across sectors, regions, and job types

(Exhibit 1). Financial industries, for example, are farmore advanced in their use of ICT compared to, say, the

healthcare sector. The type of work that is strongly

supported by ICT is mostly of a transformational or

transactional nature, and ICT helps to automate workflows.

The growing numbers of interaction workers are just

beginning to see their working environment changed

by ICT. From a geographical point of view, even regions

with similar GDP per capita have very dif ferent ICT

penetration rates.

Highly interactive technologies in the context of Web 2.0

are spreading quickly, with their use focused on

collaboration and knowledge management. In our

survey, we found that executives recognize the

importance of ICT to global business and profitability

(Exhibit 2).


10/76

10

Still room for technology diffusion and leverage01

For customer interactions and, in part, for internal

interactions, companies increasingly make use

of Web 2.0-type technologies. A very important and

new trend is that technologies used in the private

space are making their way into the workplace at an

accelerated pace.

After steam and electrification, computing has shown a

similar transformational power. While the impact of ICT is

comparable with other groundbreaking technologies, itsadoption is faster. Nevertheless, there is still a

significant time lag between technology innovations

and innovating business systems with the help of those

technologies. Today, we are seeing the first indications

of a second wave of ICT-enabled transformation focusing

on interactions. Although adoption times and innovation

cycles are getting shorter, the gap is still large between

when the technology becomes available and when new

business systems successfully use it.

Key ICT-enabled business trends are emerging

We see key trends emerging, which will help to transform

specific businesses (Exhibit 3). These trends concern

managing talent and labor; managing capital and

assets; and integrating information and optimizing

business logic.

Trends in managing talent and labor

Trend 1: Distributed co-creation. This term refers to the

harnessing of communities to create end products and

intellectual property via a collaborative, iterative, and

distributed process. Firms making use of this trend gain

access to a large, global labor pool that is motivated by

reputation, learning, and a sense of community rather

than strictly financial remuneration. The scale and

diversity of this labor pool accelerate development andcreate highly tailored products that often have higher

quality, significantly lower cost, and faster design cycles

than products and IP created with traditional methods.

Examples include Wikipedia, an online encyclopedia

updated by volunteers, which is now 12 times larger

than the Encyclopedia Britannica; Loncin, which iterated

motorcycle design with vendors to drive down cost and

capture 70 percent of the Indonesian market; Linux,

an open source operating system; and OScar, an

open-source car.

Trend 2: Prosumers. Prosumption is the increased

involvement by customers and end users in various

aspects of product design, development, marketing,

selling, and servicing. Just as technology allows

businesses to interact more directly with their customers,

the next logical step is the inclusion of customers


11/76

11

Executives recognize the importance of ICT to global business and profitability02

directly into value-delivery systems. Hence, the roles

of consumer and producer are becoming less distinct.

Companies are able to bring more desirable products to

market faster and create higher customer loyalty.

Companies can involve prosumers in several ways: by

engaging lead users in product design (e.g., Gmails

perpetual beta program, Threadless T-shirt designs);

by harnessing the wisdom of crowds in the creation of

a product or service (e.g., voting on popular articles viaDigg, predictive markets such as TradeSports); and by

leveraging broad user bases to test and market goods

(the Tremor word-of-mouth marketing communities).

Trend 3: Firm of one (firm of one bil lion). This trend

is manifested in the coordination and management of

talent pools beyond the traditional captive employee

relationship leveraging contractors, free agents, talent

networks, and communities. Companies developing

these talent pools can tap the required expertise quickly

and efficiently. Furthermore, this change in the nature

of the labor relationship could drive changes in pricing

models, potentially moving from payment for time

to payment for results. Examples include Goldcorps

find the next six million ounces of gold competition,

in which the company shared all its geological data

publicly and offered USD 575,000 in prize money to

winners; and TopCoder, a loose organization of software

developers that coordinates the development of complex

software projects through a distributed model.

Trend 4: Interaction facilitation. This term refers to

enhancing the productivity of employee interactions

and knowledge work through f lexible work environ-

ments, technologies, and new management practices.

Applications such as NetMeeting and videoconferencing

software increase the effectiveness of workplace inter-actions (whether in person or remote) and lead to higher

productivity and quality. These tools also increase

the size of the workforce by overcoming geographical

restrictions to create a remote workforce. Examples

include Best Buys Results-Only Work Environment,

where employee performance is judged on output instead

of hours, so that employees can work wherever and when-

ever they want as long as they get things done; and JetBlue

Airways, where work-at-home moms constitute the

entire reservation system workforce, requiring little more

than a telephone and a broadband connection.

Trends or managing capital and assets

Trend 5: Converged automation. Such automation leverages

large networks of connected computing platforms,

devices, and tagged objects and data. The declining

RECALL No 3 Innovation@Scale

Our Digital Future


12/76

12

3 persistent themes feed key ICT-enabled business trends03

cost of IT, increasing labor costs in developed

economies, and declining pools of labor resources in

some regions (such as Japan) are driving this

trend. Examples include increased emphasis on self-

service at retailers such as Home Depot, where

customers can scan purchases and pay through

automated machines, and the METRO Group, which

has implemented self-serv ice checkouts, electronic

price tags, and information terminals. Other

examples include the use of robots by ALSOK, aJapanese security company, as part of its integrated

security service, and Airbuss deployment of RFID

tags to detect automatically safety risks and repair

needs in its aircraft.

Trend 6: Unbundled production. The opening of assets

and production systems to outside firms increases

asset utilization and potentially creates new product

offerings. Technology now enables the disaggregating,

measuring, metering, and billing of smaller and

smaller increments of an asset. This capability leads to

better utilization, faster deployment, increased

flexibility, and more attractive consumption options.

Examples include Amazon.coms leverage of its

spare storage capacity to launch a new service offering,

whereby developers gain access to a highly reliable

and scalable infrastructure that is priced on a

pay-as-you-go basis; Flexcar, which manages a fleet

of vehicles for customers to rent in small increments;

and Virgin Mobile USA, which leases part of

Sprints cell phone network and resells under its own

brand name.

Trends or integrating inormation andoptimizing business logic

Trend 7: Data-dr iven operations and management.Also known as the new management science, this

term refers to the use of multi-source, multi-structure

data for decision support, data-driven management,

bottom-up innovation, and information flows to develop

competitive advantage and create new business

models. Technology now enables the capture and analysis

of highly specific data about company performance,

which is having a significant impact on management

practices (e.g., performance management) and IT

management (e.g., dashboards). Technology also enables

the capture and analysis of in-depth data on customer

behavior and preferences (such as pricing response),

which allows companies to identify customer needs

in an increasingly customized market (due to the long-

tail effect) and to build lasting customer relationships

based on strong e-CRM capabilities. Examples include

CEMEX, which uses a large w ireless network to


13/76

13

optimize loads and routes and improve deliveries, with

a significant impact on its clients construction times;

and Google, which draws on an internal idea market in

which employees can vote on whether to pursue ideas

submitted by their colleagues. From a customer-facing

perspect ive, The Progressive Corp. prices auto

insurance based both on information provided by the

user (such as miles traveled per year) and est imated

pricing from other providers; Harrahs uses customer

profiles to make targeted offers and provideexemplary customer service; and Amazon.com offers a

recommendation engine based on an analysis of

customers purchase histories.

Trend 8: Information for sale. New business models

are emerging around the aggregation and sale of

information, including pricing and related data, and

IP. This trend is driven by an increased demand for

information for analysis; an increased supply of

information created by data capture methods;

and an increased ability to sell information generated

by better search processes, cataloging, and

comparative pricing.

Examples include eBays sale of pricing and other product-

related data, and IBMs generation of 15 percent of its

R&D budget through licensing and custom development.

The potential or impact is large managers,policy makers, and lobbyists need to prepareto manage the change

We have found that the above trends are likely to cause

up to one quarter of value creation to change hands, with

significant variations across industries. As part of

the process, value chains are breaking up and reforming.

Furthermore, economic surplus will change hands

between players within the same or different industries,and in some cases might be transferred to the end

customer. While the impact of ICT is strongest on the

interaction types of work, the key trends will also affect

less interaction-intensive industries such as consumer

goods and pharmaceuticals.

To take advantage of the opportunities ahead and to avoid

value destruction, decision makers need to expand their

arenas for managerial innovation and economic impact

in f ive dimensions (Exhibit 4):

New economic models are emerging that will create new

industries and potentially destroy existing ones.

Not only will economic surplus change hands,

but also the way products and services are created,

generated, distributed, and paid for will change

significantly.

Decision makers need to expand arenas for managerial innovation and

economic impact04


Our Digital Future


14/76

14

Organization, talent, and management models/science

are changing rapidly.The share of tacit interactions will

grow quickly, thus demanding new ways of attracting and

developing people. Organizations will change their faces

and will be less and less constrained by company borders.

The game plan for strategy, innovation, and competitive

advantage will dramatically change.With sources of

value shifting and with new business models emerging,

the nature of competition will change. A lready today,

it is evident that creative destruction is much more

powerful in IT-intensive industries.

Value chains are breaking up and new ecosystems will

emerge, leading to significant changes in industry

structure and performance.We have already seen in the

first waves of ICT proliferation that hardly anybody was

able to predict accurately the winning organizations.

The macroeconomy and whole societies are strongly

affected by the changes; for example, globalization will

be highly inf luenced by ICT. The changes in the way

people interact will also lead to significant shifts in

our value systems and challenge some of the common

grounds for consensus in todays societies.

At both an industry sector level and a macroeconomic

level, there are significant risks alongside the huge

opportunities. Policy makers and lobbyists need to create

an environment that helps to capture the opportunities

that continue the erosion, such as mash-up voice

opportunities (i.e., the blending of different technologies)

or the spread of podcast-infused reviews of products

and services.

Regarding revenue growth, the objective is not only

about attracting new customers, but also about creating

more leverage with customers. McKinsey also identified

a small core of companies that represent the bulk

of so-called Telecom 2.0, which are redefining their

organizational boundaries in order to generate new

competitive advantages. These technologies are

being used in more openly collaborative ways both

internally and externally with consumers and

suppliers or to create new products and services such

as mash-up voice applications and others. The jury

remains out as to whether this phenomenon will

lead to a promising competitive edge. However, this

small core of companies also cla im to have benefited

the most from the advent of Web 1.0, which would

appear to suggest that they will succeed here as well.

This article is an excerpt published originally in

McKinseys Digital Content and Services brochure, 2007.

By Jacques Bughin and James Manyika

Opportunities from the Internet:

The Rise of Web 2.0 Technologies

A new set of Internet technologies dubbed Web

2.0 is aimed at harnessing the creative and

collaborative nature of online interactions. Results

from a recently released global McKinsey Quarterly

survey suggest that most companies are pursuingthese technologies with a clear-eyed understanding

of what they want from Web 2.0. McKinsey & Company

wanted to better understand where telecoms companies

find themselves regarding this new wave. Are they

already investing? Do they consider Web 2.0 technologies

to be critical for their organizations? A number of

new telecoms attackers from Skype to Jajah and

Rebtel have already begun to introduce such

product and service innovations.

McKinsey learned that telecoms is indeed moving

faster than the average industry in adopting Web 2.0

technologies on a worldwide basis but that in general,

is doing so mostly as a result of competitive pressure.

This adoption pace is clearly influenced by the more

successful adoption of Web 1.0 and because it is

more business than IT dr iven. In general, this will be

done through better customer interfaces and more

flexible internal knowledge management.

Within the consumer segment, for instance, products

such as voice are being commodit ized and Web 2.0

can create new sticky services to compensate. In

addition, competi tion may well foster new services


15/76


Our Digital Future

and avoid the risks. Different regions might capture the

opportunities in a very different way. Moreover, some of

these ICT trends provide challenges for legal and ethical

frameworks.

***

The transformational power of ICT on businesses and

society has been substantial and will increase inthe years ahead. We have identified eight key emerging

trends, which are changing the way talent and labor,

as well as capital assets, are managed. Furthermore,

information is becoming more strongly integrated

and business logic is changing fundamentally. Such

trends have the potential to make one-third of value

creation change hands. Managers as well as policy makers

need to be prepared to capture the upside of this huge

potential.

By Rolando Balsinde, Markus Lffler, James Manyika,and Pl Erik Sjtil


16/76


17/76

17

This part examines the industrys main animating

force virtualization and why incumbents must

confront it.

Telecoms players operate in a turbulent world of techno-

logical leaps, regulatory shifts, and customer preference

swings. Since the intensity of these forces appears ready

to surge, not subside, its worth ref lecting upon how the

industry got to this point and where its headed in the future.

The telecoms industry arose on the back of a massive

discontinuity: virtualization, which we define as making

objects and actions available independent of location and/

or time in effect, transforming them from the physical

to a virtual, non-physical form.

Roughly 150 years ago, virtualization meant the inventionof the telegraph and Morse code, and of the telephone

(first commercial ized, respectively, in the 1830s and

1870s). These innovations made data transmission and

voice communication location-independent: thus

configured, they began to displace traditional messenger

and delivery services. Early milestones in the virtualization

of voice communication included the 1866 completion of

the first successful transatlantic telegraph cable and the

first transcontinental phone call (from New York City to

San Francisco) in 1915. Over the past several decades,

virtual communication has come to fully inhabit the

mass market, fueled by many technological advances

that include the miniaturization of devices and the

invention and proliferation of the Internet.

Today, virtualized communication comprises ubiquitous

wireless service, rich multimedia interaction, and

the transmission of data via e-mail and the Internet.

Furthermore, the virtualization of adjacent industries

continues apace in areas such as search, advertising,

payments, and transactions. We even see the complete

virtualization of consumption patterns, and personal

and social networking, as well as economic activity in

communities where people spend time, money, and

perhaps even build completely vir tual business models.

McKinsey & Company research shows that the increasing

availability of bandwidth predominately drives telecoms

virtualization, constantly leading to fundamentally new

models of value creation and creating opportunities

for new vir tual IT-based businesses. Since telecoms

players can operate at low marginal costs af ter infra-

structure investments are made, the virtualization of

communication over time has actively cannibalizedtraditional industries, such as the postal serv ice. This

historical pattern of creative destruction makes the

telecoms industry what it is. At the same time, we are

beginning to see increasing levels of virtualization in

transactional industries (from banking to bookselling)

a process in which traditional telecoms players

themselves come under fire from new, Web-based attackers.

Thus, while traditional communication moves into a

flat world with no real differentiated value creation,

the next fundamental wave of creative destruction driven

by virtualization has already taken flight.

This publication explores virtualization and how band-

width-borne innovation provides the thrust that moves

the telecoms industry (and many others) forward. This

article covers future strategic imperatives for telcos and

how they can act to shield, expand, and capture their

02 Making the Unreal Real


Making the Unreal Real


18/76

18

current positions in the industry in order to emerge

successfully from the future virtualization battles. In

the following, we will fur ther explore ways to capture

new business opportunities and examine telecoms

innovation and corporate business development.

From broadband to megaband

How certain is the industry of continued broadband

expansion? Edholms Law, named for Philip Edholm,Nortel CTO, provides one perspective. It states that

wireline, wireless, and nomadic access bandwidth will

grow at the same predictable exponential rate, and it

has been surprisingly accurate over the years. This track

record seems likely to continue. Thus, the expected shift

from broadband to megaband in the future should

further drive virtualization across different sectors

from goods-producing industr ies to transaction (e.g.,

financial services) providers to the communications

industry itself. For example, the continued rollout of

Web 2.0, with its power to allow users to individualize

applications, products, and services, enables a broad

cross-section of traditional industries to create virtual

products for, and profit from, the Internet. However,

industries typical ly include companies that lead the way

towards virtualization and those still not aware of the

trend. This means that the future will likely see major

virtualization battles on the one side, while companies

on the other will require submersion into information

and communications technology (ICT) in order to avoid

being left behind which could be a major opportunity

for integrated telecoms players (Exhibit 1).

Todays vir tualization battle is being waged between

communication- and transact ional-level players, as

next-generation communication technologies are intro-

duced and online banking, e-commerce, and m-paymentprograms go into effect. Its expected that the future

will be characterized by strong networked communities,

with high levels of rich interaction and seamless

communication in a converged world. That means the

emergence of seamlessly available digitizable goods

(e.g., software, content, etc.), the proliferation of mobile

devices, and ubiquitous broadband access.

Three strategic imperatives: Shield, expand,and capture

Increasingly enveloped by competitive pressure, telecoms

players need to address forthcoming virtualization

discontinuities in strategic terms. The McKinsey team has

identified three strategic imperatives telcos must achieve

to defend core business assets and defeat virtualization

challengers: shield, expand, and capture (Exhibit 2).

The future will see major virtualization battles on the one side and ICT

enablement on the other01


19/76

19

1. Shield (the rebalancing/bundling game). Telcos must

shield existing revenue in their core businesses by, for

example, migrating customers to flat-rate service plans

and messaging packages, bundling existing services,

or bundling new services.

2. Expand (the market share game). Telcos need to

exploit the remaining opportunities in core markets

(e.g., by addressing under-penetrated customer segments)

and drive best-in-class category management.

3. Capture (the innovation game). They must also

understand and evaluate new opportunities beyond their

core businesses that can serve as future growth drivers.

The strategic imperatives shield, expand, and

capture focus on the three layers of the virtualization

framework, with shield concentrating on fixed-

mobile convergence (FMC) as an example opportunit y,

expand dealing with category leadership, and capture

focused on innovation.

Imperative No. 1: Shield shielding traditionaltelco revenue by promoting FMC

FMC uptake is expected to expand dramatically in the

next few years, rising from a fractional share of total

mobile connections in 2007 to nearly 10 percent in

Germany and to more than 6 percent overall in western

Europe. Because the market appears ready to

emerge, a number of basic beliefs concerning short-term

FMC have also surfaced. An integrated player, for

example, might embrace the following notions

regarding FMC:

1. Consumers desire many of the benefits associated with

convergent offers. However, with telecommunicationsbeing a relatively low-involvement product category,

price remains one of the key drivers.

2. Successful fixed-mobile convergence products typically

come from attackers that usually have nothing to lose in

breaching market conventions. This tends to give their

offerings clarity of purpose.

3. An opportunity exists for incumbents to profitably

exploit latent demand for convergent offerings. They

can target these products towards customers on

specific grounds, depending upon the strategic

segment (e.g., fixed-mobile customers, fixed-only, or

mobile-only customers, etc.). Doing so can allow

them to create revenue lock-in, reduce churn, engage in

targeted cross-/up-selling, and roll out segment-specific

attacker models.

02



3 strategic imperatives for telcos to defend core business and win

virtualization battles


20/76

20

4. A successful product management process usually

features four steps (which McKinsey calls the CHESS

approach):

a. Establish needs-based customer clusters based upon

market research (What jobs should the offering do for

different customers?)

b. Identify and evaluate opportunities in each strategicsegment (Where do blank spots exist, and where can

converged and next-generat ion offerings do the job?)

c. Design products to address the needs of each strategic

segment (Which propositions serve that purpose best?)

d. Create a communication platform for marketing the

products to specific sociodemographic segments (What

is the best way to penetrate the market, and what story

should be told?).

Thus, for incumbents, f ixed-mobile convergence in the

short term is all about strategically placing the right FMC

products in the right segments at the right times. It also

involves ensuring that products are attuned to the market

needs of the segments for which they are targeted.

Telcos interested in developing a next-generation/

convergence roadmap can begin by generating a complete

list of potential convergent offerings and then scanning

for opportunities for new product ideas. During this

process, product managers must take a customer needs

perspective rather than focusing too much on new

technologies; scanning the product offerings of players

from more-advanced markets can generate additionalideas. With the list of potential FMC offerings in hand,

managers can prioritize by evaluating each product

along two dimensions: first, based upon its attractiveness

to strategic segments (e.g., fixed-mobile customers,

fixed-only or mobile-only customers, or competitors

customers) and second, in terms of its match with the

needs and requirements of prioritized customer segments.

Two recent examples reveal how technological advances

can be used to address specif ic customer needs and

drive convergence. In the United States, insuff icient

in-home network coverage is the key driver of

mobile churn; at the same time, due to low population

density, improving network coverage is more costly

than in most west European countries. To address this

pain point, carr iers are developing innovative new

technologies.

For one, a number of tech companies, including

Motorola and Google, are investing into the development

of femtocells, an in-home access point that uses a high-

speed Internet connection to route a call from a handset

to an operators switching station. For users, this technology

promises uninterrupted mobile telephony at home and

for carriers, it could result in vastly increased network

capacity and hence, lower capital expenditure (capex).

Another example is T-Mobile USAs new HotSpot@Home service, which uses dualphones able to use both

WiFi and GRS access technologies to enable users to

make free calls over their home wireless network. This

approach also helps T-Mobile boost its network coverage

with only moderate capex charges.

Thus, the launch timing of FMC or next-generation

messaging products should address three key issues. In

terms of competitive pressure, must a telco match specific

competitor offerings to avoid losing market share?

Regarding regulation, what are the implications of

launching a particular product? And finally, addressing

technical feasibility, what is the timeline for the technical

realization of the product? In light of these issues, it

often makes sense to conduct an expert appraisal of a

telcos current offerings and its newly developed roadmap.

For example, one such appraisal, which leveraged

outside experts (i.e., McKinsey) without ties to the

company, found that the telcos current convergence

portfolio and roadmap covered all of the r ight products,

with most of the promising options having already been

launched or being considered for launch in the next

year or two. However, the appraisal also noted that until

recently, the telcos convergent offerings took too much

of a technology perspective and lacked a clear purposeor strategic focus. Given these findings, the McKinsey

team recommended that overall, the telco needed to

think about convergent offerings in a new and strategic

way in order to ensure strategic focus and clarity of purpose.

In addition, McKinsey also deduced specific product

recommendations to strengthen the existing portfolio.

Imperative No. 2: Expand collect the remainingcore business opportunities by driving best-in-class category leadership

The second imperative concentrates on expanding current

business opportunities in core telecoms markets, which

means driving best-in-class category management.

Reaching this level of performance typically requires a

different approach from todays practices. Integrated

players, for example, often rely upon separate product


21/76

21

development teams in their fixed and mobile business

units, and usually organize product development and

management according to individual offers (e.g., price

plans), services, and enablers. Typically, no integrated

customer lifetime value (CLV) assessment is undertaken;

the organization has not assigned overarching P&L

(profit and loss) responsibilities and it lacks a joint

definition of what success looks like.

The challenge involves shifting this mindset towards

the creation of an integrated product delivery system

that stretches across both fixed and mobile business

units. In this case, the product categories themselves

become the organizing principle behind product

development. This means having dedicated teams for

each category, assigning clear P&L responsibility for

category managers, introducing an integrated value

management process per category thats focused on

CLV, and creating unified targets and success criteria

per category.

Telcos must work to achieve category management

leadership by fully integrating customer insights into

the product development process. This entails making

the shift from discrete market research, data mining,

and customer segmentation activities that focus primarily

on reporting, to the development of real customer

insights, fully integrated into the product and innovation

processes. Driving category management leadership

in terms of segment-specific offerings and mass

customization requires a focus on price/value, value

differentiation, and customer segments. Price/value

represents the most important lever telcos can

use to inf luence customer buying decisions and createloyalty. Given the cost positions of most incumbents,

value dif ferentiation becomes a key lever because

these players cant realistically compete on price alone

and face the threat of customer-based cannibalization

if they attempt to do so (but smart pricing remains

important, nonetheless). Incumbents also need to

develop a segment-oriented understanding of customer

preferences and reasons for churning in both their

fixed and mobile business in order to effectively target

pain points. McKinseys research shows that

customers seek strong price/value and segment-specific

offers, which provide the best insurance against

churn.

Incumbents face fundamental challenges when

developing segment-specific offerings/bundles and

successfully mass-customizing these offerings:

Segment-specific offerings/bundles. Telcos can act to

capture untapped value potential in markets by introducing

segment-specific offers instead of pursuing one size fits

all strategies. Doing so, however, will require them to

build superior customer analysis capabilities, since they

must identify under-penetrated (but valuable) customer

segments, design needs-based offerings, and promote

them to the specif ic customer target segments.

Mass customization. Here, telcos build up the capabilities

necessary to create mass-customized offerings as a key

part of their differentiation strategies. These offerings

can be especially valuable for creating cross- and up-selling

opportunities, and for reducing subscriber churn.

Conceptually, mass customization involves the

establishment of standardized product modules and

standard offers, which are overlaid with special custom

features and serv ices or quality levels to create segment-

specific offers. Common in the consumer electronics

and personal computer industries, mass customization

provides the cost-efficient flexibility needed to meet the

requirements of specific customer segments.

Imperative No. 3: Capture transorm thecompanys innovation perormance toInnovation@Scale

The third imperative involves establishing a healthy

innovation system, capable of driving Innovation@Scale.

Innovation@Scale means building new, scalable

platforms that trigger economic value creation via new

products, services, processes, or business models.

Furthermore, these must be sustainable and financially

meaningful to a major corporation. In the past, telcosfailed to create Innovation@Scale, since technology and

equipment vendors provided most industry breakthroughs.

However, the McKinsey team believes that virtualization

allows operators to take on a different role in the innovation

game. But, to do this, telcos need to change the ways in

which they involve customers with their product offerings,

radically reduce complexity, orchestrate a shif t in

mindset, and establish an ef fective innovation system.

Customer involvement. The telecommunications industry

traditionally provides customers with what could be

characterized as low-involvement offerings. This means

that most customers arent interested in raising their

attention levels regarding telecoms services, in increas-

ing the number of purchasing decisions, or in

engaging in relevant interactions with telecoms players.

Telcos thus need to develop capabilities that make them




22/76

22

more relevant in each interaction they have with the

customer, which can be driven by introducing CLM

(customer lifecycle management) techniques and building

overall customer insights.

Complexity management. Complexity represents a key

inhibitor of innovation flexibility and speed. Incumbent

telcos must manage hyper-complex legacy systems

and processes that no longer create value and instead,

prevent them from following a more flexible and

insight-driven approach towards customers. A paramount

challenge for telcos involves finding ways to use the

opportunities presented by the next virtualization

discontinuity to pursue radical, greenfield approaches

in the place of current legacy systems, since these

cumbersome elements will not play major roles in future

telecoms value-creation opportunities.

Shift in mindset. Operational changes alone will not be

sufficient, since most incumbent telcos carry cultural

legacies of former state-owned monopolists. Tackling

the transformation challenge requires telcos to drive

entrepreneurialism, encourage risk taking, and foster

the willingness to experiment on the one hand, while

abandoning bureaucratic, slow-moving, and short-term-

oriented behavior on the other. These changes require

2. How to play.Numerous alternative business models

could be deployed for each service, a few of which

include: full p layer, wholesaler, integrator, distributor,

or service developer/white-label player.

3. How to build the service business. Telcos can

choose from among several possible paths when

entering infrastructure-focused IT services. They

include plays focused on pure organic growth; a

series of medium-sized, focused acquisitions; the

big bang acquisition of a large IT player; a joint venture

with an IT player for network-centr ic ICT services;

or a deal to swap IT outsourcing with an IT player for

network-centric ICT services.

4. How to achieve execution excellence. Questions

that arise in addressing this issue include: Should

the business be run as a separate or fully-integrated

entity? How does a telco run an efficient service

factory, and how does it optimize each serv ice line

and achieve service rollout? What processes must be

developed, and what go-to-market/channel strategies

need to be established? Most importantly, how does

the telco ensure sufficient profitability?

By Peter Karlstrmer and Katrin Suder

Opportunities in B2B: Telcos Face

an Enterprise ICT Crossroads

Research shows that the decline of Europes enterprise

fixed-line revenue and margins will cause operating

profits to plunge by 5 percent per year over the next

five years. One of the few real expansion opportunitiesfor the industry resides in information and communi-

cations technology (ICT), where growth could reach

into the double digits for individual services. Several

telecoms players have already initiated moves into

the ICT space, with most of the activity centered on

infrastructure-focused ICT services. When and how

telcos should move to capture their share of the ICT

market largely depends upon two strategic variables:

whether it makes sense to enter the ICT market from

a specific companys perspective based upon relative

attractiveness; and how quickly telcos need to react,

determined by the amount of pressure felt by their

telecommunications business. Telcos interested

in entering the ICT space need to answer four sets

of baseline questions that can prepare them for the

challenges ahead.

1. Where to play. Telcos interested in expanding their

participation in the enterprise space can choose from

a wide variety of services. These include basic network

services, infrastructure-focused ICT services, or

integrated ICT services. Plays in each area can range

from basic serv ices (e.g., hardware or software

maintenance) to managed services (e.g., out-tasking)

to VAS (value-added services).


23/76


Making the Unreal Real 23

significant effort, potentially different organizational

structures, and strong commitment among top managers

to make it happen.

Innovation system. In the end, telcos must establish

an effect ive system to drive Innovation@Scale. There

must be a clear innovation strategy that defines selected

bets and an ef fective execution approach that addresses

the specific challenges inherent in radical innovations.Sticking to standard stage-gate processes wont work for

transformational innovation themes. Instead,

different organizational settings that allow more flexibility

and focus wil l be prerequisites for success.

***

Virtualization casts a long shadow over the telecoms

industry, both as the creator of the current industry

and as the inevitable destroyer of todays status quo.

While virtualization threatens the incumbent industry,

it also provides potential new ways to capture growth

for nimble players which could include incumbents.

McKinsey is confident that the information in thispublication can help incumbents both understand and

prepare to leverage the coming virtualization-driven

discontinuities that will be faced by the telecoms industry.

By Jens-Olaf Berwig, Fabian Billing, Jan-Christoph

Kstring, Christian Kraus, and Boris Maurer


24/76


25/76

25

Focusing product development squarely on what customers

need is now the maxim in the vast majority of consumer

markets. Many companies have tailored their product

management to the requirements of the market and

hence their customers or have given their marketing and

sales departments a say in the product development

process early on. At least in theory. In practice, this model

is still encountering huge problems: nowadays, products

need to be developed faster and faster, with tighter budgets

and, above all, a very high degree of accuracy.

Such product development to order requires maximum

efficiency with maximum effectiveness. This is the

dual challenge currently facing product and marketing

managers in almost all industries.

The environment of customer-focused productdevelopment is currently marked by three trends: the

fragmentation of customer segments, especially in

saturated markets, their decreasing stability as a

consequence of ever-growing needs, and the demand

for greater and greater efficiency in the overall process,

including in product development.

Basic models o product development

When developing new products, companies can

generally take two approaches there are successful

examples of each:

The visionary. He is the bright star in any sector.

Seemingly effortlessly he forecasts market developments,

guesses customers future needs, and creates precisely

those products that are rolled out contrary to all

expectations. This type of person does actually exist,

examples being talented entrepreneurs like Apples

Steve Jobs, Virgins Richard Branson, Dietrich Mateschitz

from Red Bull, or Lawrence Page and Sergey Brin from

Google. These are people who hold onto and defend their

vision in the face of internal and external opposition.

The advantage of this approach is that a good idea for a

product comes onto the market undiluted. Particularly

in the case of highly innovative products, organizations

tend to weave too many security webs, which often weaken

the creative core of the idea. The obvious disadvantage

of this is that an organization becomes almost totally

dependent on this one person with visionary thinking:

as soon as the captain jumps ship, the ship may start to

roll. A good example of this is Michael Del l, founder

of the computer company of the same name, who wasreinstated as CEO in 2007 less than three years after

stepping down.

The systematic process. In this approach, the entire

product development process is highly standardized.

Beginning with an in-depth understanding of the customer,

it continues with the generation of ideas and testing of

the ideas using market research methods, and concludes

with the preparation and implementation of a business

case. Companies that build on this systematic approach

have three main instruments at their disposal for develop-

ing successful new products:

In-depth understanding of the customer,on the basis

of which motives and situations are compiled into

corresponding propositions. Instead of rigid, general

customer segments, e.g., by age groups or education,

03 Turning Insights Out


Turning Insights Out


26/76

26

flexible affinity clusters are chosen to approach customers

specifically and arouse their interest in new products.

Use of an existing brand. The spotlight is on new products

that are very well positioned in an existing brand and

also have a strong brand fit. If this instrument is used

correctly, the product launch throws a positive light on

the brand image and boosts sales of existing products.

Synergy effects are achieved in this way.

Consistent use of meaningful KPIs (key performance

indicators). Starting points like degree of consumer

acceptance in last quantitative test ensure that the

organization learns from its own experience and

becomes more confident about making decisions over

time. This procedure shortens the time-to-market and

especially in view of the variation in needs and the

explosion of supply increases efficiency.

The systematic process has one obvious advantage:

because the process is standardized, employee turnover

does not jeopardize a companys success. At the same

time, the company can learn from its own experience as

KPI measurements can be easily integrated into the process.

A possible disadvantage is that over-standardization

might lead to genuinely innovative ideas being discarded

far too early or tested to death.

The following section describes the systematic process

in more detail. Although this approach has been practiced

at many companies for years, successful application of

the different steps cannot always be taken for granted

best practices stand out everywhere.

Five steps to systematic, successuldevelopment

Product development processes usually comprise five

steps. By adopting this approach, a company can gradually

single out the ideas for products that have the greatest

potential. If this procedure is implemented using a KPI

Cockpit, i.e., an interface showing all KPIs updated daily,

new ideas can be tested based on previous experience.

This ensures a continuous learning curve at the company.

Step 1: Identifcation o customer needs

Even before any ideas are generated, it is important to

define for which topic a new product is to be developed.

Practical experience shows that an unsystematic

approach is unlikely to be successful. Controlled creativity

is what is needed. The topic should be formulated

sufficiently precisely to specify a direction, but at the

same time be open enough to generate as many ideas as

possible. At this stage, all available information must

be gathered on this specified topic based on hypotheses

and analyzed. The three most important areas to look

into are knowledge about the customer, previous

experience within the company, and the experience of

other companies (best practice).

Around 90 percent of all topics with practical relevance

can be addressed with four types of analyses:

1. Customers use of and attitude to similar products.

2. Potential target groups for the new product, their

needs, and buying motives (segmentation).

3. Image of the brand in this environment up to now

(analysis of brand fit, brand panels).

4. Case studies of other products with similar challeng-

es, either from the same industry or deliberately taken

from other sectors.

Things that initially appear very simple and logical in

this list present many companies with difficulties in

everyday business: the problem is seldom a lack of data,

but rather its form and its interpretation. The really

relevant findings need to be worked out and sufficient

time planned in for this.

Step 2: Generation o ideas

Now the initial ideas are developed in various iterations

and with as many dif ferent participants as possible.

Experience shows that it is crucial to include all subsequent

decision makers as well as the research and

development (R&D) department at this stage. It may

be particularly diff icult to get senior managers

with a full ca lendar to allot time for this, but if the

project managers are not able to put the topic

on their agenda at this point, the project will never have

top priority.

Another reason the R&D department must be involved

is to leverage existing expertise and avoid the not

invented here problem that leads many init iatives

nowhere. In an international organization it may be

useful to incorporate marketing or product managers

from the most important countries as well. Workshops


27/76

27

with between 10 and 20 participants have been shown

to be conducive to the generation of ideas preferably

conducted by a professional moderator who knows how

to open discussions but is also capable of producing

results. An external expert, e.g., a trend researcher, can

help to inject new insights into the group. The work-

shop should be divided into dif ferent, preferably varied

parts so that participants can approach the topic from

different angles. Various aids are available for this.IDEO, for example, has developed a set of method cards

that include a large number of different innovat ion

techniques described in simple language with an

example for processes, moderation, and a possible end

product.

The creative group should agree collectively on a product

to be developed by the end of the day. A typical end

product for a workshop day of this nature can be a concept

for a product that specifies the target group, the value

proposition, and the reason why.

Step 3: Development o concept ideas

The ideas that the workshop generated are then

enhanced. Depending on the sector, this may involve

merely honing them (FMCGs, fast-moving items) or

developing them in detail, e.g., with a cost structure

(insurance industry). This step requires a great deal of

care; after all, at the end of it the concepts are 80 percent

certain and just need to be optimized or filtered out.

At this early stage, it is a good idea to focus on the concepts

that have the greatest potential. Three elements are

particularly important:

The cost should now be roughly calculated in any case,

so that completely unprofitable products are rejected in

time. This can be done on a top-down basis the details

can always be worked out at a later stage.

Another possible feasibility check is thebrand fit .

Concepts that obviously do not match the brand essence

should not be pursued further.

On the basis of these two filters, an initial rejection

process with senior managementis essential to single

out for further work the concepts senior management

regards as being actually relevant.

Around eight to ten product concepts should be left once

this third step has been completed.

Step 4: Qualitative test and preselectiono concepts

Now it is time to test the particularly promising concepts

with the target group. These tests have two aims: f irstly,

to separate the relevant from the irrelevant products,

and secondly, to generate ideas and pointers as to how

the concepts can be improved. Depending on what stage

product development is at, two methods in particularare suitable: the focus group and the prototype test.

If the concepts have already been fleshed out, focus

groups are an eff icient means of testing the suitability

of the ideas as early and cost-effectively as possible. As

consumers generally have trouble putting their desires

and ideas into words, it is helpful if they can visualize

things. If a prototype of a product can already be produced,

the customer should be given the opportunity to experience

the product first-hand, with feedback and background

information on its use and consumer acceptance being

gathered in detailed interviews. The focus groups can

then be dropped.

At the end of this phase, there should be five to six

concepts left that will finally be tested in greater depth.

Step 5: Quantitative test and fnal selectiono the concepts

The goal of the test that now follows is to create final

versions of the best concepts from the customers

perspective, rate their customer acceptance, draw up

a detailed business case and, if necessary, finally test

their brand fit. The traditional approach starts with a

standardized questionnaire that is used online or ina one-on-one interview.

Typical questions that are answered with standardized

concept tests are the involvement effort, interest in the

concept, appeal of the concept, compelling features,

customer acceptance, and willingness to recommend

to others. A clear drawback here is the direct question

about customer acceptance because in the case of new

products in particular it cannot be gauged against actual

behavior. The results should therefore not be used 1:1

but on a discounted basis.

The calculation of the brand fit gives clear indications as

to whether the new product matches the existing

brand. Questions relating to this can be included in the

questionnaire cost-effectively and evaluated. If, for

example, you ask people to name ten characteristics of


Turning Insights Out


28/76

28

the concept to be evaluated that are identical to those

of the existing brand, the correlation between the

evaluations shows the proximity of the concept and the

brand. If you enter the correlation value of the brand

fit on one axis of a chart and the willingness to buy a

product on the other axis, you can compare and evaluate

the different concepts (Exhibit 1). Once the product has

been launched, the actual sales can be added as a third

dimension. Over time, this produces a model that

the project manager can use to infer implications forother product developments.

Requirements and rules o customer-ocusedproduct development

No matter how clear the process essentially is, its

success is determined by the level of detail. Practical

experience shows that a lot of conditions have to be

satisfied if the five steps described are to produce not

just a one-off project but rather a continuous flow of

new, successful products as part of the corporate culture.

No matter how banal the factors may seem, they are

often not implemented systematically enough:

The systematic product development process has to take

place regularlyif it is to avoid being just a flash in the

pan repeating it periodically ensures that all involved

internalize the rules and that a learning curve emerges.

The steps in the process must have a simple structure

and be easy to understand. Particularly in high-tech

sectors like telecommunications or insurance, processes

are often excessively complex and are not put into practice

for this reason.

Product development needs someone with overallresponsibility.This person must be a senior manager

so that the product development process receives due

attention from top management for relevant decisions.

Too much do-it-yourself can be harmful. When developing

the ideas, the group benefits from the stimulus of a

professional external moderator who not only knows

how to manage the creative process but can also add

value by providing input on content. External experts

who are capable of delivering new ideas and perspectives

for the different steps in the development process over

and over again may equally be helpful.

The process described only fully blossoms if all roles

and responsibilities are similarly reflected in the overall

organization. Clear competencies, especially between

Sample results: all results fit the image of the core market well;

concepts 1 and 2 fit it best01


29/76

product management and marketing functions, are a

key success factor. Companies that are still making the

transition from a product focus to a strong customer

focus should take particular care that the reinforcement

of marketing functions is accompanied by a correspond-

ing revaluation of the product management role.

Control logic that reflects the areas of responsibility

(e.g., income statement, cost, number of customers,

time-to-market) of everyone involved in the product

development process is also indispensable for an

efficient, effect ive product development process. The

customer focus can then be quantified on the basis of

parameters like customer value.

Last but not least, the success of the product develop-

ment process depends on how intensively (and

how visibly) top management is involved in the product

development process and supports its focus

on customer needs. This may result in processes and

structures having to be reconfigured to focus

more squarely on customers needs.


Turning Insights Out 29

or whom to partner with should dif fer by region or

country depending on the local situation. Seeking

interoperabi lity with other IM players lowers the riskfor all parties.

Operators need to answer two questions. First, what

is the likely consumer demand for IM from niche

application to mass market? And secondly, how

should they address this demand from defending

against it, to introducing proprietary solutions, to

developing full partnerships with the Internet players?

We have identified a number of key steps to implement

IM, with interoperability as a key element. These

steps include partnership decisions; technology and

service decisions; handset deployment; and the

marketing and product development cycle.

Mobile instant messaging presents both a challenge

and an opportunity for operators. Players that act quickly

and cultivate Internet partners and interoperability will

benefit the most. Those pursuing over-defensive or

closed solutions will face diminished returns.

This article is an excerpt published originally in

McKinseys Telecoms Extranet (http://telecoms.

mckinsey.com).

By Nuno Goncalves Pedro, Bernhard Schmidt, andMichael Wilshire

Opportunities in Over-the-Top

Applications: Winning Mobile Instant

Messaging Strategies

While mobile instant messaging (IM) has been

embraced as an important extension of the widely

used desktop application, it also provides a potentialumbrella for a number of other mobile services,

including video, content, and even voice. IM services

on the desktop today form one of the largest commu-

nications networks worldwide. They are especially

popular with younger consumers, who also make

the most use of mobile SMS. There is clear evidence

that many users of fixed IM would also value a mobile

version of the service, although much of this demand

has been nurtured by over-the-top Internet players

offering services that are free at the margin to the

user, leaving telcos behind. Unfortunately, this could

cannibalize a large proport ion of the mobile industrys

profits as these over-the-top mobile applications

compete with traditional services (e.g., IM with SMS,

mobile VoIP with voice).

While the risks associated with mobile IM are real, it

could provide operators with a new revenue opportunity

if developed and managed careful ly. Internet players

will welcome new business models that allow them

to monetize their IM traffic more ef fectively and to

charge a mobility premium for mobile instant

messaging. Mobile operators can benefit strongly from

alliances and by creating interoperability with existing

online players as well as with other mobile operators.The choice of whether to partner with online players


30/76

30

***

The idea of customer-focused product development is

not a new one, but its success depends on what the enter-

prise makes of it: as in a host of other areas, implemen-

tation is decisive. Companies that manage to implement

their product development in recurrent, systematic

processes have a good chance of mastering the dualchallenge of efficiency and effectiveness. Developing

new products rapidly and cost-effectively can be the

all-important step forward, especially in interna-

tional competition. If, when doing this, large, complex

organizations also manage to combine the systematic

approach with the basic idea behind the visionary

approach even just a little bit they may have discov-

ered the key to success.

By Claudia Bnte and Haiko van Lengen


31/76


32/76


33/76

33

Part 2 Making the Unreal Real examined the impact

virtualization has had on the telecoms industry,

described the future strategic imperatives for telcos,

and revealed how incumbents can act to shield and

expand their current positions in the industry. This

art icle will explore ways to capture new business

opportunities in three specific areas: the mobile

Internet (mobile TV/search and commerce), Internet

protocol television (IPTV), and digital storage (Exhibit 1).

The telecoms industry rightly views virtualization as

one of the driving forces behind the successive waves

of growth that participants have enjoyed over the past

150 years. Clearly, virtualization creates discontinuity-

driven profitable growth opportunities on a regular

basis, and the expected explosion in bandwidth should

multiply them significantly over the next several years.

Mobile Internet: Broadband unbound?

A number of technical barriers have thus far impeded

the rollout of mobile Internet service, but the industry

continues to make progress in overcoming them.

In particular, the mobile bandwidth bottleneck keeps

fading, enabling new mobile applications that

provide improved user experience. Apples iPhone, for

example, represents the most recent step forward,

offering several mobile Internet applications ranging

from iTunes to Internet navigation of a quality that

would have been unthinkable in the past. And, while

the gap to fixed band-width remains, mobile service

can handle increasingly advanced applications and

services, which in concert with tarif f reductions, have

allowed data traff ic to increase. Besides mobile

bandwidth, storage capacity of mobile handsets has long

been a bottleneck.

Today, however, as storage capacity expands, new

multimedia capabilities increase, as does the ability to

store a larger collection of media in small devices.

Moreover, mobile screens continue to get better in terms

of resolution and quality, enabling new applications and

improved user experience, while software and process-

ing power both also keep improving, boosting usability.

In addition, device availability has increased due to the

proliferation of SIM cards, which Web-enable new devices

such as MP3 players (this trend heightens the need for

telcos to defend themselves against device manufacturer

attempts to capture new sources of traff ic and value-

added service revenue). While all these factors support

the rapid development of the mobile Internet, battery liferemains one big potential bottleneck because it hasnt

improved at the same pace as other key technologies. In

order to further elaborate on the opportunities of the

mobile Internet, the following pages will concentrate on

two of the biggest opportunities within mobile Internet

applications: mobile TV and mobile search.

Mobile television: A waiting solution?

Mobile TV typically offers a number of paid and free chan-

nels via a mobile handset, with customers expected to

use it primarily during waiting periods or while commuting.

Besides offering an additional revenue stream, mobile T V

provides the incumbent with an interesting possibility to

enhance the attractiveness of its mobile offers in a highly

competitive environment and hence, shield its existing

customer base while gaining new subscribers.

04 Moving Beyond


Moving Beyond


34/76

34

A workable mobile TV business model might include a

flat subscription rate for a set number of channels and

provide ways to capture a share of anticipated advertising

revenue. Mobile operators need to cooperate with content

owners, aggregators, and channels to make this model

work. The mobile TV market in western Europe is

expected to grow at nearly 110 percent annually from

2006, reaching EUR 5.1 billion in 2010. Possible threats

to this growth include mobile data substitutes that

crowd TV out of the market or increased take-up incarry-on TV devices (e.g., video-ready iPods or Sonys

PSP). To make mobile TV a success, telcos must address

questions across three dimensions: market/consumer

demand; technology; and the business model (Exhibit 2).

Each of these dimensions will be examined further.

A) Market/consumer demand. A number of market

discontinuities will affect opportunities in mobile TV.

Several will center on the need to build better networks

and devices namely, the rollout of high-speed mobile

networks, the fact that mobile devices will soon begin to

approach todays personal computer capabilities, and

the proliferation of WiFi networks. A second set of

trends surrounds evolving consumer behavior, including

the increasing amounts of time people spend using

entertainment services and the rapid growth of new

applications beyond voice and simple data, such as location

services, video mail, and social networking. Yet another

group of trends centers on increased competit ion.

Together, these trends signal new opportunities for

applications and mobile community services, the need

to approach integrated wireless/wireline players in an

integrated manner, and the fact that industry players

must act now, since time is running out.

In order to succeed in this increasingly competitive

environment, McKinsey & Companys analyses haveshown that companies must tackle unique barriers to

adoption in different markets. In Germany, for

example, consumer surveys reveal that price, quality,

and navigation capabilities emerge as the main barriers

to adoption. Lower prices are the top priority for all

user groups, regardless of technology or customer age.

McKinsey also learned that 3G users and younger-

segment customers value high sound quality and faster

download speeds, and that easy navigation is important

to non-3G users and people over 30.

B) Technology. Mobile TV can be delivered via three

different technologies. First, network-based 3G/4G

unicast is suitable for short (and longer) streamed video

clips or for live TV delivered via the wireless broadband

network. Bandwidth availability remains the limiting

factor, since downloading complete movies still

Key topics for telcos01


35/76

35

requires too much time. The two other technologies are

broadcast (i.e., mobile network-independent), which is

gaining momentum in Asia and doesnt rely upon the

mobile bandwidth; and cache & carry (i.e., video clips

that are downloaded to a PC first and then transferred

to a mobile device, such as a mobile phone or an iPod),

which is certainly the least sophisticated technology,

but is gaining popularity due to the significant increase

in podcasts.

C) Business model. Operators leverage mobile video

for multiple purposes. Broadband video can increase

ARPU, for instance: one operator is already seeing

S-DMB (satellite digital multimedia broadcasting)

watching times of nearly 60 minutes per day. Operators

can also leverage mobile TV to encourage churn-in

(i.e., attracting customers from other mobile players/

incumbents), with attackers in South Korea, for example,

planning to offer free TV to churn in subscribers from

incumbents. Yet a third use concentrates on providing a

platform for new services, with operators in Japan, for

example, developing next-generation interactive services

via mobile video, including shopping and polling.

Two competing mobile TV revenue models have

coalesced: subscription- and ad revenue-driven. In

the subscription model, users might pay a monthly fee

for general content and an additional fee for premium

programming or receive general content for free with a

monthly fee for premium service. Advertising-enabled

plays include advertising-supported free-to-air (FTA)

TV broadcasting or the offer of limited advertising on

subscription-based T V (although audience reaction

must be tested in the latter case). Subscribers typically

perceive mobile TV advertising differently from

traditional TV ads, due to length (e.g., 15-second spots

instead of 30) and lower run frequencies (e.g., 10 insteadof 20 per hour) due to the different viewing experience.

Because of these differences, mobile TV CPM (advertising

cost per thousand viewers) might be lower than w ith the

traditional experience.

The interests of other stakeholders will likely make

it diff icult for operators to make money in the mobile

music and video businesses. Content providers, for

example, seek a high share of content revenue and

price, thus limiting consumer choice via proprietary

DRM (digital rights management). Customers appear

unwilling to pay significant premiums for traff ic-based

instant gratification, and older subscribers are often

unable to use current features due to interface difficulties.

In addition, equipment manufacturers are increasingly

offering network-independent solutions using competing

platforms (e.g., Apple iPod, Yahoo! Music).

To create a mobile TV success case, telcos must answer questions along

three dimensions02


Moving Beyond


36/76

36

Overall, several hurdles must be overcome before mobile

TV can become widespread. These include issues

such as which technology will be adopted, who will

invest into mobile TV while demand is limited, can the

advertising model work, and most importantly is

there enough customer demand?

Search and commerce: Locating growth?

McKinsey expects mobile search and commerce revenue

to grow at nearly 75 percent annually between 2006

and 2010, reaching EUR 1.4 billion in western Europe.

Strategically, the incumbent rationale for mobile search

and commerce centers on seizing an emerging revenue

opportunity in the mobile market. Its clear that telcos

can rightfully assume natural ownership of mobile

search and commerce, due to their unique assets. These

include having controlled access via handsets and

the applications installed on them and owning

existing customer relationships. Furthermore, mobile

operators possess unique localization capabilities

and can locate customers using triangulation and cell-

identification techniques. Western Europe a lready ben-

efits from localization service and the United States is

evolving towards it with the rollout of handset

GPS enablement. Operators should thus be able to

leverage emerging customer demand for mobile search

and commerce.

Three basic types of mobile search and commerce exist.

The first stand-alone search capability focuses on

locating specific places or things (e.g., a nearby drugstore

while shopping) and utilizes localized search and mapping/

navigation systems. Mobile commerce enables the userto access online shopping opportunities on the go.

Finally, search and commerce combines the above two

capabilities to offer extended serv ices (e.g., being able

to compare pricing on plasma TVs while in a consumer

electronics store). Already, major online players are

investing to provide mobile search capabilities, with an

emphasis on location-based services.

McKinsey has identified four key mobile search and

commerce success criteria:

1. As local search engines become increasingly important

aggregators of local content and functionality, telcos

must develop the ability to skillfully leverage a small

number of appropriate local data sources (e.g., Yellow

Pages, directories).

2. Telcos must develop proprietary content and functio-

nality to differentiate themselves from pure aggregators.

They can secure broad and deep editorial capabilities

and user-generated content (i.e., innovative features/

functionality) through partnerships.

3. Telcos also need a way to drive traffic to local sites,

such as existing brand power, distribution deals, or

strong consumer awareness of products and services.

4. Finally, establishing relationships with local advertisers

covering nearly all market verticals in most geographic

markets will be important because small businesses are

underrepresented in online advertising and significant

upside potential exists for the player that cracks this market.

Besides offering significant opportunities, operators

should also be aware of the significant threats linked to

these applica

Date post:	06-Apr-2018
Category:	Documents
Upload:	kentselve
View:	217 times
Download:	0 times

McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale

Documents