Telecom companies continue to be under tremendous pressure. Wireline operators are losing margins and face increasingly fierce competition from new entrants on their turf. With a continued loss of voice revenues, they are moving toward broadband infrastructures at full steam. Wireless operators appear to be more and more threatened by extinction as well. In spite of growing markets, average revenue per user (ARPU) for voice is declining, and the only way to fill the gap is to introduce operationally costly data services. All in all, it has become imperative for telecom companies to reinvent themselves and adopt the nimbleness that makes their new competitors so successful. A very tangible path in this direction is a radical farewell to rigid product development processes, replacing them with much more agile, exploratory, and entrepreneurial approaches to materialize innovation.

Innovation is no easy task. It requires embracing a new way of doing business, where spotting and cultivating new technology is fundamental. This includes the systematic identification of new technologies and business models, detailed evaluation, aggressive prototyping, and, last but not least, implementation and operations. These are key differentiators where tomorrow's successful telecom leaders need to succeed.

Both wireline and wireless telecom companies are being increasingly pressured by market saturation, new competitors, eroding margins, and technological disruptions. The pace of change in each of these areas is significantly more intense than in other industries. Keeping up with this acceleration is a challenge. The pressure on wireline telcos intensifies with continued price erosion, mainly driven by new entrants that attack the incumbents on their home turf—voice communications. As voice becomes just another application that can be delivered over an Internet protocol (IP) environment, the potential for new competition is enormous. These trends, including the following, are happening globally:

• Market liberalization, new technologies such as voice over IP (VoIP), and new competitors are all shaping a potentially lethal environment for traditional landline operators.
• Access line erosion is continuing at a depressing rate. For example, the total number of residential lines in the United States today has already decreased to 140 million and is expected to fall to 120 million by 2010. The bet for the telcos is to fuel growth by getting a larger share of their customers' telecom/communication/entertainment wallet to compensate for a loss in market share and revenues.
• Enormous capital expenses (CAPEX) have been committed by the regional Bell operating companies (RBOCs) to escape this pressure and make triple play a reality. We estimate that more than $15 billion of additional CAPEX will be allocated by the U.S. TriBOC within the next three years. In order to materialize a return on these investments, it is imperative that the RBOCs launch an innovative and sophisticated portfolio of value-added services that is appealing to their clientele.

Figure 1: Western Europe's Fixed-Line Subscriber Trends and Forecast

The pressure on wireless operators is apparent and results mostly from increasing market saturation. The following are trends related to decreasing overall ARPU, mainly caused by erosion in voice, which cannot be substituted for by data services:

• In the most attractive markets that are characterized by high ARPU, growth is starting to slow down and competition is getting increasingly fierce.
• New entrants, especially mobile virtual network operators (MVNOs), threaten the existence of wireless operators beyond being a pipe.
• Voice ARPUs are stagnating based on increasing price pressure.
• The development and diffusion of data services were thought to be able to compensate for these reductions but have proven to be more costly than expected.
• The targeted data ratios of the total ARPUs, initially planned at around 40 percent in 2005, are still far behind initial expectations and linger around 20 percent in western Europe and 8 percent at maximum in the United States.
• Even in the most advanced wireless markets such as South Korea, mobile data services have not been able to create incremental ARPU; in fact, they are barely making up for the voice and interconnection erosion that is happening at the same time.
• In addition, investments in third generation (3G) infrastructures are increasingly threatened by new entrants—large and small municipalities, unconstrained by profitability requirements, are offering Wi-Fi at a fraction of the cost of a 3G data subscription, mostly for about $10 a month and in some cases even for free.

Figure 2: U.S. Mobile ARPU Trends and Forecast

New competitors such as the MVNOs or municipalities in the wireless case, or new entrants such as Skype in the wireline case, jeopardize the formerly dominant positions of market incumbents and are living proof that it is now imperative for telecom companies to differentiate themselves in order to avoid being perceived as a mere pipe. They have to be quicker and more efficient in order to stop losing ground. This means a shift in the legacy innovation paradigm, away from that characterized by an overall conservative approach, plus rigid and highly formalized processes, and toward agile and more entrepreneurial approaches where failure is an integrated part of the learning process that will ultimately foster innovation and differentiation.

As technologies, devices, markets, and competitors all converge, service providers of every type are facing a very new future. Cable and Internet players such as Yahoo, Google, and Microsoft are offering voice services, which in turn pressures wireline operators to offer video and Internet service just to stay at par. Convergence touches every aspect of how multiple industries do business, including managing the investment community, deploying new infrastructure, training the sales force, and integrating customer care.

The last area, customer care, is a significant area worth focusing on. Telecom companies will need to develop methods and procedures that encompass a wider spectrum of functionality. The knowledge base used by customer care reps will need to store info on a wider variety of services. Billing systems will need to be fine-tuned in order to integrate services and pricing plans, rather than merely printing multiple charges on a single page. The reps themselves will need to be cross-trained on multiple services. From billing inquiries to tech support for feature-rich devices, the customer care challenge is staggering.

As triple and quadruple play become real, the players will need to develop not just new processes for the technology they are deploying, but also new skills and strategies for the business they are entering. For example, cable operators entering the voice arena will need to learn new things such as how to develop calling plans or deal with customers who deny they made those 57 calls overseas. Likewise, telcos will need to learn about TV programming and selling commercials quickly.

Companies that can adapt and grow will win, offering a seamless, integrated, and innovative new portfolio of services that make their customers' lives easier and more cost-effective. Those that do not adapt will suffer dearly at the hands of competitors that were more successful at reinventing themselves.

Successful firms have embraced new paradigms to speed up the materialization of innovation, thereby building and maintaining a significant competitive edge. This has the potential to fundamentally shift the entire way in which innovation is materialized. The following are some case studies of rather big and successful companies that have embraced this new paradigm:

• Microsoft has developed a dedicated blog to better embrace customer feedback and opinions related to their products. Blogs are gathering momentum as a communication tool on the Internet—the numbers have increased from 5 million users at the end of 2004 to more than 50 million active bloggers during the summer of 2005. Microsoft deploys its blog in a systematic fashion to foster the interaction with its user base. The blog is being used more and more as a substitute for the annual user conferences, as it provides a much more timely and up-to-date platform for user interaction. For any new product initiative at Microsoft, it is now imperative to share new functionalities or significant changes with the MS blogging community. Microsoft's blog has more than 50,000 active users.
• The operating system Linux is another very tangible example of traditional approaches for innovation being made obsolete. Since the original placement of the raw software kernel by Linus Torvalds in 1991, the program has continued to evolve and, in 2003, achieved a 25 percent market share as an operating system (OS) for servers. Institutions and companies such as NASA, eBay, Mitsubishi, Sony, Google, and Motorola have deployed Linux on their servers and helped to make it a much tougher competitor for Microsoft Windows. A continually increasing user community contributes to the optimization and improvement of the program. Based on these continual improvements, there is an updated Linux version available on the net for download every four to six weeks. Similar on-line networks are being used by companies such as Procter & Gamble or Audi in order to speed up time to market and improve access to prospective customers.
• Cellon is a wireless phone design and systems integration company targeting the wireless handset industry. Cellon has helped phone manufacturers trim the time from design to market down to five months. The basis for this speed is modular designs, including chipsets, circuitry, seamless interaction, and cooperation with manufacturers. In this specific case, such an approach is a key differentiator, as the life cycle for a wireless phone today is only nine months. Some 25 million phones have been shipped to date based on Cellon's design and approach.

The impact of this is apparent—anticipating and embracing these new approaches will allow telecom companies to take the lead rather than fall behind. It enables them to face the challenge before them in the shape of new competitors that are eroding their margins. Ultimately, a more agile approach will allow them to regain the lead based on their superior and rich infrastructure inventory that promotes service innovations.

In the course of our project work in the past few years, Detecon has designed and implemented a very nimble approach that has been proven to deliver the desired results in various client engagements. This approach consists of the following five steps:

• Innovating—Based on a long track record of respective engagements, we have developed a dedicated approach to not only identify and assess technology and business model innovations for telecom companies, but to also "cut through the mist" and provide a thorough assessment of those technologies that are potentially disruptive. This scouting and identification work is based on a methodology that we have developed over the past eight years and a comprehensive database that features in excess of 1,000 innovative companies, technologies, and business models.
• Detailing and impact analyzing—In many cases, a more detailed and thorough analysis of a new technology or business model is required before the actual development dollars are committed. This optional step needs to happen in an efficient fashion in order to not delay the innovation momentum, providing the required data points based on the 80-20 rule.
• Prototyping—Today's Web technologies and increasingly commoditized electronic components have created a whole new range of opportunities to make innovation tangible. Rapid prototyping of both physical and virtual products will allow an audience to embrace new and revolutionary ideas much more quickly than a slide deck. This is especially true for a board-level audience, which will appreciate an illustration that not only shows certain features, but also inspires creativity related to additional features and functionalities.
• Implementing—This step requires more hands-on expertise and pragmatism than any other, which implies that it is also the inflection point where the "operations guys" take over to make sure that the concept and prototype go beyond imagineering. Detecon has been in the industry for many years, and it is a fundamental element of our approach that disruptive ideas will only flourish and live up to their potential if the individuals handling the implementation phase can rely on hands-on expertise.
• Operating—In many cases, new technologies fail due to a lack of capabilities and tools to operate them. For example, many mobile network operators have seen exuberant growth in their early years, and then neglected the importance of the evolution and sophistication of their platform and back office operations. The impact is often costly, and in order to keep subscribers happy, the operator employs an increasing number of customer care reps and incentives in order to retain customers. This is, of course, not a long-term strategy.

It is vital to remember that the innovation process is cyclical. Once a new service has been brought to market, the quest for even further innovation and improvement needs to begin. There is no status quo, given the increasingly fast pace of change in technology, competition, and customer needs.