Open Business Models in the Telecommunications Industry

Introduction

Similar to other industries the markets related to the transmission storage and information processing, that is telecommunications, have evolved from a high-profit, capital intensive and highly concentrated into a highly fragmented market with increasing number of participants and, to a large extent, commoditized products. The technological convergence between computing and telecommunications is fostering the emergence of new players such as Google, Apple and more recently Facebook as formidable competitors to incumbent telcos.

As far as financial performance is concerned it is revealing that whereas stock markets has been punishing most large carriers and vendors for the past decade, it has consistently rewarded their counterparts, internet companies with higher stock valuations since 2004, Apple (+2879%), Google (464%) compared to Verizon (-0.64%), Nokia (-58%) or Ericsson (+11.91%) for an average appreciation in the Nasdaq technological market of +30.48%.

More important however is that traditional revenue sources for established telcos are reaching their maximum capacity therefore limiting growth potential at least in developed regions such as Europe or USA.

According to the Economist, developing countries which in 2000 accounted for around one-quarter of the world’s 700m or so mobile phones have overtaken developed countries accounting for three-quarters of an estimated 4 billion mobile subscribers in 2009, (Economist, 2009).

Being developing countries the next stop in terms of potential growth notwithstanding, these markets offer much lower marginal profits per user compared to traditional European or American consumers as well as increasing pressure from new vendors and local carriers able to compete with equivalent products and services.

Three main factors concur in shaping the actual telecommunications market, (1) stagnating or even diminishing revenues per user, (2) new internet players offering substitute services, (3) new low cost telcos operating in developing countries. As a result business models must adapt to a commoditized environment, refer to Figure 1.

Figure 1.

Market evolution and structure in telecommunications

The rest of the chapter is structured as follows: section 2 provides a brief strategic analysis from a dynamic capabilities perspective, section 3 describes open business models as an emerging form in the telecommunications industry, section 4 provides a case of study of open business model as practiced by Telefónica, one of the largest telecommunication companies worldwide, aimed at promoting innovation and high-value services and applications

Competing In Turbulent Markets

Classical theories of strategic analysis rely on the ability to optimize internal resources and achieve economies of scale to determine the success of a company. This thinking paradigm however fails to identify how to proceed in dynamic markets characterized by (1) open international commerce (2) rapid technological change (3) systemic technologies and (4) well-developed global markets for the exchange of goods and services, (Teece, 2009).

In dynamic markets, precisely the ones in which telcos operate today, long-term successful business models need to find and develop new opportunities, combine internal knowledge with external abilities as well as strive for continuous process improvement.

Under the dynamic capabilities paradigm as proposed in (Teece, 2009; Helfat, 2007; Penrose, 1957), sustainable advantages require more than the ownership of difficult-to-replicate assets such as large customer’s base, installed infrastructure or favourable access to capital. Being able to adapt to changing customer and technological opportunities, shape the surrounding ecosystem, develop new products and processes and implement viable business models are a must-have for firms.