Everyone is aware of the carriers' dilemma: To meet the exponential growth in data traffic, mobile carriers must spend ever more money to finance the build out of their wireless networks (both access and backhaul). Yet this spending and plant upgrade must be done while carrier data revenues are growing much more slowly (estimated at only 3% annually) than the increased data traffic they must support. Tiered pricing, new business models with revenue sharing (e.g. eReader downloads over 3G networks), new apps and services (e.g LBS, health monitoring, etc) have all been suggested But with their often stodgy corporate cultures and bureaucracies, can carriers innovate on their own and execute promptly? If not, they are in danger of being marginalized and dis-intermediated, becoming bit pipe providers who don't share in the profits of the mobile app and M2M bonanza. And the same pressures exist for wire-line and fiber facilities based carriers. Is collaboration and investment in start-ups a better solution for telcos to grow revenues and fund network expansion? Several analysts think so.
Telecom Analyst Mohit Agrawal has suggested that "carriers collaborate with all players in the ecosystem to remain relevant and get their fair share of new revenue streams and profits." Mohit recommends that carriers invest in start ups offering new services on mobile networks in order to collaborate on compelling new services with future growth. A few carriers have already started to invest in the new venture, e.g. Eventful, a location-based calendar service, announced a $10 million round that included money from Telefónica. Pelago, which is developing a mobile social network called Whrrl, raised $15 million, with some of it coming from Deutsche Telekom’s venture capital arm, T-Ventures. In such a carrier- start- up or partnership, Mohit envisions carriers that offer mobile app types of services as aggregators that facilitate access to Internet content rather than creating it.
Derek Kerton, Principal Analyst of the Kerton Group, is a firm believer in start-ups working with carriers. At the Sep 16th Telecom Council Carrier Connections Summit.
Derek stated that entrepreneurs and start-ups now have excellent opportunities to work with both small and large carriers. In his opening keynote on Carrier Innovation, Derek said that "carriers have field offices in Silicon Valley to facilitate partnering, technology transfer, internal evangelism, and strategic investment. For Silicon Valley companies seeking to build relationships with carriers, there is no better place to start than the local representatives, who can become your internal champions, and can route you through to the right groups back at their head office." One of his suggestions for telecom targeted start-ups takes a page from the "Green" movement: "think globally and act locally. At least to start…" The telcos have "missed a couple of boats, learned a lesson, and don't want to miss another" so are now much more receptive to working with entrepreneurial companies that can help them innovate.
Carriers like Swiss Telecom and KT have started new partnership programs, created new facilities and test beds to encourage partnerships with start-up companies with promising new technologies. Indeed, at this Telecom Council Carrier Connections meeting many telcos described their innovation programs. These included: Sprint, NTT DoCoMo, AT&T, BT, SingTel, Swisscom, SK Telecom, Bouygues Telecom. Telecom Council Director Stephanie Owyoung, said: “Of the 10 carriers represented in the Carrier Connections agenda, every one of them is growing their innovation scouting activities this year. Between partnership and direct-to-market options, I expect 2011 to be a big year for telecom entrepreneurs.”
Mr. Kerton believes the smaller carriers are more nimble (meaning they can move services to market quicker), but the larger carriers offer a larger revenue opportunity for the right application or mix of services. The larger carriers have "their own set way of doing things," he said. Moreover, many new technologies that start-ups might bring to the telco are currently being developed in a large carrier's lab. This is particularly true if the new technology or software impacts a carrier's network infrastructure (access, inter-office, or core) and management systems. So start-ups might find themselves competing with their potential carrier customer's home grown, lab developed technologies. Kerton says, "That's a tough fight to win."
Derek writes that "Working with carriers is getting easier, but it still takes time. The carrier innovation funnels (in Silicon Valley) might start by looking at 500 start-ups a year. They whittle that down to around 40 companies that they (the telcos) are willing to champion and present to their home office business units. In the end, only 3-7 of those companies end up making partnerships with the telco in any given year. The similarities to Venture Capital funnel statistics are obvious, he says. Some of those 500 companies are ones that had already presented to the carrier in prior years, but had become more mature or changed their pitch. Also, the 500 companies are widely variable in quality. Some of them have just concept ideas of a founder or chief architect, while others are 50-person companies with existing customers and carrier-grade operations. Obviously, the latter group has much better odds."
The face-time a start-up might get with a carrier depends on the type of product or service offered. If it's in the mobile app space, the telco is likely to meet with 500 or so companies at a time (think developer conference). This is because the new revenue opportunities per partner are very lean for low cost mobile apps. But if a start-up has a new technology that improves or augments a telco's core network, reduces their costs, or disrupts existing business, then a one-on-one meeting and engagement is possible, according to Kerton.
Continuing, Kerton said, "Although a carrier deal can be very lucrative, and can immediately boost distribution for any company, start-ups should enter the process with the right expectations. Carriers have created amazing programs in the past 5 years, both for developer and apps (Developer Programs, DevCons, web tools, SDKs), and for deeper partnerships (labs, test beds, outreach offices). For mobile app developers, this means very fast distribution of content, but for companies that seek deeper relationships, deal making with carriers still moves slowly by Silicon Valley standards."
The Silicon Valley based Telecom Council is certainly driving carrier connections with start-ups. Regular telecom ecosystem meetings put various stakeholders in the room to discuss timely trends. Their Service Provider Investment Forum (SPIF) selects "start up of the year" nominees from more than 100 startups each year. More than 20 global carriers with over 2 billion total subscribers vote for winners in eight categories focused on innovation, engineering excellence, disruptive technologies, communication solutions, fixed and mobile opportunities, and contributions to the future of telecom. The Telecom Council will introduce the nominees to journalists and selected bloggers attending the fourth-annual edition of ShowStoppers @ Mobile World Congress, 13 Feb. 2011, in Barcelona. SPIFFY winners will be announced later in February 2011. Start up winners of the 2010 SPIFFY awards included: Lithium Technologies, Cooliris, Funambol, Micro Power, Edgewater Networks, Gogobeans and 4Home. In addition, Verizon was cited as the "Most Supportive Carrier" last year.
So there does appear to be light at the end of the tunnel for start-ups with promising new technologies and applications aimed at various types of telcos. And that could totally revitalize the very worn out telco business model of selling more bandwidth, getting more mobile subscribers or increasing ARPU. We will be tracking this trend and reporting on what we observe in the weeks and months ahead.