MOVING FORWARD IN REVERSE

03 04
WINSIGHTS
MOVING FORWARD IN REVERSE
Why U.S. Telecom Firms Should Forget the Past
FROM DUMB PIPES
TO SMART SERVICES
We do not envy U.S. telecom CEOs. At a
time of rapid change, potent forces chip
away at their traditional business model.
Surrounded by device makers, content
providers, social networks and an array of
disruptive technologies, the carriers face a
daunting challenge. They must find a way
to transition from owning and operating
so-called “dumb pipes” to creating new
portfolios of smart network services.
Owning a slew of dumb pipes was a good thing as they
formed the heart of the telecom business – a source of
healthy rents and toll from voice traffic that flowed
through. And telecom carriers made all real-time
communication happen. But, now they run the risk of
marginalization. A stark example is the Apple iPhone that
runs on the AT&T network. Customer loyalty is higher
to Apple than AT&T. Given the phone's versatility,
interface, and apps, they credit Apple for everything they
admire but blame AT&T for dropped calls and dead
zones. So, it's a win-win for Apple and not so much
for AT&T.
Every business finds it tough to abandon the way they
traditionally defined themselves. However, in order to turn
things around, U.S. carriers will have to ditch their
devotion to infrastructure ownership and embrace a new
business model.

05 06
WINSIGHTS
Though not easy, telecom CEOs can draw lessons from “reverse innovation” or breakthrough ideas that
originate in emerging markets and are powerful enough to conquer the developed world.
THE SOLUTION
We would like to propose a solution. In a
fast-changing industry, massive infrastructure
investments can burden balance
sheets and cut flexibility. U.S. telecom
companies should turn themselves into
lean and agile virtual organizations – ones
built for 21st century challenges. Though
not easy, telecom CEOs can draw lessons
from “reverse innovation” or
breakthrough ideas that originate in
emerging markets and are powerful
enough to conquer the developed world.
A case in point – India's telecom boom!
HOW INDIA COPED?
To say that the Indian market grew fast
would be an understatement. From 1994
to the present, telecom coverage across
the population grew from less than one
percent to 53 percent. Over the past
decade, subscription grew from 6 million
to 690 million (land lines plus mobiles), a
35 percent compound annual growth rate.
Astonishing numbers even without
factoring in the market constraints of an
underdeveloped and unreliable power grid
and a vast, poor, and predominantly rural
nation outside of the major urban centers.
Indian telecoms staggered under the
burden of network building costs and
meeting overwhelming demand for
services as government liberalized
regulatory policies to stimulate market
growth. Competition for customer
acquisition was so cut-throat that telecom
calling plans seldom covered costs.
Something had to give. Bharti Airtel, an
entrepreneurial upstart whose
competitive strengths lay in marketing and
customer acquisition, was the first to
recognize that infrastructure-building
diluted its core advantage. In 2004, it
developed a strategy to outsource
network installation, maintenance and
service to Ericsson, Nokia, and Siemens;
and got IBM to take over the internal IT
systems and services. These steps freed
Airtel from the sustained and huge upfront
investments that a growing market drove.
It also enabled them to focus on core
competencies. Another Indian provider,
Aircel, adopted a similar model working
with Wipro and Alcatel-Lucent.
BENEFITS OF
OUTSOURCING
Outsourcing is a well-established hedge.
With increasing speed, yesterday's core
becomes today's commodity. But even
mature technologies serve the needs of
important customer segments. Once firms
identify non-core activities and assets that
can safely be managed by capable third
parties, they accomplish these
valuable economies:
• They can offload the burden of non-core
network ownership (maintenance, repair,
and replacement of infrastructure)
• They pay only for the services that they
and their customers consume
• They are able to reserve more enterprise
capital for investment in core activities
• And, they liberate management bandwidth
to focus on highest-value strategies
Structure contracts (Airtel's deal with
IBM) that eschew fixed fees or
“time-and-material” models, instead
including profit-share incentives, make
service providers into “partners” in a
client's success. Once Bharti Airtel made
its move, other Indian telecoms followed
suit. Freed from the management drain of
network and infrastructure issues, the
carriers innovated on service offerings
tailored to Indian customer preferences.
WILL IT WORK IN
THE U.S.?
Certainly, there are differences in the ways
that Indian and U.S. markets work. Bharti
Airtel, with its entrepreneurial roots and
little experience in telecom, was ideologically
unconnected to past industry
practice and identity. Nonetheless, we
firmly believe that benefits similar to what
Airtel and its competitors achieved
from network outsourcing are available
to U.S. telecoms – if only they can let
go of the past and find inspiration in
reverse innovation!
In fact, one U.S. telecom has already
moved. Sprint Nextel signed a seven-year
deal to outsource its network operations
to Ericsson, a contract worth about
$5 billion. European wireless carriers are
negotiating deals in growing numbers.
When such deals occur, a snowball effect
typically produces greater economies of
scale for both clients and providers. But we
believe that the main – and most strategic
– benefit that U.S. carriers will realize is
the flexibility to control their own destiny
in an increasingly complex ecosystem.
Times of uncertainty and complexity are
often the enemies of courage. On the
other hand, they are also the times when
courage is most generously rewarded.