Abstract:

The present chapter contributes to existing open innovation literature by presenting a case of study of a large telecommunication company engaged in incorporating external developers into its innovation processes.

Considering the dynamic capabilities framework this chapter conducts a strategic analysis of the telecommunications market. The results of this analysis justifies a growing tendency practiced by large telcos, this is to incorporate external resources into their own internal processes of development and innovation.

We believe the case of study hereby presented is interesting from a theoretical perspective as it validates the dynamic capabilities framework for strategic analysis in markets exposed to rapid, technologically induced, change.

Similar to other industries the markets related to the transmission storage and information processing, that is telecommunications, has 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.

To summarize 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. This paper presents a recent initiative conducted by Telefónica, one of the largest telecommunication companies worldwide, aimed at promoting innovation and high-value services and applications.

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 a large firm.

Keywords:

Open innovation, business models, telecommunication industry.