Summary: What is a ‘business model problem’? How can you tell when you’ve got one? What are the key business model challenges faced by telcos today, and how should they address them? (February 2012, Foundation 2.0)

• Below is an extract from this 14 page Telco 2.0 Report. The report can be downloaded in full PDF format by members of the Telco 2.0 Executive Briefing service here. 
• Additionally, to give an introduction to the principles of Telco 2.0 and digital business model innovation, we now offer for download a small selection of free Telco 2.0 Briefing reports (including this one) and a growing collection of what we think are the best 3rd party 'white papers'. To access these reports you will need to become a Foundation 2.0 member. To do this, use the promotional code FOUNDATION2 in the box provided on the sign-up page here. Your Foundation 2.0 member details will allow you to access the reports shown here only, and once registered, you will be able to download the report here. 
  
• We'll also be discussing business model innovation at the Silicon Valley (27-28 March) and London (12-13 June) Executive Brainstorms.
  
• To access reports from the full Telco 2.0 Executive Briefing service, or to submit whitepapers for review for inclusion in this service, please email or call +44 (0) 207 247 5003.

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Introduction

This short introductory paper provides a brief overview of:

• What a ‘business model’ is;
• How to spot a ‘business model problem’;
• Why business model innovation is important;
• The challenges to the telco business model, and how business model innovation helps;
• How STL Partners, the New Digital Economics Executive Brainstorms, and Telco 2.0 Research help to address these challenges.

NB. STL Partners focuses on ‘business model innovation’ in the digital economy, outlining the theory, opportunities and best practice in the field, and developing new strategies for clients. It also runs the Telco 2.0 and Digital Entertainment 2.0 Initiatives to research and promote new business models in those sectors.

What is a business model?

A ‘business model’ is a structured articulation of a company’s strategic approach to making money.

Building on academic research into business model design, STL Partners has developed a five-part Business Model Framework as a core analytical tool (see Figure 1). STL Partners uses this framework to help consider all the implications of changes made to a business model. As well as considering the activity of a single organisation, it analyses how companies interact to deliver value and the specific roles played by different players.

Figure 1 – STL Partners’ Five Part Business Model Framework

Essentially, a service offering is delivered to customers in the marketplace (in competition with alternative products and services, and within the context of legislation and regulation). The value network is the collection of companies that together deliver the service offering – so, for example, a value network may include content partners or network infrastructure providers. They are supported in their activities by technology, which provides the specific functionality required to deliver the service offering. The whole ecosystem lives or dies according to its ability to make money (finance), which also determines the capital investment flowing into the ecosystem. 

What is a ‘business model problem’?

A ‘business model problem’ can present a structural challenge to the sustainability of a company’s or an industry’s core approach to making money. In many cases, threats – and opportunities - are created by new business models coming into competition with existing ones.

Business model problems typically can’t be solved simply by employing a better sales manager, a price cut, or incremental cost cutting. Lateral solutions are needed which may involve new utilisation of existing assets or capabilities. The Roadmap to New Telco 2.0 Business Models report describes the strategic business model innovation opportunities we see for telcos.

How to spot a business model problem

Business model problems often manifest themselves as an insidious decline in business performance even in the absence of an obvious economic, operational or directly competitive threat. Further signs of a ‘business model problem’ include:

• New kinds of competition. Business model challenges are often posed by new entrants, either from adjacent markets or start-ups unconcerned by the erosion of core revenues. For example, telcos’ business models are being disrupted by Internet companies, as described in Telco 2.0’s latest research on Google, Apple, Facebook, Microsoft/Skype and Amazon.
• A surprising competitive proposition that addresses a need your business already serves, but in a new way. The nastiest type of surprise is someone else providing something for free to your customers that you charge for. Examples include Skype’s free VOIP calls, which compete with traditional PSTN telephony, and free newspapers (ad-funded) competing with paid-for papers. 
• Step changes in technology (e.g. LTE) and regulation which change the ‘rules of the game’, enabling new players to come into a market using new business models.
• Unmatchable execution. Some business model innovators succeed in creating operations and value networks of such scale and/or complexity that it becomes very difficult to compete directly with them. Examples include the scale of major retailers’ buying power (e.g. Wal-Mart, Tesco), Apple’s highly-integrated digital value network and Google’s dominance of the web search market. 

Why is changing your business model so difficult?

Figure 2 below summarises why many companies get caught out even if they know they face an issue with their business models.

Fundamentally, it is very difficult to embark on change when a business has been set on one successful business model for many years, has many assets wrapped up in this endeavour, and is still making substantial revenues and profits from this business – even if the need for change is obvious.

Figure 2 – Why is business model change so difficult?

Why is digital business model innovation so important?

The underlying digitalisation of products, services, information and communications is creating a commonality of skills and capabilities across many previously disparate players in the new hyper-connected digital economy. IT companies, technology vendors, telecoms companies, internet players, retailers and entertainment companies are starting to possess increasingly overlapping skills and assets and this leads them into more competition with each other.

Furthermore, new technologies e.g. smartphones, tablets, LTE / Fibre, Cloud Services, Apps, M2M are continually shaking up the digital economy and enabling radical business model innovations. Both consumer and enterprise end-users are responding by behaving in new ways that take advantage of increasingly mobile, on-demand, multi-device services.

Hence the ‘New Digital Economy’ is evolving at a pace and level of complexity that continually offers both threats and opportunities...

To access the rest of this 14 page Strategy 2.0 Report in full including...

• Apple, Google, Facebook - classic business model innovators
• The ‘Great Game’
• Disrupting the telcos
• ‘Under-The-Floor’ (UTF) Players
• Disruptions in Digital Entertainment and Commerce
• Driving - or defending against - disruptive innovations

...and the following report figures...

• Figure 1 – STL Partners’ Five Part Business Model Framework
• Figure 2 – Why is business model change so difficult?
• Figure 3 – The ‘Great Game’
• Figure 4 – Telco Business Model Innovation Challenges
• Figure 5 – The impact of ‘OTT’ players on telcos’ business model
• Figure 6 – Other ecosystem players, including potential ‘Under-The-Floor’ (UTF) Players
• Figure 7 – The Telco 2.0™ 'two-sided' telecoms business model
• Figure 8 – EMEA and APAC New Digital Economics delegates’ views of Telco 2.0 Strategies

...members of the Telco 2.0 Executive Briefing service can download it in full PDF format here.