Telecom innovation strategy for smart home

Telecom Innovation

Strategy for Smart Home

Aliaksandr (Sasha) Baradyntsau

alex.barady@gmail.com

Amsterdam Business School

2017

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The paper is going to analyse a fast growing but challenging, slowly maturing but still uncertain smart home market and incumbent telecommunication and cable companies strategic positioning for competition in this field.

The internet of things wave of technologies is coming and going to change people’s life in a similar way computers and smartphones have changed before. The market, however, is highly fragmented with many start-ups and early offerings from established technologies companies, which do not resonate with the consumers expectation yet, who straggle to understand what particular problems does the smart home solve for them. The investment into the connected devices, which are considered by most to be expensive toys, is still significant in compare to an average family income. Analysts predict a quick adoption when devices become more intelligent and affordable for clients, although few doubt that smart home is coming and going to have huge implication both on consumers and business. Once widely adopted, smart home would open a door to new business models and prosperity for companies that embrace them ahead of the market.

That market development, not mature yet but with the promising future, brings profound challenges and vast opportunities to many industries including telecom firms, who control internet connection to people homes, but usually unable to monetise that relationship beyond charging consumers for the broadband usage. In order to get a significant smart home market share, telecom enterprises need to learn from their previous mistakes during internet boom and invest into new innovative propositions for consumers before the market becomes mature. They need an innovation strategy, that will leverage their unique position and relationship with current consumers and, if correctly played, could put them ahead of competitors. We are going to analyse possible telecom strategies to grasp those opportunities in the connected home market, design innovation framework taking into account telecom companies specific position on the market and propose management recommendations in implementation of those findings.

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Abstract / Executive Summary ... 2 Chapter 1: Market and Trends Overview ... 4 Introduction ... 4 Smart Home Market Overview ... 6 Underlying Theory ... 8 Chapter 2: Telecoms and Smart Home ... 9 Telecom Market Positioning ... 9 Smart Home As A New Revenue Stream ... 11 Telecom Challenges in Smart Home ... 13 Telecom Smart Home Strategy ... 15 Chapter 3: Framework Application ... 16 Smart Home Value Creation ... 16 Smart Home Value Capturing ... 23 Smart Home Types of Innovation ... 27 Chapter 4: Innovation Strategy ... 30 Routine Innovation ... 30 Disruptive Innovation ... 31 Radical Innovation ... 33 Architectural Innovation ... 34 Chapter 5: Recommendations ... 36 Short-term Recommendations (0-12 months) ... 36 Mid-term Recommendations (12-36 months) ... 37 Long-term Recommendations (more than 36 months) ... 39 Appendix ... 40 Articles ... 40 Reports ... 40 Table of Figures ... 41

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INTRODUCTION

In the last decade internet disrupted many traditional industries. Technology companies like Amazon, Google, Netflix and others have changed forever retail, publishing, advertisement, transportation, communication, media, entertainment and other businesses. Traditional companies have failed to respond to the changes brought by internet adoption, which had an impact on their revenues, margins and sometime even business continuity. Internet technologies combined with new business models resulted in appearance of new companies that challenged fundamental inefficiencies of traditional businesses, which struggled to adapt their organisations to new environment. Internet enabled a quick scale for start-ups, which led to creation of giant companies in a relatively short period of time and disrupt many industries more quickly than anyone expected.

The consumer behaviour has also changed because of the internet and especially adoption of smartphones, that made possible to provide fundamentally new services to consumers like ordering a car or food, making payments or watching live video directly from a smartphone being on the go. As a result, people expect accessibility for products and services, immediacy in fulfilling their needs, convince and great user experience. They are less tolerant to mistakes and can easily cancel their contracts and switch to competitors by installing a new application from the application store in couple of minutes. Described qualities became a default standard for any service people use. Having a good application is no longer a competitive advantage but a must has attribute for any respected company. The consumers expectation is on the rise and technology companies are to be blamed for continue raising those expectations even higher. Traditional players in each industry do not have a choice but to adapt and try to catch a departing train of digital transformation and innovation. During the internet revolution most enterprises in the telecommunication industry - telephone, cable and mobile companies - started playing a role of an internet service provider (ISP). They deliver a last mile access to internet users and charge their subscribers a monthly fee for using the service. In compare to technology companies, however, the consumer satisfaction with the telecommunication services has been usually relatively low. The paradox

is that although telecom companies provide a broadband internet, that enable other companies like Amazon, Google, Netflix to thrive during the first digital revolution, they have frequently failed to succeed in innovation themselves and have been unable to capture a value of a digital business pie, despite having a strategic position on the market. Only very few of them launched their own digital products successfully. FIGURE 1: CONNECTED HOME INSTALLED BASE AND PENETRATION EU AND NA (SOURCE: MARKET ANALYSIS REPORT HOW TO CREATE GROWTH FROM THE CONNECTED HOME, DEUTSCHE TELEKOM AG, FEBRUARY 2016) The Internet of Things wave of technologies is promising to become a next revolution, that is going to change even more profoundly how we are interacting with the world around us than the first digital revolution brought by the internet. The consumer behaviour how people buy and consume services and products will depends on the experience and interaction with the services that will be more natural for people than using an application on the smart phone. More personalized and human interaction via voice will be a key interface to control and communicate with the fluid changing living environment, which will include the concept of smart home but go beyond that and expands to smart cities, connected cars and smart buildings. On the other hand, the change is also going to be disruptive for many businesses in the same way as the internet was a decade ago. Existing business models will be challenged by new more efficient, but also many new opportunities will appear for start-ups but also established companies, who will be good positioned and who will invest into the innovative internet of things technologies and start experimenting with the business models, earlier than their competitors.

SMART HOME MARKET OVERVIEW

Number of devices in each home is growing rapidly. If couple of years ago, we had only computers were connected to internet, today it is a normal situation for any household to have a laptop, a smartphone, a tablet and a reader per each family member to be connected to internet. People are getting used to the situation that many objects in their homes are connected, especially popular becoming virtual assistance, who can take voice commands and help people with daily tasks. Advance technologies like voice recognition and artificial intelligent are needed to provide the best user experience and fulfil changing behaviour habits impacted by technology. FIGURE 2: A TIMELINE OF DEVICE CONNECTIVITY (SOURCE: MARKET ANALYSIS REPORT HOW TO CREATE GROWTH FROM THE CONNECTED HOME, DEUTSCHE TELEKOM AG, FEBRUARY 2016) Numerous start-ups are appearing in the smart home area that are experimenting with new devices, services and business models. Energy and utilities management, health and wellness, home chore automation, smart gardening, entertainment and smart appliances, and even pet and baby monitoring are just few areas to mention where new entrepreneurs are trying to come up with new idea which they hope will resonate with consumers and make them rich. Almost any new appliance from a refrigerator to a bulb have by default internet connection. In the light of coming rapid internet of things adoption and as the result changing consumer behaviour, companies have to respond by developing and marketing relevant services and value propositions. Technology companies are best positioned in capturing this new market. Google, Apple and Amazon have brought to the market their smart home solutions controlled by voice and connected with their other devices in the ecosystem

including smartphones, tablets and TVs. An experience and scale in the internet business helps them navigate and apply similar business models in a new connected home market. Their growing partnership ecosystem evolves smart home solutions into the platform where similar to the app store concept is realised by allowing other companies connect and provide their services to consumers. In such a way, the platforms become more useful for consumers and more people start using smart home ecosystems. It also works other way, more people use and buy smart home device, more interesting and promising is becoming for the businesses to develop new services and applications for those platforms.

FIGURE 3: Source CBI Insights

A critical mass of installations and services is required in order for the smart home to become a default standard and an installation for each house hold. In addition to smart devices, the services are developed which do a complex logic and calculation on the backend to perform and automate tasks for consumers. Good examples of such services would be energy and water consumption management. Using the artificial intelligent it will be possible in the nearest future to improve efficiency and save costs. Another industry which is going to thrive is insurance. By providing data from connected devices in the timely manner to insurance companies, one can lower their home and health insurance bills. Another use case,

which is the most widespread already, is a retailing industry. Adoption of the Amazon Echo, primarily in the United States and United Kingdom, is proving how voice interaction with the e-commerce platform can simplify and improve shopping experience. The low price for the Amazon’s device was also an important factor in their success. Once the prices will start going down for connected device, the adoption will increase as well. Traditional companies in industries like insurance, healthcare and energy are challenged by start-ups that through the smart home platforms getting direct access to people homes and start to provide more efficient and compelling services to consumers. Number of new connected devices like lock, leak detector, thermostat, lightening, energy tracking, pill case, are appearing on the marker. New appliances, like washer, dryer, stove, oven, refrigerator, vacuum cleaner, are by default connected to the internet. Slowly by persistently the adoption, especially in new house, are growing up and going to reach a critical mass, which is required for profitable business models.

UNDERLYING THEORY

The research foundation of this paper will be based on the smart home consumers’ insights and an innovation strategy frameworks proposed by Gary P Pisano in this HBR article (You Need an Innovation Strategy, HBR, June 2015). They will bring different perspective and dimensions to the research. Consumer insights will bring external perspective and focus on the customer’s needs. The innovation strategy framework will tackle internal perspective regarding how telecoms need to innovate and execute their strategy to satisfy consumers’ needs. The true innovation strategy is mandatory to fulfil the aspiration of capturing the connected home market. According to the Gary P. Pisano (You Need an Innovation Strategy, HBR, June 2015), a robust innovation strategy should answer following three questions: How will innovation create value for potential customers? How will the company capture a share of the value its innovations generate? What types of innovations will allow the company to create and capture value, and what resources should each type receive? All those questions will be discussed and analysed in details. At the end of the paper we will provide a list of management recommendations, that can be used by telecom management in order to design their innovation strategy for the smart home. It can be used as a blue print for short-term, mid-term and long-term action items and investment opportunities, which they need to do in order to create and capture value in the upcoming smart home markets.

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Consumers expect services to be reliable and delivered and without interruption or breaks. Digital touch points they interact with have to be available on different devices and be always accessible. As the result of that, consumers expect a fast and reliable connectivity everywhere, which is the key for developing smart home propositions and platforms. The connectivity in-home and out-of-home are equally important. Consumers expect a seamless experience and transition over the all interaction touch points of consumed services independent where they are present physically in-home or out-of-home.

The connectivity becomes something like air or water, which people, especially young, are taking for granted. With increasing number of connected devices and increasing traffic in networks, the quality of the connections is crucial for providing good services and customer experience. Telecoms (including cable operators) are the best positioned to provide the best services in the connectivity domain, which is a pre-requisite for future smart home developments. The number growing number of connected device will require better in-home connectivity and products consolidating all the devices into one smart home hub. The ability to control devices remotely will require a mobile connectivity and the application that allows people be in charge of their home when they are not physically in their homes.

Realizing this opportunity telecommunication operators are developing total connectivity offering which combines fixed-line and mobile internet in one bundle. There are three strategic options available for them – partnerships (contracts), joint ventures, acquisitions. All three are exploited by incumbent telecoms in the European market – Virgin Media’s mobile virtual network operator (MVNO) agreement with Everything Everywhere in the United Kingdom, joint venture between Ziggo and Vodafone in Netherlands, Telenet acquisition of BASE from KPN in Belgium or Vodafone acquisition of KabelDeuschland in Germany. There is a high synergy between mobile and fixed line operators from market value proposition to consumers and possible efficiencies gained from possible resources optimisation. Only few companies are positioned to fulfil those consumer expectations on the large scale, since a large investment into the infrastructure required to provide such connectivity.

The barriers between fixed and mobile services will be removed and genuine all-in packages will be launched which will include voice, video, data, mobile and will cover all family members and be tailored to their needs. That will eventually happen through acquisitions and consolidation of the companies, which is required to drive efficiencies, building the scale and developing advanced offerings to the consumers. Couple of years will be required to consolidate companies and offerings on the European scale, but few analysts doubt that it merges between mobile and fixed-line operator will happen eventually. The rumour about Vodafone acquisition of Liberty Global has been around for couple of years and resulted in their joint venture in the Netherlands market, which might be scaled to the whole Europe.

After consolidation of mobile and fixed-line operators, improving efficiency and tailoring their offering to changing needs of consumers, the next question for the industry will be where to find a new growth and revenue opportunity. Some of the revenue streams have disappeared recently. Highly profitable a decade ago SMS market has been eliminated by over-the-top messaging applications. With a new European regulation, roaming tariffs are no longer possible inside of the European Union and will bring down this revenue stream as well. Even the voice service, which has been a core of telecom offering for a long time, has been challenged by over-the-top services like Skype of Viber.

On contrarily, the data service has been booming and demand has been growing. However, the demand for data has not resulted in a much higher growth for revenue. The expectation from consumers is that data has to be cheap and unlimited. In order to satisfy such demand more infrastructure investment has been required in the developed markets, but the growth was timid if it was at all. For example, most of a new revenue for Vodafone has been coming from emerging markets like South Africa or India by adding new customers. In the mature markets in particular in Europe growth has stagnated as the market penetration is high, but the revenue per customer metric has not grown and even declined because of the competitive over the top services or regulations. The consolidation with broadband companies in particular Liberty Global can improve efficiency for Vodafone and provide better core offering to the consumer, but will not add any new revenue generating stream. One of the new revenue stream can become a smart home proposition developed by the consolidated telecom providers in the future.

SMART HOME AS A NEW REVENUE STREAM

At the moment, there are four major revenue streams or four types of Revenue Generating Units (RGU) in the industry – voice, video, data and mobile. That rough division is skewed differently for operators, but remain a pattern in their business-to-consumer (B2C) segment. The business-to-business (B2B) telecom segment and revenue patters are different and out of scope of this paper. One of the revenue stream in the past – SMS – has almost disappeared. Other revenue streams are being challenged by over-the-top applications like Skype and Viber for the voice services and Netflix and Amazon are threatening video offering by cable companies, who are increasingly building barriers to entry in order to protect existing steams. For example, AT&T could potentially acquire HBO to compete against Netflix. Telecoms are increasingly looking for possible new revenue that Internet of Things, Big Data or Machine Learning trends can bring to them. In the search for this new fifth revenue stream in the consumer (B2C) segment, many telecoms have looked into the smart home market as a promising opportunity for a new sub-subscription revenue. The smart home proposition has been already tried with some level of success in western markets, but the market is still extremely fragmented (see Smart Home Market Overview). Number of different start-ups, big technologies companies, utilities, telecoms and others are looking into this market as the future business opportunities. That will be difficult to predict who is going to benefit the most of this new market, but telecoms definitely hold a strategic position in capturing value in this market. There are number of advantages they possess, which other players do not have, in particular telecoms control an internet pipeline that goes into people’s homes and as described before a good connectivity will be required for the successful smart home proposition, because number of connected devices is rapidly growing, but the expectation for the service level from consumers is growing as well.

Recognizable brands and a network of sales points are also in telecoms advantage, because that will allow to teach consumers about new smart home devices and do upsells on top of their existing services. Another advantage is that people get used to pay telecoms monthly fee for their services, which is not the case for Google, Apple and in less extend Amazon, which offers prime subscription. A subscription model would be a preferable option,

as it will allow to recover significant capital investments. However, there is a question whether consumers would be happy to pay for the smart home subscription. The telecom industry will need to understand consumers pain points and develop new customer propositions, which will be valuable enough for people to pay a monthly fee. Experiments with other models are also possible and will be required in order to compete with the internet companies, who managed to monetise people’s data without charging them a monthly fee. In the smart home environment, however, many will be reluctant to sell their personal data and might distrust technologies companies, which is in telecom favour. In addition to a new possible revenue, smart home proposition will help to reduce churn of subscribers. That is an extremely important metrics for telecoms. For example, because of Netflix and other over the top video propositions, number of cable video subscribers have been declining for last several years overall, which had an impact on the top-line of most cable firms. When more services that bring customer value are bundled together, that provided at the reasonable price, that help both to do the up-sell and increase the revenue per customer, but also reduce a probability that client would decide to change for another service. FIGURE 4. ANALYSYS MASON, SMART HOME: CSPS’ OPERATIONAL ADVANTAGES, MARCH 2016 Obviously, Netflix will never provide voice or data services, and although their video proposition might be more attractive, many people will go for telecom video service, because it is bundled with other services and provided at the discounted price. As the FIGURE 4 shows, the probability that a consumer will switch to other service provider is reduced for people who are subscribed for more services. At the moment, most of telecommunication companies

offer Triple (data, video, voice) or Quadruple (plus mobile) services (discussed in Telecom Market Positioning). The smart home could become a part that enhance Quadruple services into Penta proposition and reduce churn even further.

TELECOM CHALLENGES IN SMART HOME

The successful competition on the smart home market would require for telecoms to provide digital services to consumers over the smart home devices. It is a challenging task since telecoms will need to learn how to develop digital services and provide them over the connected devices. From the previous results, one can see that there are few digital products telecoms developed in-house. Developing smart home proposition will require similar skills as developing digital services for the internet but in addition strategic partnership with software and hardware providers. However, only few companies in the telecom industry successfully developed digital services offerings to consumers or able to monetize them. There was similar idea for the internet services as for the smart home now, because telecoms provide internet, they will be in a strategic position to monetise it beyond just monthly fee paid for the connectivity. In reality, however, other companies like Google, Facebook and Amazon benefited from the internet disproportionally more than the telecoms, while telecoms have been struggling to develop compelling for consumers digital products. Some companies are still trying instead of being just Internet Service Provider (ISP), to transform themselves into Digital Service Providers (DSP), but in most of the cases without much success. In order to understand future telecoms’ challenges in the smart home market product development, one need to analyse what did telecoms accomplished in the digital area in the past, what worked and what did not work. There are different reasons for that failures which include but not limited to culture, skills, organisational structure, current business models. Those challenges need to be properly addressed in the innovation strategy for the smart home market.

Although, there are few example of in-house digital telecom products, there are many examples of successful investments into the internet companies by telecoms. For example, Naspers is a good example of a company were such investment worked successfully and now

constitutes majority of the revenue for the company. Many internet start-ups in the United States have been backed by the telecoms. That gives a hint that one of the possible way for telecoms to test the smart home market could be from seed investments into the start-ups described in the section Smart Home Market Overview, rather than trying to build smart home products themselves. They can build a platform for smart home start-ups who a desperately looking for consumers, but lacking access to consumers’ homes, which telecoms have.

Another area telecoms can learn from and leverage in their advantage is the video Set-Top-Box development. It is one of the few areas, where telecoms succeeded in building their own products and building a partnership ecosystem around. Recent generation of those devices are quite advanced, provide good user experience, integration with multiple applications like Netflix and in general considered to be a success for the providers. Those products are in the entertainment space where cable companies managed to develop their own software and devices, which are might the first step into the smart home proposition.

They can leverage the lessons learnt from this development, supplier network and the skills developed in order to penetrate the smart home market. But it will also require new skills and capabilities including experimentation with new business models like freemium model, which are not traditional for the telecoms, who used to charge monthly fee for any service they provide. That will be more difficult to do in the competition with Amazon, Google and Apple, who will charge a one-time fee for the device and use it as the entry point into the people houses in order to collect data and sell their other services. An experimentation with business models, which are not traditional for telecom, but more common for internet companies, will be required in order to compete with technology companies.

Developing own devices based on Set-to-Boxes or Wi-Fi routers and a partnership ecosystems both in the software, hardware and business areas won’t be enough to compete yet. The biggest challenge is to be in development of the scalable platform integrated with the cloud and big data infrastructure. This area is mastered by Facebook, Google and Amazon, but definitely to be learn be telecoms. That will require not only special skills but also changing internal process to agile development and accounting principles (OPEX and CAPEX calculations), which potential will be impossible to do because of a high debt level in industry.

TELECOM SMART HOME STRATEGY

For entering the market, there are three aspects telecoms need to focus on - creating value, capturing value and designing an innovation strategy that underpins the endeavour. Value creation, especially if telecom want to charge a monthly fee for such services or find other way to monetize and recover invested capital, can only be done in the cooperation with other companies. That will require an extensive network of partnerships with other industry players, start-ups incubators, device manufactures and also other telecom players in order to grow the industry and market together, which is a benefit for all. That’s not a standard process for telecoms and they will need to master true partnership models which needs to be properly designed and managed and bring value for all parties.

The value capturing will depend on the business models’ telecoms select and will require a lot of experimentation and possible capital investments. The profit share models in conjunction with partnerships discussed above will help to grow a new market together and make a smart home pie bigger, rather than competing only for market dominance. Even the possible partnership with technology companies, which look more like competitors at the moment would be possible. The same scenario as it happened in video on demand space, when Netflix became a partner rather than a competitor for most of the telecoms and cable companies. As described before, the subscription model would be the best for telecoms, but it is far from being clear if that model would be possible in the smart home market. Finally, the innovation strategy will need to go hand in hand with other part of the organisation work and suppliers’ network to deliver the smart home proposition. Marketing, technology, product development, research, supplier management have to work close together to make, deliver and capture the value in the smart home market. That might be easier to do or experiment in some smaller markets and then scale the full smart home proposition in larger markets. Later in this paper we will analyse the strength and weakness of the telecoms in regarding to the smart home proposition and provide management recommendations how to leverage the telecoms’ strength and play down weakness to be successful into the smart home competition. Those recommendations will come from the innovation strategy for the smart home market, which we will propose in the course of this

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SMART HOME VALUE CREATION

How will smart home innovation create value for potential customers? Gary P. Pisano states that “unless innovation induces potential customers to pay more, saves them money, or provides some larger societal benefit, it is not creating value”. There are many use cases when smart home can give societal benefit or save money. For example, security systems or elderly care devices provide clear benefits for the potential consumers. On another hand, energy and utilities management devices coupled with the artificial intelligent can substantially reduce costs for the consumers. As shown on the FIGURE 3, numerous start-ups are exploring different use cases, that can be of substantial benefit for the consumers. Although, some future benefits are clear, many consumers have still doubt about devices and that smart home technology are proper tools for solving their problems. Firstly, many people are still not familiar with the offering on the market. That is a problem of awareness and consumer education. A lot of work to be done by players in the industry to educate consumers about technologies, its usage and problems they are solving using those technologies. For example, Amazon is running an advertising campaign in the UK and the United States to educate potential consumers on the Amazon Echo usage. Other companies including telecoms have to spend more on education, if they want a market to become mature faster. Telecoms can leverage their sales networks to run campaign to show case smart home devices and communicate benefits to consumers. The will need to train their personnel and become associated with the internet of things trend in the consumers mind, as companies who are looking into the future. Secondly, even those who are familiar do not see many reasons to buy smart devices yet, as they do not see or believe that those devices are the best possible solutions for their problems or because current available devices are very expensive and require a lot of upfront investment. For example, elderly care applications or monitoring cameras are long time on the market already, but people prefer in many cases a face to face interaction with their elderly parents rather than relying on the technologies, which are designed for that. On another hand large one time investment required is also slowing down an adoption of the smart home technologies, even if people believe that devices are useful.

As the market matured, devices will become more common and cheaper. Telecom can play a role in making devices more affordable by leasing them to consumers, the same as they do for the phones and tables. That will allow to have propositions for the mass market, rather than for high end consumers, who consider the smart home as a nice to have and fun to use and play with electronic toys. People will get used to the technologies and trust them solving their problems, more business opportunities will appear. As shown on the Error! Reference source not found., there are several possible areas telecom can focus on in order to bring

value to their customers. In most of the cases partnership with other companies from completely different industries required in order to create a value. Owning the relationship with customers telecoms could leverage their brand names, distribution and installation services, billing systems to bring to the market other players and create value for the consumers together.

There are two possible benefits for the telecoms in the smart home market. The first, as already described in the FIGURE 4, which is churn reduction when smart home proposition is bundled with other services into the “Penta” proposition. The second, is a new revenue generation, which is ideally should be based on the subscription fee, but could be also freemium. The profit sharing models with partners will be needed to deliver value to consumers in the areas of the security, utilities, wellness, smart appliances and entertainment. Data monetisation is also a possibility in the areas like banking, insurance or retail.

FIGURE 5. MCKINSEY & COMPANY, THE CONNECTED HOME MARKET

Security systems are especially popular in the USA and telecoms companies like Comcast or Verizon are successfully marketing and selling such systems, which solve an actual problem for people to be safe at their homes and feel secure about themselves and their family. Usually the proposition comes with movement detectors, video cameras and notification systems. Systems are less popular in Europe, because the problem of security less important in this region than in the USA. The telecoms are able to charge a monthly fee for the service. That is the market which already mastered in the USA, proved to be successful in reducing churn when bundled with other services and also people are willing to pay a monthly fee for such service. As a recommendation, companies in other markets like Latin America or South Africa, where the proposition will be the most interesting, taking into account security problems in those regions, could scale a similar business model for their markets.

Competing companies like Nest do also provide security cameras, however, the business model is different – consumer needs to pay for a device but the service its self is free. People are asked to pay for additional features like an additional storage space. That’s a typical freemium business model popular for internet services, but not that much for the telecom yet. The internet technologies companies get used to such models for year and were able to do monetisation for add-ons, but telecoms have not implemented it for any of their services. As the competition is going to intensify in smart home space, telecoms will need to experiment with the business models to provide consumers more value. Consumers will need

to have a choice to receive a basic service for free, which nevertheless could be bundled with other telecom services like data or video, and be able to purchase addition feature only when needed. Data monetisation is another business model, that will allow offer basic services for free, but it is still not clear if the consumers will be eager to share their data about homes, as they have been sharing data while using internet. Another area is utilities management, that includes connected thermostat (Nest is also a prominent player in this area), energy and water management and so on. Energy companies saves people’ money by providing a monitoring, controlling and management capabilities for energy consumption optimisation in homes. Connecting smart energy devices and integrating them with the artificial intelligent deployed in the cloud will optimise the energy usage and decrease people’s monthly bill spent on energy. According to Gary P. Pisano saving money creates value for consumer and they are eager to embrace innovative solution in order to achieve savings. That a strong motivator for people to try new devices and services. The adoption for such technologies will surge, once solutions achieve substantial savings and will not require high upfront payments. Utilities companies are best positioned to be leaders in that segment, as they possess similar advantages in the utilities market as telecoms have in their industry – people get used to pay monthly fee for utilities services, brands are known by consumers and they already collect and use data about energy consumptions on the big scale. Telecom could partner with them to make alliances against technologies companies like Google, who are looking into both telecommunication and utilities markets to disturb by promoting their Nest products. Such alliances are natural since telecoms and utilities are naturally supplement each other’s capabilities, rather than compete again each other.

Wellness monitoring customer value proposition will require partnership with medical services providers. Telecom again can play on their strength of brand recognition, direct relationship to the consumer and Omni-channels sales touch points, which medical players do not know. Elderly and child care could be the first use cases to implement together. The scope of services could cover remote video conferences between elderly people and their children, monitoring elderly and small children health via connected devices, medical insurance coverage based on the data coming from the family households. Alliances and partnership, which are not the strongest telecoms’ side will be required to successful develop and operate such propositions. Also, as described before, the acquisitions of start-ups in this

area could be the best way to enter the markets, since developing of technologies is not always the strongest side of telecoms’ business. Closing technological gaps by start-up will still require an integration efforts into their technological landscape and architecture. The challenges with medical devices is another level of responsibilities and liabilities which is required and also completely different domain expertise needed. Integration and partnership with medical service providers should fill the missing gap in providing those skills. Smart appliances are going to be manufactured by traditional companies in this space like Samsung. However, a lot of work needs to be done to educate consumers why and how to use those smart appliances. As an example, Amazon runs currently a campaign in UK with the explanation how to use Amazon Echo, what commands people can say and what benefits will it provide to them. Firstly, telecoms can play a role in people education. When people are signing a contract at a telecom store, staff can educate people how and why to use smart homes. People will be mostly interested in what problems smart appliances can solve, rather than what devices they can buy. An attempt could be done to map smart appliances into the user journey and problems people have in order to explain how they solve substantial problems for people. Rather than selling devices, telecoms can solve services as the problem solutions. The sales and education efforts can be optimised along all channels – service points, web sites, mobile applications, different types of marketing campaigns.

Secondly, same as for the smartphones, telecoms can make partnership with appliances manufactures and lease devices to people. One of the problems for the smart home adoption is that devices are still expensive. Similar to iPhone, one can lease smart home devices and pay a monthly fee to telecom providers. That will increase stickiness and reduce churn and help people with adoption. For the smart appliances manufactures that means an access to additional sales points which they do not have, but probably even more important possibility to install their devices, provision and on-board to internet and as the last step provide services around their monitoring and predictive maintenance, which telecoms can provide if develop corresponding services to partner with the manufactures.

Thirdly, telecom could simplify re-sell a wide range of different devices from different manufactures in their stores. That’s probably the easiest options, since it does not require any investments into the technologies, platforms or particular type of complex partnership

agreements. But it’s also the least attractive option since that will be a competition with both devices manufactures themselves, who are more focused recently on direct branding and sales to consumers, but also retailers and especially e-commerce players. The retail space is already crowded and margins are declining, especially challenged by Amazon. This option is unattractive from commercial point of view. Instead, telecoms have to concentrate on services, rather than making money on re-selling of appliances, which is a one-time sale and not a recurring revenue, a traditional way of monetising their services for telecoms.

The last areas mentioned on the Error! Reference source not found., is the smart entertainment. Cable companies have been in the entertainment business for many years. They have introduced devices capable of steaming hundreds of channels into people’s home. The set-top-box is already a smart device connected to internet that provides rich functionality for content watching and discovery. It has a rich set of features like recordings, electronic TV guides, integration with the third party’s applications like Netflix. In addition to that telecoms could develop a whole new ecosystem around set-top-boxes to make them a key element in the connected home proposition. An integration with other devices in the home and other internet services can enrich the entertainment experience. For example, Amazon Echo could replace a remote control by providing a voice control capabilities, which are not available in the set-top-boxes usually.

FIGURE 6. ANALYSYS MASON, SMART HOME: CSPS’ OPERATIONAL ADVANTAGES, MARCH 2016

in the Error! Reference source not found.), at the beginning, telecoms’ focus has to be on a single, simple and compelling customer value proposition. They will need to build trust with customers and demonstrate that they could be a valuable partner in the connected home space both for consumers and partners from other industries. Value creation will be only possible as a joint effort with players from insurance, healthcare, energy and other industries, otherwise the efforts to enter the smart home market will end up in just selling internet pipe, which is a commodity and highly competitive business. Partnership with other companies, could lead in creating a platform that is going to solve multiple consumers’ pain points and cover many use case, which could be of substantial benefits for the consumers like saving money. An ecosystem and a platform should also simplify devices installation, usage and replacement, which will make a connected home an easier for people to adopt and enjoy.

SMART HOME VALUE CAPTURING

How will the company capture a share of the value its innovations generate? The same as in the first digital revolution, which telecoms companies enabled, but did not succeed to capture most of the value, the most active competitors in the smart home market are the internet giants. Telecoms have launched some of the services especially in the United States and doing some experimentations with business models. In addition, they have already set-top-box and Wi-Fi routers devises in people home, which could be considered as the smart home hubs, if they are updated with additional functionality and, probably, hardware. Subscription model is the most preferable model for telecoms and any additional provided services by telecoms will be tried to follow this model.

Google, Amazon, Apple are looking into the smart home market from a different angel. The most interesting aspect for them is additional data they can capture from people’s homes. They see it as an opportunity to become even closer to their consumers. As they already know what people are doing on the internet, the next step is to know what exactly people are doing in their homes. Connected home will provide a lot of data, that will be analysed by machine learning algorithm to understand people habits and consumer behaviour and sell even more customized products and services or re-sell the data to other enterprises who are willing to capture the value by knowing people preferences and behaviour.

Technological companies have developed a central smart home hubs, as a central piece of the technology to give people control of their homes and, of course, insights and data to the technology companies themselves. The central hubs provide applications store to enable homes with the extra applications and capabilities provided by others players who make own services on top of platforms. The same as for app stores on smartphones, any company can develop their own services on top of the smart home hub and smart home clouds by using the provided APIs and interfaces. The give insurance, finance, energy, entertainment, sports, retailer and other industries capability not to develop own platform, but still provide useful consumers service in people’s home and learn from the data about consumers what additional services and products can be provided and developed in the future.

The most successful device on the market in Amazon Echo, which has already adoption of millions of people and thousands of additional services have been developed on top. The first mover has an advantage since it allows to create a platform with a lot of services developed by third parties. More popular platform becomes more company develop services for this platform. More services are developed for the platform, more popular it becomes. As we described in the previous chapter, no single company will be able to bring people value and services which they would like to consume in the smart home environment. Developing a platform is the best way to enable other companies in providing their services on top. At the moment, even Google and Apple are lagging behind Amazon in developing smart home products. Only recently they have released their own products with the same idea as Amazon had already released.

Now if we look at the smart home market from telecoms perspective, the Wi-Fi modems and Set-top-Boxes, however, are still supplied in most of the houses by them. They control what protocols are available and how devices are connected and on-boarded to the internet. That’s an advantage to control those key entry points for devices in such a fragmented market. If during next two or three years, telecom companies replace Wi-Fi modems in their customers’ homes by new smart modems with advanced connected device management capabilities, that will give them a huge advantage over internet giants whose smart home hubs although growing, have still low adoption. Even the most popular Amazon Echo is not in every house today. When Wi-Fi modems and Set-to-Boxes are present in almost each house. That a good situation from the value capturing perspective and more innovation efforts have to be put by telecoms to enrich the functionality of devices they are providing to people already.

At the beginning, the sales of consumers’ devices will be driving the smart home market. Telecoms can enter a smart home market by re-selling devices of partners and which are easily on-boarded into the Wi-Fi modems installed into the consumers’ houses. The spread the devices cost could be over a long-term contract – same model as they use for mobile devices in partnership with Apple or Samsung. That will protect telecoms’ existing business, reduce churn and will allow explore the market and learn more about pitfalls and the opportunity. Of course, as described, the re-selling devices itself is not a viable business model in the highly competitive retail business, but that can be a good a good entry to start.

Appliance manufactures like Samsung and Philips would be happy to explore the possible partnership in this area in order to push higher adoption of their smart devices. The killer feature will be easy on-boarding. The installation flows for many devices are extremely complex. The Next camera installation guide has multiple steps and creation of a separate cloud user account, which will be required into order to login and control nest camera. The same situation for other devices as well – people are requested to create separate user accounts, go through many installation steps and in some cases even provide bank accounts for premium services which might be used by people. Telecoms can play a role in simplifying all the on-boarding steps and do it in one click, the user data and payments information can be provisioned by better integration with appliance manufactures cloud. Such partnerships have open questions regarding capturing value and monetisation (probably reduce churn and increase streakiness as with mobile devices), but will allow telecoms to taste the water in the smart home market and start preparing for the future more mature markets. As the market matures, the services model will be a key revenue component for smart home providers. Selling services with a long-term contract is preferable business models for telecoms that they will try to apply for the smart homes as well. Instead of just re-selling devices, telecoms will need to sell and provide more complex services. At the end of the day, people are not interested in buying smart devices, but more interested in what problems do those devices sell for them. Telecoms can develop a catalogue of services which people can subscribe to and cancel, if it’s not needed. The capturing of value will happen thorough the subscription fee. For example, if someone wants to subscribe to video babysitter service, they can go to the website or mobile app, subscribe to the service. The device will be delivered to home next days with already provisioned data and pre-installed profiles, so it is not required to do long steps in making a device working in a secure manner in your home. You can just start immediately using a device without any further efforts. Once a device is not needed any more and you want to cancel the subscription, it will be returned back. The development of a catalogue of service will require a substantial upfront capital investments and only telecoms with a large scale can afford such investments into the products and cloud service developments. The same is applicable for partnership efforts. It would be much easier to do a partnership with appliance manufacture for large telecoms, since their size of the market will be more attractive for large companies like Samsung or

Philips. The size will be a crucial element in competing against technology companies as well, who are going to invest into the internet of things and machine learning technologies a large amount of capital. The telecom industry consolidation already discussed above would define who from telecom industry can lead a smart home proposition. As we can see from the United State market, that the leader in the smart home service is Comcast, the largest cable operator in the country. In Europe, an adoption is much lower and there is no leader in the smart home market and it is more fragmented and immature. The biggest operators will lead the market. Probably more consolidation will be required to get already described synergies, but also to invest more on a larger scale into the internet of things technologies which include smart home devices and value proposition. Another aspect, where larger company will be better position is the standardisation. In order to fully benefit from partnerships, the smart home standardisation need to happen. That’s going to be the only way to easy support a large number of connected devices in each home. Large telecom companies together with the partnership network can drive the standardisation and as result benefit from that adoption as well. Smaller companies will have to follow the defined standards.

The competition, however, and unwillingness of customers to pay for a premium subscription, will challenge a traditional telecoms’ business model orthodoxy. It can happen that people won’t be ready to pay a traditional subscription monthly fee for smart home services. The required investment will not find a business case, if the consumers rejects a subscription model. An alternative approach is a fermium model, which some device manufactures are already exploring. A consumer buys a device with basic features, but then can enable premium services. For example, the Nest Cam provides live video streaming to smart devices as part of the device cost, but users can subscribe to a remote video recording as for additional cost from 10 EURO per month. This approach will allow telecoms to generate an additional revenue beyond an initial device and infrastructure cost, and on another hand, allow consumers be flexible in what they pay and not be bound to the long-term contract. Already mentioned data monetisation will be another alternative to the subscription model, but will need to consider always changing and each time more stricter data privacy laws and also people increasing awareness and concerns how their data is used. Especially, that question will be important for a smart home proposition and adoption in European countries

SMART HOME TYPES OF INNOVATION

What types of innovations will allow the company to create and capture value, and what resources should each type receive? For the last innovation strategy question, Gary P. Pisano uses an innovation landscape map to assess how innovation ideas and projects fit with the company’s existing business model and technical capabilities. The classification matrix can assist with the decision which exact projects to pursue and what budget to allocate in order to achieve a desired innovative outcome. It will serve as an organisational roadmap for the connected home opportunity, which telecoms management can use in order to put the right focus on the right initiative. The success of value creation and value capturing will depend on the classification matrix and priorities management choose to follow. The proper budget and people allocation will materialize an innovation strategy into the implementation that will follow. According to Gary P. Pisano: “Certainly, technological innovation is a huge creator of economic value and a driver of competitive advantage. But some important innovations may have little to do with new technology. In the past couple of decades, we have seen a plethora of companies (Netflix, Amazon, LinkedIn, Uber) master the art of business model innovation. Thus, in thinking about innovation opportunities, companies have a choice about how much of their efforts to focus on technological innovation and how much to invest in business model innovation.” The balance between business and technology innovation is important. Although, mentioned companies by Pisano have achieved success in the business innovation in most of areas, it has always been underpinned by the strong platform development efforts, which would not have been possible without technology advancements. The classification matrix will consider both technology and business aspects of the innovation. They will form the dimensions for the classification matrix and projects will be classified according to those dimensions. When creating an innovation strategy, companies have a choice about how much to focus on technological innovation and how much to invest in business model innovation. The innovation landscape map is a helpful tool to prioritize strategic innovation options and map them into the existing technical and business strategy and capabilities. In some cases, a new innovation can be based on existing technical or business capabilities and will require business to re-think how they apply them

As the result two dimensions suggest four quadrants. Gary P. Pisano describes them as following: “Routine innovation builds on a company’s existing technologies and business model—and hence its customer base. Disruptive innovation requires a new business model but not a technological breakthrough. Radical innovation is the polar opposite of disruptive innovation. The challenge here is purely technological. Architectural innovation combines technological and business model disruptions.” Routine innovation in the smart home market should leverage telecoms existing capabilities such as their distribution channels and brands, but also technological capabilities in the video (set-top-box development) and connectivity (Wi-Fi routers implementations). Disruptive innovation should explore all different forms of partnerships with other companies to create a substantial new value for consumers in the smart home space, which telecom cannot bring themselves. Radical innovation for telecoms in the smart home must focus on advancing technical capabilities, they currently do not have such as new more advanced smart home hubs and internet of things cloud technologies, including machine learning. Architectural innovation should explore a platform development which in the combination of new fermium model will touch both technology and business.

The technology and business axes give required dimensions to drive an innovation strategy discussions and planning between people responsible for those two aspects of organisation. In reality, the situation in a typical telco company could be more complex and bewildered. Additional dimensions such as operational countries, brands and competitors on local markets have to be added into the consideration while designing a true innovation strategy. Those aspects could be delegated into the operational countries, who know better the local market situation and could react in a more responsive way than the corporate headquarters. The combination of all type of innovation will form an innovation classification matrix for the organisation. A matrix is going to be unique per company since technical and business capabilities, an organisation possesses, is a different per organisation. However, one can attempt to create an innovation strategy matrix for a particular industry, in our case a telecommunication industry in regards to the smart home business opportunity. Each individual telecom company will need to adjust the matrix to match their unique capabilities, but that adjustment will not be significant and will include the same basic building described blocks. The matrix can serve as a roadmap to action and basis for the innovation strategy that needs to be mapped against business and technology strategies of any given organisation.

DISTRUPTIVE ARCHITECTURAL REQUIRES NEW BUSINESS MODEL Manufactures Partnership: Smart Thing Samsung Nest Camera & Thermostat Phillips Hue Technology Partnership: Google Smart Home Amazon Alexa Service Partnership: Utilities Companies Municipalities Retailers Insurance Firms Smart Home Platform & Freemium Model: A middleware platform is required to support smart home devices and offer services as a Freemium Model. That’s a combination of Radical and Disruptive strategic options that through partnership and technology development will allow to provide a true extendable platform both consumers, manufactures and service providers ROUTINE RADICAL LEVERAGE EXISTING BUSINESS MODEL Installation of New Devices Long-term Contracts Leveraging existing sales, distribution, support channels Security Services Energy Saving Services Smart Home Controller App Home Entertainment Gateway/Home Hub: A smart home hub can be integrated into set-top box/wireless router, but few solutions as yet. Smart Home Cloud Smart Home Voice Control Home Automation Devices Auto-Install Services & Apps for Alexa Google Smart Home Apps LEVERAGE EXISTING TECHNICAL COMPETENCES REQUIRES NEW TECHNICAL COMPETENCES

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ROUTINE INNOVATION

Telecoms have a number of assets and advantages, which other players in an emerging smart home market do not have. Most of telecoms have a large network of stores where they can show consumers new connected devices and explain how they work. They can play an important role in promotion of smart homes and also in consumers education. That will not require any business or technology innovation, but will be an important step in promoting of the new industry and market. They can also leverage their support centres and train existing staff to provide a 24/7 support for a new set of smart home devices. The same applies for installation services. Both support and installation services are already functioning and will only require people training to support new set of service and devices. Re-selling of devices can be the first steps in order to try the smart home market and no any business or technological innovations are needed to start doing that. That will qualify as a routine innovation, but can give new ideas to telecoms what to do next and can bring important lesson learns and consumer insights that can be an input for other types of innovations. Probably the most important advantage is that consumers knows telecoms brands and get used to pay monthly subscription for their services. Probably it would be difficult to start charging consumers a monthly fee for the smart home services, as they are still at the earlier stage of the development and still a long way to go till consumers will be ready to pay monthly fees. But telecoms can start with the devices leasing as a way to get first monthly payments from their consumers. Telecoms can extend their long-term contracts to support a new set of services and spread cost of sometimes expensive new device over the long period. That might take 10 years for market to get mature. Telecoms could taste the water without much investment by re-selling devices using described capabilities and assets, that neither device manufactures nor technology companies like Google, Amazon have at their disposal. That will be a routine innovation since no new business models or technical competences are required for the implementation. While doing those simple steps, telecoms will get direct contacts with consumers and can have a discussion regarding next steps in the smart home area. For example, on top of re-selling devices, they can start introducing services in partnership with other companies. That will require other type of innovation described later.

DISRUPTIVE INNOVATION

In the long term, it will not be enough for telecoms to stick to their existing business models and technologies capabilities. The market is still to be defined and as described major players are starting a competition for it. Telecoms have to explore alternative partnerships and business models to be successful. For example, Amazon Echo supports already thousands of add-ons which makes it an attractive platform for consumers. Investing once in the device people are getting an eco-system with multiple functionality and access to multiple services. To be disruptive in the smart home space, true partnerships with other companies will be required for telecoms. They will need to develop their unique smart home platform, that will exploit unique telecoms strengths. There are three major groups of possible parents. First, consumer devices manufactures are struggling to move from one-time sells to a service model. Here where telecoms can help them, create value for consumers, and split the possible revenue between them and devices manufactures. As described in the routine innovation section, telecoms can leverage their existing assets to drive adaptions of devices. On top of that, they can use existing billing systems to change additional services costs for devices maintenance, monitoring and premium features. The true platform integration, in particular in regards of big data generated from devices, between telecoms and manufacture will be needed to realizes the partnership the full potential. Easy installation and user provisioning will be a clear benefit to the consumers. Especially telecoms with the high market penetration will be able to setup such partnership with companies like Philips or Samsung.

Second, partnership with other service providers like insurance firms, utilities companies, municipalities, health care providers and small and medium retailers, who do not have a scale of Amazon, could be another group of partners, which telecoms need to work with. That will allow to give consumers much richer functionality and services and hopefully to solve real pain points, that current smart home solutions cannot solve. The range of functionality can be provided have been described above already. The key for those types of partnership to be successful is a way telecoms are going to split the revenue between them and other services providers. A concept that can work is the same as telecoms use for content providers, when they have mastered contracts negations with networks and studios. The scale of the telecoms business will be important in order to get better deals.

Third, partnership with technology companies like Google and Amazon. At the moment, the perception is that they are competitors and partnership does not make much sense. The important lesson can be drawn from the similar relationship situation telecoms had with Netflix, which was perceived as a strong competitor for the video services telecoms sells. Today, however, Netflix is not a competitor, but a partner. On most of set-to-boxes consumers can access the Netflix application and even bound their bills payments to telecom bills. We can predict a similar situation in the smart home market between telecoms and technology companies. FIGURE 7. ANALYSYS MASON, SMART HOME: CSPS’ OPERATIONAL ADVANTAGES, MARCH 2016 Telecoms and technology companies’ capabilities and services in the connected home space are complementary to each other. Above is the comparison done by the Analysys Mason company, a global consulting and research firm specializing in telecoms, that shows that true partnerships must be possible between telecoms and technology companies, as their assents are complementary to each other for a comprehensive and meaningful smart home proposition for consumers. Technology companies have capabilities, where telecoms are weak and other way round, where telecoms are strong, technology companies do not have strong present. Consumer will true benefit from possible partnership in order to get access to the best technology, platform, support and installation services. As the recommendation step for telecom management is to start discussions with tech companies.

RADICAL INNOVATION

There are number of technological projects and initiative telecoms have to implement to bring a radical innovation to their connected home offering space. For that they will need new technological capabilities, especially in cloud and embedded development. Although, the partnership with the technology companies will be the best approach to provide a platform for consumers, from the business relationship point of view, the partnership will be difficult to obtain in the short or mid-term, as the market has not been defined yet and everyone is hoping to capture the biggest slice of the pie in insolation without collaboration. That’s why in the nearest future, telecoms have to enhance their technological capabilities. Again, analogy from the entertainment part of the telecoms business – to make sure Netflix start collaboration, telecoms had to develop their own over the top video development services. Possible short-term technology advancement can be a development of a smart home hub functionality to seamlessly connect devices, control and monitor. The functionality can be integrated into existing set-to-boxes or Wi-Fi routers. That will be both investment on the R&D side to develop a technology, but also a capital investment into the physical devices, which usually are delivered into the consumers’ house on the cost of internet providers or as part of premium service, which will be difficult to justify in the immature smart home market. Strategical investment in the platform for the connected devices and in-time delivery those devices in people’s homes will allow telecoms to build a strong position for the smart home market, which is going to be more mature in couple of year. More advanced device will be possible to enhance with additional services obtained from the partnership agreements described in the previous section.

Another technology that is a must have for any elaborated smart home solution is a connected devices cloud. Again, most of telecoms, especially departments pre-occupied with the connectivity projects, do not possess neither technology no skills or organisational structure to delivery this radical innovation. They have to build those capabilities from scratch in house using agile methodologies or again partner with other telecoms, who invested into the technology already, for example Telefonica or AT&T have developed a connected cloud already and can re-sell those technologies to telecoms with a smaller scale.

ARCHITECTURAL INNOVATION

The already described disruptive and radical innovation are both required to enable a platform, that telecoms need to be leaders in the connected home market. The same as in the mobile market, the platform approach is the only ones that cut through and reach a scale. The platform must to support multiple use cases, otherwise it does not bring a significant value to the consumer. Some companies, like Deutsche Telekom, support open source Smart Home community in the hope that the leverage of development communities will deliver enhanced features and capabilities. They bet on the open source technologies and protocols, as well as the start-up community, that will make the platform working with a new and valuable functionality for consumers.

FIGURE 8. MICHAEL E. PORTER AND JAMES E. HEPPELMANN, HOW SMART, CONNECTED PRODUCTS ARE TRANSFORMING COMPETITION, HBR, NOVEMBER 2014

The platform idea has also fascinated many business thinkers. In the article “How Smart, Connected Products Are Transforming Competition” (HBR, November 2014), Michael Porter and James Heppelmann described requirements for the connected home platform both from the technology and human resources perspectives: “Smart, connected products require an entirely new technology infrastructure: modified hardware, software applications,