-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
1/76
Telecommunications
Innovation@Scale
RECALL No3
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
2/76
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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.
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
5/76
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
6/76
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
7/76
7RECALL No 3 Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
8/76
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
9/76
9RECALL No 3 Innovation@Scale
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).
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
RECALL No 3 Innovation@Scale
Our Digital Future
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
15/76
15RECALL No 3 Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
16/76
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
RECALL No 3 Innovation@Scale
Making the Unreal Real
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
RECALL No 3 Innovation@Scale
Making the Unreal Real
3 strategic imperatives for telcos to defend core business and win
virtualization battles
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
RECALL No 3 Innovation@Scale
Making the Unreal Real
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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).
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
23/76
RECALL No 3 Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
24/76
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
RECALL No 3 Innovation@Scale
Turning Insights Out
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
RECALL No 3 Innovation@Scale
Turning Insights Out
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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.
RECALL No 3 Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
31/76
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
32/76
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
RECALL No 3 Innovation@Scale
Moving Beyond
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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
RECALL No 3 Innovation@Scale
Moving Beyond
-
8/2/2019 McKinsey Telecoms. RECALL No. 03, 2007 - Innovation@Scale
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