Opening up
How R&D is changing in the
telecommunications sector today
An Economist Intelligence Unit report

sponsored by


Opening up
How R&D is changing in the telecommunications sector today

Preface

Opening up: How R&D is changing in the
telecommunications sector today investigates how
technology and telecommunications firms are dealing
with the process of innovation. The report was
commissioned by SAS.
The Economist Intelligence Unit bears sole
responsibility for the content of this report. The
Economist Intelligence Unit’s editorial team executed
the online survey, conducted the interviews and
wrote the report. The findings and views expressed in
this report do not necessarily reflect the views of the
sponsor.
The research drew on two main initiatives:
● The Economist Intelligence Unit conducted a wideranging online survey of senior technology and
telecoms executives worldwide during February
2008. In total, 327 executives took part.
● To supplement the survey results, the Economist
Intelligence Unit also conducted in-depth

interviews with senior executives from a range of
technology and telecoms companies globally.
Duncan Campbell-Smith was the author of the report
and James Watson was the editor.
We would like to thank all the executives who
participated in the survey and interviews for their time
and insights.
April 2008

© The Economist Intelligence Unit 2008

1


Opening up
How R&D is changing in the telecommunications sector today

Executive summary

F

ew industries can rival the rate of innovation
seen within the telecommunications sector
over the past decade. In 1998, mobile phone
companies such as Nokia boasted of high-end models
with built-in FM radio and infrared connectivity. By
2007, many phones offered digital cameras and music
players, video conferencing, wireless networking and
the capability to browse the Internet and respond
to e-mails. Accordingly, phone networks have been

upgraded to handle rising volumes of voice, video and
data traffic, even as users increasingly route their calls
over the Internet instead. Less than five years ago,
a start-up company released the first version of its
software that allowed users to make free phone calls
between any two computers. Today, Skype is used by
some 276m people to make voice or video calls, share
files and send money.
It has been a busy decade to keep up with. This
is especially true for the thousands of companies
responsible for these breakthroughs—or for those
aiming to enter the telecoms market. As the rate of
innovation has increased, so have the pressures and
demands placed on those responsible for this R&D
effort. Inevitably, this has forced them to change
the way they work. This report from the Economist
Intelligence Unit, sponsored by SAS, aims to explore
these changes in greater detail and the overall impact
on the innovation process. Some of the key findings
within the report include:

1. Open Innovation,
The new imperative for
creating and profiting
from technology, Henry
Chesbrough, Harvard
Business School Press,
2003.

● Telecoms firms are increasingly embracing Open

Innovation. The traditional R&D model in telecoms,
as in other industries, was to keep research tightly
under wraps as companies developed new products
or services. But this approach is giving way to a more
open one, dubbed Open Innovation (OI) by business

2

© The Economist Intelligence Unit 2008

professor Henry Chesbrough1, which instead seeks
to engage suppliers, corporate partners, academia
and customers in the R&D process. This extends
to intellectual property (IP), where companies
profit from others use of their own ideas, while also
licensing ideas from elsewhere. The majority (74%) of
telecoms companies polled for this report agree that
the way they innovate today is significantly different
from how they approached innovation a decade ago.
● Open Innovation involves closer links with a
growing number of external partners... Shifting
to an OI model will typically mean fostering more
of a venture-capital environment internally, while
cultivating stronger links with start-up firms,
academic researchers and commercial partners. Over
the past two years, companies typically partnered with
two to five other organisations, although about one
in four tied up with just one or none at all. Looking
ahead, the number of those who won’t partner
will decline (from 10% to less than 6%), while the

proportion of those partnering with more than five
other organisations will increase (from 23% to 35%).
However, survey respondents also expect this to prove
more expensive and labour-intensive.
● …but most of all with customers. Perhaps most
important of all will be the expansion of the role
played by customers in OI. More respondents to this
survey (63%) say they have involved customers in the
innovation process than any other of ten suggested
approaches, including partnering with other firms,
acquiring new technologies or financing a start-up.
Previous liberalisations of the telecoms marketplace
saw first equipment manufacturing and then network
services transformed by new entrants. The impact of


Opening up
How R&D is changing in the telecommunications sector today

customers on the innovation process may prove to be
equally transformational.
● But opening up the R&D process often requires
organisational upheaval. Large companies with a
long history in the industry will need to revise their
organisational structures and processes significantly
if they are to pursue OI successfully. Years of
upheaval have prepared many of them for this next
big change. But newer, smaller companies with
less of an organisational legacy may yet prove—like
newly modernising countries with less of a legacy

infrastructure—to be keen competitors at the
innovation game. R&D managers will have their work
cut out for them.
● Most telecoms firms have already had new rivals
enter their market through new innovations—
or expect this to happen soon. Within the
communications sector as a whole, the boundaries
between telecoms and computer software have been

steadily eroding. About two-thirds (64%) of firms
polled say that a new rival has entered their market
through a new innovation over the past five years,
with most of the balance expecting this to happen
in the next five years. Just 8% don’t believe this will
happen. In this environment, companies are looking
to OI as a key resource—helping them to identify
future revenue streams, speed up their response to
technological change and come up with ideas for new
products and services.
Over the coming decade, technological developments
in the telecoms market will continue their rapid
evolution. Companies seeking a source of innovation
will look to tap into ideas from all over the world.
Indeed, today’s emerging markets look likely to
be a major source of tomorrow’s ideas. Take Indiabased Spice, for example. The telecoms firm recently
introduced a mobile phone costing just US$20, in
response to local customer demand. Expect more
innovations from unexpected places.

© The Economist Intelligence Unit 2008


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Opening up
How R&D is changing in the telecommunications sector today

Introduction

T

en years ago, with projected sales for mobile
phones and anything connected with the
Internet already pointing vertiginously
upwards, it was still possible for leading companies
in the telecommunications industry to see topsecret laboratories as their ticket to the future. New
products were generally being kept behind closed
doors, as ever, until the marketing people were ready
to unleash them. Senior research executives might
attend industry conferences for a welcome change of
scene and some dutiful networking. But they needed
to be wary of disclosing any proprietary information.
When Nicolas Demassieux left the academic world
to join Motorola in 1997, he was surprised to find
that in some cases its employees were discouraged
from attending conferences at all: the risk of leaking
valuable titbits, in the view of his US-based seniors,
far outweighed the chances of learning anything that
Motorola did not already know.
Today, as director of its broadband wireless

research, Mr Demassieux is one of the key figures
shaping Motorola’s whole approach to technology
and innovation. He looks back at the late 1990s as
the end of the road for the big R&D laboratories that
dominated the global telecoms industry through
most of the second half of the 20th century. Ten years
on, he and his industry peers around the world must
now work within a completely different paradigm.
It is universally known as Open Innovation (OI) and
has been winning converts rapidly in recent years.
Adapting to it is now prompting changes in the
telecoms industry that are transforming the R&D
process out of all recognition—and reaching beyond it
into every aspect of the business.
The essence of OI is an acceptance of the need to
collaborate with other parties—suppliers, academic
4

© The Economist Intelligence Unit 2008

researchers, industry partners and perhaps above
all customers—on the development of new products
and services. How this collaboration will work differs
from one project to the next and needs constant
reappraisal. But the objective in every case is to
harness ideas and expertise across a wider horizon
than even the largest company could contemplate
on its own. Matt Bross, BT Group’s chief technology
officer, talks about seeking innovation “beyond the
boundaries of our payroll”. And where this can be

fused with internal innovation, the result will be
waves of successive innovations that catch up with
customers’ constantly changing needs almost as soon
as they appear (or, indeed, rather sooner if needs can
be anticipated). Mr Bross likes to call it “innovation at
the speed of life, not the speed of technology”.
To the extent that this means innovation is led
by incremental, pragmatic adjustments rather than
blockbuster inventions, the phenomenon is nothing
new. But OI has lifted the concept to a new level,
by bringing some of the most advanced ideas in the
world’s applied research laboratories into direct and
two-way contact with mass-market consumerism.
In a world of universal access to computers and the
Internet, millions of mobile handset-users have ideas
about innovation and ways of sharing them. The OI
phenomenon is not unique to the telecoms business,
but few others exemplify its impact so dramatically.
In a sense it marks a third, climactic stage in
the long-drawn-out liberalisation of the old global
marketplace run by state-owned telecoms monopolies.
In the first, it was opened up to outside equipment
manufacturers, who transformed the hardware. In the
second, its networks and international cables were
opened up to outside service providers, who helped
to ensure that, when the time came, the blessings of


Opening up
How R&D is changing in the telecommunications sector today


Over the next two years, how do you expect the pace, cost and complexity of researching
and developing new products/services to change?
(% respondents)
Increase significantly

Increase moderately

No change

Complexity of R&D
40

44

11

Pace of R&D
34

49

14

Cost of R&D
21

56

15


Source: Economist Intelligence Unit survey

the worldwide web were quickly made available via
broadband to millions of ordinary customers. And now,
in the third stage, it is wide open to the new ideas and
vaulting demands of those same customers.
The broad consequence for industry executives is
a quantum step-up in the pace of change, bringing
increased complexity (and some additional spending)
in its wake. In our survey of more than 320 executives,

74% of the respondents agree that their approach to
innovation is already significantly different from the way
they handled it five to ten years ago. When asked about
their expectations of change in the next two years,
there was roughly an 80/20 split among respondents
regarding pace, cost and complexity: around 80%
think change will be increasing either moderately or
significantly under all of these three headings.

© The Economist Intelligence Unit 2008

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Opening up
How R&D is changing in the telecommunications sector today

From telco to softco


T

raditional telephone companies were large
organisations dominated by linear processes
and silo-bound structures. Adapting them to
the world of OI is taking time: there are many internal
barriers that need dismantling before colleagues
can pool their work together and lift the boundaries
between themselves and the outside world. “Everyone
in the company really has to believe that the OI model
is going to work,” says Mr Demassieux.
Most of the world’s large telecoms groups, both
equipment manufacturers and service providers, have
set off in search of new and better R&D models, with
real momentum since about 2004. More than 40%
of our survey respondents estimate that over 10% of
their employees are engaged on innovative projects,
and a sizable minority, 23%, think the numbers

Which of the following approaches has your company primarily
taken to develop new products/services over the past two years?
Select up to two.

stretch to over one-fifth of the workforce. A new breed
of “innovation directors” has emerged at corporate
level, charged with remoulding the old structures
and processes. Theirs is a challenging task, however,
and it has really only just begun. Whatever the new
familiarity of OI as a popular buzz phrase, traditional

attitudes will be hard to dislodge. Our survey invited
respondents to indicate the extent of their R&D
collaboration with outside partners across a range of
seven categories. Nearly 30% chose an alternative:
continuing to develop new products and services
entirely in-house.
Leaving behind this model in favour of OI is
described by Mr Bross at BT as “turning telco into
softco”. It is not widely expected to save on R&D costs:
one-half of respondents say that they have increased
R&D spending over the past two years and even more
(59%) expect it to rise over the next two years, with
many anticipating an increase of more than 10%. Some
of the conspicuous features of the process include:

(% respondents)
Developing new products/services partly in-house, but relying
on partners for some parts of this process
53

Developing new products/services entirely in-house
28

Developing new products/services in partnership/
collaboration with other firms
24

Developing new products/services in partnership/
collaboration with our customers
18


Focusing on developing concepts/architectures, while
relying on partners for the rest
15

Relying on mergers and acquisitions to bring in new products/services
13

Licensing intellectual property from third parties
10

Outsourcing all/most of our R&D to third parties
4

Other
1
Source: Economist Intelligence Unit survey

6

© The Economist Intelligence Unit 2008

● Setting up internal “incubation units” to pursue
new ideas within a kind of venture-capital
environment. This will provide access to funding
and technical support, even though senior
management knows that barely a quarter or so of
the ideas, at best, will ever be carried through into
commercial launches.
● Being alert to start-up businesses, not just in

telecoms but anywhere that a promising idea
has taken off with a possible future application
in telecoms. Their funding needs will invariably
present opportunities for an enterprising telco
to step in as an investor or perhaps assume full
ownership.


Opening up
How R&D is changing in the telecommunications sector today

● Entering mutually supportive relationships with
applied research teams at the top universities
around the world. These typically used to be
sponsorship deals for blue-sky thinking that carried
a “long-term” tag, but they are now just as likely
to be jointly managed investigations targeted
at specific problems and (or so management will
be hoping) a short-cut to clever solutions in the
near to medium term. Around one-half of our
survey’s respondents acknowledge active links with
academic research.
● Forming strategic partnerships with other large
companies, not just from the telecoms industry but
from adjacent sectors such as television, computer
games and publishing. Our survey indicates a
big drop in the proportion of firms showing no

Case study: Telefónica’s
Internet laboratory

Young people in particular—armed with
laptop computers, mobile phones, the
power of the web and plenty of time at
their disposal—have become a potent
ingredient of any successful R&D effort.
One striking reminder of this has been an
extraordinary event held annually since
2000 in the Spanish city of Valencia and
known as the Campus Party. Around the
clock for seven days, thousands of (mostly
young) participants exchange ideas on
the latest crazes in computer simulation,
communications software and all things
digital. The Valencia event is sponsored
these days by Telefónica, the giant Spanish group with telecoms businesses across
Europe and Latin America. Russ Shaw was
appointed as Telefónica’s first director of
innovation in 2007. Sizing up the assorted

interest in partnerships or acquisitions over the
next two years, compared with the past two years.
Also, rather than ignoring intellectual property
(IP) being developed by others, companies are
encouraged to draw on it. Equally, internal patents
can be licensed to other firms as a source of
revenue (rather than, as is often the case, using
it as a defence mechanism against another firm
developing the same IP).
Above all, perhaps, the process involves a readiness
to accept that individuals, coming together

from disparate corporate and non-corporate
backgrounds, may now hold the key to the most
successful brainstorming sessions. BT talks about
“agile working” groups—drawing on technical,
development, marketing and sales skills all in one

techno-heads attracted to the Campus
Party from companies, consultancies, universities and bedroom start-ups, he thinks
it “encapsulates the essence of Open Innovation”.
He originally worked for O2, a UK
mobile operator that was acquired by
Telefónica in March 2006. Since then, and
still branded as O2, the business has been
able to harness customer feedback for OI
projects over the Internet, in ways that
have often surprised Mr Shaw. At the start
of 2007, for example, O2 squirreled away
on its website the prototype of a proposed
new mass-market product called Blue
Book. It has been designed to straddle
mobile phones and the internet, allowing
users to copy information (including
photographs) off their handsets and onto
their websites at the touch of a key or two.
Within weeks, despite being quite hard to
locate, the service attracted thousands
of experimental users. By December
2007, it had 40,000 subscribers. Their

comments, says Mr Shaw, have assisted

O2 in numerous ways—helping, for
example, to iron out some of the initial
security concerns among users, which the
company might otherwise have seriously
underestimated in the promotion of the
product (finally launched in March 2008).
Another example has involved a much
more structured approach to customers: in
November 2007 a ring-fenced development
team put “O2 Wallet” into the London
market for a trial period with 500 users.
It is a mobile service that includes a
travel card capability for the city (under
the Oyster card aegis) and a Barclaycard
component. The trial will last six months,
and customer feedback via the internet is
already prompting significant refinements.
Mr Shaw sees the process as the kind of
internal incubation that suits OI perfectly:
“it is all about setting up an environment in
which managers can get away from the dayto-day operating business while remaining
extremely close to their customers”.

© The Economist Intelligence Unit 2008

7


Opening up
How R&D is changing in the telecommunications sector today


How many new products/services did your firm bring to market over the past two years—and how
many does it plan to introduce in the next two years?
(% respondents)
None

Less than 3

3 to 6

7 to 20

More than 20

Don’t know

Past two years
5

27

30

22

15 1

Next two years
2


18

28

34

13

5

Source: Economist Intelligence Unit survey

room—that can bring a new dimension of flexibility
to its development programmes, delivering a better
end-product faster and more cheaply that in the past.
As recently as 2005, agile working accounted for
less than 15% of the development prospects inside
BT. By January 2008, the corresponding figure was
70%. The company also taps external expertise with
“hothouse” discussions—and in deference to some of
the most knowledgeable customers in the market, the
company has not been slow to invite the participation
of teenagers at schools in the vicinity of its main UK
research laboratories.
More broadly, every teenager with a view now
has the power to share it with a million of his or her
peers (see box: Telefónica’s Internet laboratory).

8


© The Economist Intelligence Unit 2008

The Internet has left the telecoms industry with no
option but to treat customers as an integral part of
the innovation process. Almost two-thirds of the
respondents to the survey confirm that they have
involved customers in the innovation process over the
past two years. As this suggests, Internet feedback is
playing a steadily greater role in new product launches
everywhere, and there is going to be no shortage of
these. The number of new products headed for the
marketplace looks set to rise inexorably. Among the
survey respondents, about one in three expect to
launch between seven and 20 new products in the
next two years, up from about one in five over the past
two years. This increase exactly matches a drop among
those anticipating few or no launches.


Opening up
How R&D is changing in the telecommunications sector today

Raising the bar

O

f course, people across the industry know
that OI is about much more than lastminute market trials for emerging products.
To really prove its worth, OI must help telecoms
companies to meet three principal objectives: help

find new ideas; accelerate new product development;
and create stronger links with customers.
● First, it needs to stimulate fresh thinking about
future sources of revenue for an industry that has seen
the profitability of its traditional services worn to a
thread by competition: in many markets, including the
US, basic voice and data services are now increasingly
free to the end-user. Telecoms firms must find ways of
linking remarkable new digital technologies to their
mass-market customer bases, through partnerships
where appropriate, or risk losing their customers to
breakthrough ideas from their rivals, which include
some of the most innovative companies on the planet.
The danger is evident already in the extent to which
the boundaries of the traditional telco sector are
being blurred. In the survey, about two-thirds (64%)
of respondents say that, within the past five years,
they have seen firms entering their marketplace for
the first time on the back of a new innovation, and the
survey garnered plenty of examples, such as Apple’s
entry into the mobile handset market.

underlying today’s leading-edge products often dates
back decades. For example, the coding technology
at the core of the mobile communications standard,
CDMA, was originally a military technology designed
during the second world war. Contrast this with the
range of life cycles assigned by survey respondents
to their average product: a bell-curve distribution
runs from less than three months to over three years,

with the median cycle lasting 12-18 months. When
asked about the future trend, one-half expect to see
life cycles shorten further in the next two years and
one-fifth of respondents think that they will shrink
by at least 30%. Mr Demassieux at Motorola says it
is hard to see how the time needed to establish a
basic communications standard like 3G could ever be
compressed to much less than ten years. “But we must
learn as an industry how to use OI to help us reduce
the gestation period on new product ideas from 10-15
years down to three years or less.”
What is the average amount of time it takes for your firm’s
products/services to reach the maturity phase of their lifecycle
in their particular market?
(% respondents)
Less than 3 months
2

3 to 6 months
9

6 to 9 months
16

9 to 12 months

● A second main objective of OI is to accelerate the
whole business of turning blue-sky thinking into
marketable products and services. The rationale
for good old-fashioned joint ventures has always

included a sharing of costs and a pooling of ideas, but
an added dimension of OI is the way that non-linear
processes might be used to move the whole R&D effort
along much more quickly. The fundamental research

16

12 to 18 months
21

18 to 24 months
14

24 to 36 months
9

More than 36 months
7

Don’t know/Not applicable
6
Source: Economist Intelligence Unit survey

© The Economist Intelligence Unit 2008

9


Opening up
How R&D is changing in the telecommunications sector today


To what extent do you agree or disagree with the following?
(% respondents)
Strongly agree

Agree

Neither agree nor disagree

Disagree

Strongly disagree

Customers have a much greater impact on our innovation process today than in the past
31

47

16

4 1

Source: The Economist Intelligence Unit survey

● The third main objective is that OI must help
companies to identify what Russ Shaw, director of
innovation at Spanish telecom group Telefónica
calls “differentiated customer experiences”. This is
where a much expanded role for customers in the
innovation process might bring real dividends for

the marketing department. As ever, they are looking
for new products that offer far more than just a lower
price or even a better route to “convergence”—the

10

© The Economist Intelligence Unit 2008

merging, that is, of hitherto separate services. The
marketing folk want to find new products with which
customers will develop some emotional affinity. It
has happened in other high-tech markets: witness
the way in which businesspeople especially have
come to identify so strongly with a branded product
such as RIM’s ubiquitous Blackberry. OI will really
prove its mettle if it can help to lead to this kind of
breakthrough.


Opening up
How R&D is changing in the telecommunications sector today

Today new technology, tomorrow a new organisation

A

dopting OI with these goals in mind, however,
is simply not compatible with the risk-averse
culture that characterised the old telecoms
industry when so much of it was berthed alongside

national post offices. For many managers, perhaps
most, the learning process is only just beginning. They
will need, for instance, to contend with the difficulties
of handling far more partners at the same time,
juggling different timelines and conflicting priorities.
They will face HR problems in the workplace, where
younger engineers will inevitably adjust to an
outward-facing (and heavily Internet-influenced)
culture rather more easily than will most of the
greybeards. And in place of the old assumption that
nothing would be sourced externally that could be
made in-house, they will have to confront some tricky
make/buy decisions over the R&D budget—not least in
persuading in-house engineers to part with money for
research by third parties.
In fact, novel make/buy decisions will crop up
at every point of the value chain as the switch to OI
gathers pace. The essence of a more open approach
is that successive collaborative projects will need
handling in different ways. Every corporate function
from finance and marketing to the management of
intellectual rights and corporate communications
will therefore need continuous reassessment. This
prompts many people in the industry to observe that

“innovation” is not just about the introduction of new
technology. As Mr Bross at BT puts it, “the innovation
genie is out of the bottle”. In the survey, respondents
were asked how far innovation would actually amount
over the next two years to a refinement of existing

business processes. Almost 50% see it being “strongly
focused” in this direction, a notable shift from the
29% who think the same is true of the past two years.
Accordingly, there is strong endorsement for the
view that business-process innovation would be
increasingly important over the next two years.
But then, standard business practices have been
under pressure from all sides and not just from a need
to rethink R&D methodologies. With a rising portion of
income derived from mobile advertising, for example,
many firms have needed to revise their basic revenue
model: 58% of respondents agree that they have done
so in the past two years or would be doing so in the
next two. In short, no industry is more exposed than
telecoms to the need for that fundamental break with
past organisational norms that is now being so much
discussed in management circles. As the strategy
guru, Gary Hamel, puts it in the first 2008 edition of
The McKinsey Quarterly2, “The Internet is making it
possible to amplify and aggregate human capabilities
in ways never before possible … [so] we’re going to
have to turn a lot of our legacy management beliefs
on their head.” But does this mean that younger

To what extent is innovation at your firm focused on refining existing business processes (eg, enhanced billing process)
or developing new business processes?
(% respondents)

Strongly focused on
refining business processes


Somewhat focused on
refining business processes

Little or not at all focused on
refining business processes

Don’t know/
Not applicable

Past two years
29

46

20

5

Next two years
48

33

12

6

Source: Economist Intelligence Unit survey


© The Economist Intelligence Unit 2008

2. The McKinsey Quarterly,
McKinsey & Company,
2008.

11


Opening up
How R&D is changing in the telecommunications sector today

Has your company revised its revenue model over the past two
years, or does it plan to do so within the next two years, to
reflect the rapidly changing telecommunications landscape
(eg, switching to an ad-based revenue model)?
(% respondents)
We already did so more than two years ago
9

Yes, we did so in the past two years
31

Yes, we plan to do so within the next two years
27

We are considering this, but have no plans to do so right now
14

We have not changed our model and don’t plan to do so right now

9
Source: Economist Intelligence Unit survey

companies with less of a legacy to worry about
might enjoy a lasting advantage? Given the heavily
structured nature of the traditional telco and the
appearance of so many sprightly new competitors
since the 1990s, it is a potent question for the
industry.

12

© The Economist Intelligence Unit 2008

Those inside the biggest global groups can make
a fair case that the fixed-line business model has
been under threat for so long that their teams are
now well and truly open to new ideas. Some smaller
mobile operators, by contrast, have yet to see their
core voice and SMS traffic volumes peaking: their
businesses, it is implied, are less flexible than some
outsiders might suppose. And along with their legacy
management beliefs, most of the big groups have
of course inherited plenty of cash. They can use it to
speed the realignment of their organisations, not
least by purchasing successful mobile operators. No
doubt acquisitions will go on being used to perk up
the innovation score sheet, especially where they
might bring direct benefits to the bottom line as
well as bright ideas. As Mr Shaw confirms, “If, in the

process of looking for venture-capital targets, I come
across a company that has a more efficient way of
delivering an existing service, I’m certainly going to
take a closer look.”


Opening up
How R&D is changing in the telecommunications sector today

Strategy before structure

W

ithin more than one successful upstart
company, however, there is an evident
conviction that their lack of past baggage
can be a powerful source of advantage. No upstart
has grown faster than Skype, the Internet-borne
communications company that was launched in 2003
and then bought by eBay for US$2.6bn in 2005:
it had 276m subscribers at the last count. Stefan
Öberg heads up the development of its telecoms and
business products and sees OI as a critical part of
the company’s DNA: “Openness was built in from the
beginning.” With no central infrastructure of its own
and a complete reliance on the Internet, management
knows the business will live or die depending on its
ability to keep up with its customers.
Thus, it was quick to take note when a surprisingly
large proportion of its subscribers wanted to use

a web-cam device to make video telephone calls.
Early in 2006, it launched a prototype service, Video
Calling, and then worked closely with a network of
1,500 or so customers on addressing the early flaws.
Their feedback—and a close partnership with an
external hardware developer, Logitech—led directly
to the launch late last year of High Quality Video,
a much refined service with a new and far superior
camera. Skype managers think video conferencing
has enormous potential. They can pursue successive
rounds of innovation without needing to invest
heavily each time in a fresh infrastructure, and they
can work within a culture wholly committed to the
next big change. As Mr Öberg points out, “We don’t
have to deal with the risks of cannibalisation.”
He and his colleagues are inclined to compare
current trends in the telecoms industry with the
evolution of the railways. In the beginning was total
vertical integration: those who built the track also

ran the trains. But maintaining the infrastructure
and looking after the passengers came eventually to
be recognised as different businesses. Integration
was left behind, so that modern customer-facing
travel companies could offer their services on a safe
network owned and operated by others as a basic
utility. The parallel outcome in telecoms will see
software-driven companies (like Skype) developing
ever better applications for the end-user, while the
big telco groups settle down to making good money

as guardians of the cable networks. Open Innovation
will be critical to the first group, much less so to the
second, and different aptitudes at OI will have much
to do with sorting out the one group from the other.
“Many of the big global groups are struggling with this
emerging divide,” comments Mr Öberg. “They do need
to change their business model.”
The notion that time is fast running out for the
old vertically integrated telecoms industry is readily
endorsed by Anastassia Lauterbach. She is the head
of strategy at T-Mobile International, a subsidiary
of Deutsche Telekom. The introduction of new
networks based on Internet protocols has led, she
says, “to a whole new eco-system”—a horizontal
marketplace, that might indeed be teeming one day
with new applications from every household name in
the software business. But to envisage an industry
polarised between infrastructure companies and
consumer-led providers is to predict a future with a
fundamental flaw. Those who operate the networks,
she says, will also run the customer call centres. And
why would a T-Mobile centre be interested in taking
calls from irate customers of third-party services?
Or to put the problem in a wider context, why would
a network operator with billions invested in its
infrastructure be happy to let asset-light rivals steal
© The Economist Intelligence Unit 2008

13



Opening up
How R&D is changing in the telecommunications sector today

a march on it in building hugely valuable consumer
brands? Ms Lauterbach sees it as one of the biggest
strategic issues facing her peers, and one of the
least understood. “Its importance is being hugely
underestimated within the industry itself as well as
within the broader marketplace.”
Like her counterpart at Skype, she thinks
business models are therefore in urgent need of
reappraisal. Unsurprisingly, however, she draws a
different conclusion. The biggest network operators,
like T-Mobile’s own parent group, must sustain
the competitive position derived from their core
knowledge of the networks—their accumulated

14

© The Economist Intelligence Unit 2008

expertise in the “middleware” of enabling devices, as
well as the hardware of cables and relay stations—and
then learn to focus on the portfolio of selected
applications that underpin their brand with end-users.
This will mean making difficult choices. Ms Lauterbach
believes that most of the leading operators have only
begun to think seriously about this in the past year or
two. But no amount of innovation, open or otherwise,

will compensate the operators in the long run for a
lack of strategic direction. First they must decide on
their focus, before turning their resources to building
the innovative operating systems and services that
their customers will expect from them.


Opening up
How R&D is changing in the telecommunications sector today

Conclusion

T

he Internet has transformed the process of
innovation in telecoms. This is quickening
the pace of technological change, putting
traditional organisational structures under great
pressure and raising some fundamental strategic
issues for the industry. It is also, of course, speeding
along its globalisation, but it is worth noting
here that national markets can still retain unique
characteristics. And as with companies, so with
countries: some have moved much more quickly
than others to ensure that their telecoms markets
are open to innovation. Those with the least to lose
have been among the first to ditch the old ways. It is
no coincidence that the software engineers behind
Skype were based in Tallinn, the capital of Estonia
(population: 1.3m). The company’s development

centre is still located there, in a country that
abandoned much of its decrepit fixed-line network
in the immediate aftermath of the Soviet empire’s
collapse and now boasts one of the most sophisticated

wireless telecoms marketplaces in the world. Perhaps
the same kind of leap-frog phenomenon will recur
now in other places, from Latin America to southern
Asia. So where, among the largest countries, should
leading telecoms operators be looking hardest at
consumer behaviour for a clue to future trends? Not to
continental Europe, according to our survey. The US
and Japan are seen as the best bellwether markets,
followed by China, South Korea and India.
But whatever the trends, senior executives in
the telecoms industry seem universally agreed that
the companies best placed to keep up with them are
very likely over time to be those that can genuinely
embrace Open Innovation. Less clear is the extent to
which they have yet taken to heart the organisational
and strategic implications—and without a doubt the
transformation that many anticipate on the back of
OI has only just begun. “Our industry has a long way
to go,” says Telefónica’s Mr Shaw. “We are only on the
cusp of this.”

© The Economist Intelligence Unit 2008

15



Appendix: Survey results
Opening up: How R&D is changing in the telecommunications sector today

Appendix
In February 2008, The Economist Intelligence Unit surveyed 327 senior technology and telecoms executives
from around the world. Our sincere thanks go to all those who took part in the survey. Please note that not all
answers add up to 100%, because of rounding or because respondents were able to provide multiple answers to
some questions.

What is your company’s main line of business?
(% respondents)
Full-service integrated telecommunications provider
24

IT services provider

What percentage of your workforce is currently involved in an
innovation project (eg, spending at least half of their time
working on a relevant project aimed at identifying a new
product/service, or upgrading a current product/service or
process, or a combination of both)?
(% respondents)

14

None

IT software provider


1

14

Less than 3%

Telecommunications equipment manufacturer

21

11

3% to 4%

Telecommunications software provider (eg, billing, inventory management)

14

8

5% to 9%

IT hardware provider

18

6

10% to 19%


Mobile-only telecommunications provider

20

6

20% to 50%

Value-added services provider (eg, billing, customer care)

14

4

More than 50%

Fixed-line telecommunications provider only

9

3

Don’t know

Consumer electronics manufacturer

3

3


Cable operator
1

Satellite provider

Which of the following most closely describes your firm’s efforts
to conduct basic (eg, fundamental or theoretical) scientific
research, if any?

1

Other
6

(% respondents)
We don’t engage in basic scientific research at any level. All our
innovation is based on existing technologies (eg, applied research)

Approximately what is your company’s total R&D spending
as a proportion of its annual revenue?

38

We support mixed teams of researchers, including both in-house
corporate researchers and also external academic researchers

(% respondents)
Less than 1%

11


1% to 2%

13

3% to 4%

17

5% to 6%

12

7% to 9%

7

10% or more
Don’t know

16

© The Economist Intelligence Unit 2008

33
6

22

We don’t directly invest in basic research, but we closely monitor

ongoing research within the academic community and seek to acquire/
license relevant technologies/start-ups emerging from them
18

We conduct basic scientific research in-house
14

We sponsor academic laboratories conducting basic scientific research
7


Appendix: Survey results
Opening up: How R&D is changing in the telecommunications sector today

How has the proportion of revenue your company spends on R&D changed over the past two years,
and how is it expected to change in the next two years?
(% respondents)
Increase by more than 10%

Increase 1% to 10%

No change

Decrease 1% to 10%

Decrease by more than 10%

Don’t know

Past two years

18

32

35

9 1

5

Next two years
22

37

25

6

3

8

How many new products/services did your firm bring to market over the past two years—and how
many does it plan to introduce in the next two years?
(% respondents)
None

Less than 3


3 to 6

7 to 10

11 to 15

16 to 20

More than 20

Don’t know

Past two years
5

27

30

15

5

10

5

2

15 1


Next two years
2

18

28

Which of the following approaches has your company primarily
taken to develop new products/services over the past two years?
Select up to two.

19

13

5

And what will it focus on over the next two years?
Select up to two.
(% respondents)

(% respondents)
Developing new products/services partly in-house, but relying
on partners for some parts of this process

Developing new products/services partly in-house, but relying
on partners for some parts of this process

45

53

Developing new products/services entirely in-house

Developing new products/services entirely in-house
28

Developing new products/services in partnership/
collaboration with other firms
24

Developing new products/services in partnership/
collaboration with our customers
18

Focusing on developing concepts/architectures, while
relying on partners for the rest
15

29

Developing new products/services in partnership/
collaboration with other firms
24

Developing new products/services in partnership/
collaboration with our customers
23

Focusing on developing concepts/architectures, while

relying on partners for the rest
17

Relying on mergers and acquisitions to bring in new products/services

Relying on mergers and acquisitions to bring in new products/services
13

15

Licensing intellectual property from third parties

Licensing intellectual property from third parties
10

8

Outsourcing all/most of our R&D to third parties

Outsourcing all/most of our R&D to third parties
4

Other
1

Don’t know

6

Other

0

Don’t know
1

1

© The Economist Intelligence Unit 2008

17


Appendix: Survey results
Opening up: How R&D is changing in the telecommunications sector today

How many companies did your firm either acquire or partner with in the past two years, with the primary intention of bringing new
technologies, products or services on board? And how many does it intend to acquire and partner with over the next two years?
(% respondents)
None

1

2 to 5

6 to 9

10 to 20

More than 20


Don’t know

Acquire
Past two years
46

17

27

4

3 1

3

Next two years
30

14

27

6

3 2

17

Partner with

Past two years
10

15

50

10

7

6

3

Next two years
5

9

41

16

7

7

16


Which of the following approaches has your company carried
out in its pursuit of innovation over the past two years?
Select all that apply.

Which of the following metrics does your firm’s senior
management primarily use to account for or measure R&D
progress? Select up to three.

(% respondents)

(% respondents)

Involving customers in the innovation process

ROI from new products/services launched
63

Collaborating with third parties to develop new products/services

46

Proportion of revenue derived from new products/services

54

Working with third parties to turn an innovation
process into working products/services
34

Identifying a specific technology/innovation process

and then acquiring or licensing it
25

Providing a significant internal bonus for employees
developing a successful product/service
23

Sharing an internal innovation process with third parties
to help deliver new breakthroughs
16

Financing third party start-up companies or academic institutions
13

Giving employees a certain percentage of work time
to pursue their innovations of their own choice
12

Investing in a highly speculative technology/innovation process
in the hope of a major breakthrough
12

Launching a specific technology incubator to develop start-ups
8

Providing a prize of some sort to spur innovation from outside the company
7

Other
1


18

© The Economist Intelligence Unit 2008

37

Total number of products/services currently under development
23

Feedback on new products/services from internal or
external review groups and/or customers
18

Total spending on R&D
16

Ratio of ideas that are developed into commercial products/services
16

Total time taken for an innovation to generate revenue
16

Number of patents filed
15

Number of proposals created for new products/services
14

Time taken from inception to launch for new products/services

14

None; we don’t seek to measure R&D in a quantifiable way
9

Total headcount in R&D function
7

Don’t know/Not applicable
6

Other
1


Appendix: Survey results
Opening up: How R&D is changing in the telecommunications sector today

In your view, has your company’s strategy of acquisition and/or partnership been broadly
successful, in terms of developing new innovations?
(% respondents)
Highly successful

Somewhat successful

Neutral

Somewhat unsuccessful

Highly unsuccessful


Not applicable

Acquisitions strategy
11

31

18

8

4

29

Partnerships strategy
20

46

17

9 2

6

To what extent is innovation at your firm focused on refining existing business processes (eg, enhanced billing process)
or developing new business processes?
(% respondents)


Strongly focused on
refining business processes

Somewhat focused on
refining business processes

Little or not at all focused on
refining business processes

Don’t know/
Not applicable

Past two years
29

46

20

5

Next two years
48

33

12

6


How would you rate your company’s overall performance with the new products/services it introduced over the past two
years, in terms of commercial success, customer satisfaction and technological breakthroughs?
(% respondents)
Highly successful

Somewhat successful

Not at all successful

Commercially
30

63

7

Customer satisfaction
42

55

4

Technological breakthroughs
28

58

14


Has your company revised its revenue model over the past two
years, or does it plan to do so within the next two years, to
reflect the rapidly changing telecommunications landscape
(eg, switching to an ad-based revenue model)?

Which of the following metrics does your firm track?
Select all that apply.

(% respondents)

Percentage of capital invested in innovation-related activities

We already did so more than two years ago

Number of employees in an innovation or entrepreneur-related role

(% respondents)

51
36

9

Percentage of time that employees spend on innovation-related projects

Yes, we did so in the past two years

29


31

Percentage of employees for whom innovation is one of their key goals

Yes, we plan to do so within the next two years
27

We are considering this, but have no plans to do so right now
14

20

Percentage of executives’ time spent on innovation-related issues,
rather than day-to-day operations
18

We have not changed our model and don’t plan to do so right now
9

Don’t know/Not applicable

Percentage of managers with an innovation-related
background and/or training
9

10

Other
2


Don't know/Not applicable
22

© The Economist Intelligence Unit 2008

19


Appendix: Survey results
Opening up: How R&D is changing in the telecommunications sector today

Has your company had a new competitor from outside your traditional sector enter your market through a new innovation (eg, a
software firm entering the voice communications business)? Has your firm entered a new market through the same mechanism?
(% respondents)
Yes, this has happened
in the past five years

Yes, this has happened
in the past two years

No, but we expect this to happen
within the next two years

No, but we expect this to happen
within the next five years

No, and do not expect
it to happen

Don’t know


Another firm entering our market through a new innovation
23

38

17

10

8

4

My firm entering a new market through a new innovation
15

35

26

9

9

5

To what extent do you agree or disagree with the following?
(% respondents)
Strongly agree


Agree

Neither agree nor disagree

Disagree

Strongly disagree

Don’t know/ Not applicable

The way we innovate today is significantly different from how we approached it five to ten years ago
30

44

15

5 1

4

Customers have a much greater impact on our innovation process today than in the past
31

47

16

4 11


Innovation costs us a lot more today than it did five or ten years ago
15

31

23

21

4

5

Our company only has a vague sense of how effective any particular innovation initiative is
7

31

25

25

10 2

Business process innovation is increasingly important for our company’s future success
38

45


12 1 2 1

Innovative marketing is where we put most of our attention (eg, new ways of promoting products/services), rather than actual product or process innovation
15

30

26

22

7 1

Over the next two years, how do you expect the pace, cost and complexity of researching
and developing new products/services to change?
(% respondents)
Increase significantly

Increase moderately

No change

Decrease moderately

Decrease significantly

Don’t know

Pace of R&D
34


49

14 2 1

Cost of R&D
21

56

15

71

Complexity of R&D
40

20

© The Economist Intelligence Unit 2008

44

11 2 1


Appendix: Survey results
Opening up: How R&D is changing in the telecommunications sector today

How long is the average lifecycle of your firm’s products/services today, compared with what it was two years ago?

And how do you expect it to change in two years’ time?
(% respondents)
Much longer
A little longer
(at least 30%) (10%-29%)

About the same
(+/- 10%)

A little shorter
(10%-29%)

Much shorter
(at least 30%)

Don’t know/
Not applicable

Today, compared to two years ago
6

19

28

29

11

7


20

7

In two years’ time, compared to today
8

10

26

30

What do you see as the most significant innovation challenges
facing firms in the telecommunications industry today?
Select up to three.

What is the average amount of time it takes for your firm’s
products/services to reach the maturity phase of their lifecycle
in their particular market?

(% respondents)

(% respondents)

Pace of technological change in the industry

Less than 3 months
46


Dealing with disruptive technologies (eg, WiMax, VoIP)

2

3 to 6 months
44

Determining an appropriate business model for new products/services

9

6 to 9 months

34

Distinguishing breakthrough new technologies from over-hyped innovation

16

9 to 12 months

32

Constant downward pressure from customers on pricing

16

12 to 18 months


24

Choosing which companies to partner/collaborate with

21

18 to 24 months

24

Sustaining R&D investment through a business/economic downturn

14

24 to 36 months

19

Dealing with the shortage and/or cost of talent

9

More than 36 months

19

Collaborating with multiple industry stakeholders (eg, operators, handset makers)

7


Don’t know/Not applicable

11

6

Understanding how to integrate content appropriately
9

Knowing when to “fail” and switch R&D direction
8

Meeting regulatory requirements
7

Ensuring that new products/services are not infringing on existing patent rights
5

Other
2

In your opinion, which of the following countries do you think
provides the strongest indicator of what future consumer trends
might look like for the telecommunications industry?
(% respondents)
US
20

Japan
19


South Korea
14

China
14

India
12

UK
10

France
2

Germany
2

Canada
1

Other
4

Don’t know
4

© The Economist Intelligence Unit 2008


21


Appendix: Survey results
Opening up: How R&D is changing in the telecommunications sector today

About the respondents

What are your main functional roles?
Please choose no more than three functions.

In which region are you personally based?
(% respondents)

(% respondents)
Asia-Pacific
33

Strategy and business development
45

Western Europe
General management

31

39

North America
Marketing and sales


16

29

Eastern Europe
IT

8

17

Middle East and Africa
R&D

7

16

Latin America

Operations and production

3

16

Finance
14


What is your title?

Information and research

(% respondents)

13

Customer service
Board member

9

4

Risk

CEO/President/Managing director

6
23

Procurement

CFO/Treasurer/Comptroller

3

5


Legal

CIO/Technology director

3

6

Human resources

Other C-level executive

2
11

Supply-chain management

SVP/VP/Director

2
23

Head of Business Unit

2
9

Head of Department
19


22

Other

© The Economist Intelligence Unit 2008


Appendix: Survey results
Opening up: How R&D is changing in the telecommunications sector today

What are your company’s annual global revenues in US dollars?

How has your company’s EBITDA changed each year, on average,
over the past three years?

(% respondents)

(% respondents)
Decrease
12

$500m or less

51

$500m to $1bn

10

$1bn to $5bn


18

1% to 5% increase

$5bn to $10bn

5

5% to 10% increase

$10bn or more

16

No change
10
19
21

10% to 20% increase
11

Over 20% increase
12

Don’t know
14

How has your organisation’s share price changed over the past

three years, if applicable?
(% respondents)
Over 100% increase
8

51% to 100% increase
5

31% to 50% increase
10

11% to 30% increase
12

Less than 10% increase
6

No change
4

Less than 10% decrease
5

11% to 20% decrease
4

Over 20% decrease
7

Don’t know/Not applicable

38

© The Economist Intelligence Unit 2008

23


Whilst every effort has been taken to verify the accuracy
of this information, neither The Economist Intelligence
Unit Ltd. nor the sponsor of this report can accept any
responsibility or liability for reliance by any person on
this white paper or any of the information, opinions or
conclusions set out in the white paper.

24

© The Economist Intelligence Unit 2008