Telefonica Digital: Only A First Step Towards Transforming The Telco Business Model

I recently attended an event in London where Telefonica shed more light on its Digital division. Digital is the central division driving innovation at Telefonica group and was formed in September 2011. However, Telefonica, despite the creation of Digital, still is somewhat in the old telco mold of inside-out innovation.

Digitization is undoubtedly a major theme affecting both society and the economy, bringing huge implications for communication, collaboration, consumption, and production. The big focus areas for Digital are e-health, digital content distribution, security, cloud, M2M, OTT comms, financial services, and advertising. In this respect, Digital is the right answer. My main observations from the event are:

  • Digital’s product development process is not end-user-focused enough. Digital does not seem to involve the actual end users as much as other solution providers, like for instance Colt (http://goo.gl/oBCO0). What was missing during most presentations was a better demand-analysis of its customer base. Digitization has big implications for company cultures, modes of operation, and ways of life. Businesses require significant assistance in preparing for these challenges such as change management. Digital did not explain how it plans to address these either through internal capabilities or through partnerships with business consulting firms like Deloitte. This means that Telefonica risks developing solutions that do not meet demand. Moreover, detailed customer case studies were not discussed, although Digital did present its portfolio development approach.
  • Readiness for cultural change shows through in the HTML5 browser-based Operating System approach to app usage. Perhaps the most interesting initiative Digital announced was its collaboration with Firefox regarding the development of a browser-based approach to app usage. This initiative is based on similar thinking that we encountered during a recent meeting with Google Enterprise (http://goo.gl/Dbd9Q). Telefonica helps driving the app market as one of the main benefits of a browser-based approach are a more developer-friendly platform by having to write applications only once for usage across several OSes rather than for each OS separately.
  • Digital looks well-positioned to deal with selective M2M opportunities. For instance, Digital pursues several promising initiatives in the emerging e-health sector. First, it provides B2B telemonitoring solutions for chronically ill patients. In the UK, this offer is aimed at GPs who have budgets that they receive from the National Health Service for a given population they look after. Thanks to more cost-efficient e-monitoring solutions, GPs can undertake additional medical services within the same budget. Second, Digital will launch B2C monitoring and emergency solutions directly for individuals, such as for frail persons. Telefonica looks positioned to take on the role of managing these emerging ecosystems.
  • Digital investigates opportunities with OTT based communication solutions. TU Me, with features similar to WhatsApp, is truly OTT and network agnostic, but seems at odds with the Joyn initiative (http://goo.gl/MSxB8) and risks alienating Telefonica’s partners in Joyn. Another offer, TU Go, is like a more flexible traditional phone service but offers billing that is tied to the user’s existing tariff schemes. But TU Go is limited to Telefonica users. I believe TU Go is unlikely to succeed as it reflects a closed user group approach rather than a true open collaboration platform. Overall, the TU Go approach reflects old-school telco thinking and does not go far enough such as to embrace network-agnostic solutions such as Deutsche Telekom’s videoconferencing offering, VideoMeet (http://goo.gl/Envp4).

Digital as the transformation engine remains closely integrated into Telefonica group. Digital pursues an experimental and innovation-focused strategy. For instance, management compensation mostly centers on product innovation and brand building rather than financial KPIs. Also, Digital’s revenue target of €5 billion against group revenues of €63 billion (2011) looks not terribly ambitious. Digital plans to double its revenue base of currently €2.4 billion to €5 billion by 2015.

Overall, Telefonica compares reasonably well to its direct telco peers in terms of strategic positioning and innovation management. However, Telefonica is not miles ahead of its peers and certainly misses tackling some of the most pressing issues, most notably focusing on the empowerment of business processes and moving towards network agnostic solution provisioning.

In order to be successful going forward, carriers need to embrace a much more end-customer-driven strategy. With some important exceptions, Telefonica still is pursuing a strategy that relies too much on developing products in the hope that customers will buy them as opposed to develop solutions that reflect very specific requirements. Consumers look for solutions that allow them to access communication, collaboration, and entertainment in a siloed fashion such as WhatsApp, Facebook, Dropbox, or Skype irrespective of device and network provider. Business is looking for solutions that support particular business processes beyond plain communications. Telefonica did not clearly demonstrate how its products and solutions support specific business processes.

Digital is a sensible move as it aims to address important challenges facing the traditional telco business model. The general direction of Digital is right, but the speed of transformation might still be too slow.