What Will Big Telecom Become Next?

Huawei-2

If you want to give yourself some perspective on just how profound the digital revolution has been, consider what it has done to the telecom sector. Businesses that were once boring utilities transmitting voice through copper to fixed locations have been transformed into global, wireless data-moving powerhouses that will soon connect almost everything to almost everything else. Considering all the things that little device in your pocket or purse does, it’s astounding that we even still call it a phone.

But the same apps that are making the phone do so much more are also eating into carriers’ revenues. Martin Creaner, corporate strategy advisor for Huawei – the largest telecom equipment maker in the world – sees telecom companies changing their business models to adapt. A speaker at the “Strategies for Success in the New Era of Connected Ecosystems” conference held by Wharton’s Mack Institute for Innovation Management, he spoke to Knowledge@Wharton about how the industry is changing in the digital age.

An edited transcript of the conversation appears below.

Knowledge@Wharton: The global mobile telecom business is very competitive, and I’m wondering how can digital technology give Huawei a competitive advantage in China and elsewhere?

Martin Creaner: You’re quite right, it is hugely competitive as an industry. But the competition isn’t just between the telecoms. If competition was just between the telecoms, you could handle that. The real competition is coming from what are called “over-the-top” players, like WhatsApp, like Viber, Skype — companies that don’t necessarily own a network, but are creating a service that utilizes the network.

Increasingly, telecoms are finding that their revenues are being eroded, their core lines of business voice and data and messaging are being eroded by other services. They still get some small revenue from offering the basic connectivity, but they’re not getting the sweet additional revenue streams. And by and large, telecoms have identified that is an unstoppable trend. Telecoms need to shift their whole business model in order to adapt to that, and that’s where digital technologies come in.

The telecoms have capabilities, networks, systems, and they’ve got lots of interesting data. They’ve got billing systems and payment systems. And increasingly, the telecoms are beginning to look at their future as being a company that enables lots of these other services to get to market, and providing interesting business-to-business services to those over-the-top players, and taking a small slice of revenue in return, rather than being the company that develops and provides the services themselves. That’s the digital shift that telecoms are undergoing.

“The telecoms are beginning to look at their future as being a company that enables lots of these other services to get to market … and taking a small slice of revenue in return.”

Knowledge@Wharton: What new business models is Huawei pursuing, and what new markets are you thinking of entering?

Creaner: Huawei is a supplier to all of the key digital telecoms, one of the leading suppliers. Between them — Huawei and Ericsson — and to a lesser extent, Alcatel-Lucent, which was just purchased by Nokia, they supply the communications infrastructure to hundreds of telecoms around the world.

The challenge that I’ve just spoken about is the challenge that’s being faced by the telecoms themselves, the AT&Ts, the Verizons, the Vodafones, the China Mobiles, the Deutsche Telecoms. Huawei is sitting one step back in that value chain, providing the network equipment and the devices and so on to those companies.

What is Huawei’s key interest at the moment is trying to understand how the marketplace is going to change for their customers — how the AT&Ts and Verizons and Vodafones and Deutsche Telecoms and so on will react to these pressures that I’ve just talked about. What systems, software, and services will they need from Huawei in 3- to 5-years’ time to enable them to compete in the new digital economy that they’ll find themselves in?

Knowledge@Wharton: There’s an analogy to a gold rush, where there are all the gold miners out there trying to find gold, but there’s someone selling all of them the shovels. Is that more or less what your company is doing?

Creaner: Yes, by and large. In the industry, it doesn’t matter which country you’re in or which network you’re running across, chances are it’s utilizing either Huawei equipment or Ericsson equipment or Alcatel-Lucent equipment. Those are really your three options out there. Now, connectivity is growing across the world. That industry is getting bigger, so, you’ll continually sell more equipment to service the need that everybody has for connectivity. But the business models for how the telecoms make money from providing that connectivity is the key bit that is changing.

Huawei will continue “selling shovels” to the telecoms that are providing connectivity. But what’s key to understand is what, in addition, are the telecoms going to need for how they operate a new type of business in 3- to 5-years’ time? … And that’s why Huawei has gotten involved with Wharton and a number of other leading business schools — to try and understand how these things are changing in other industries and what can Huawei learn. And maybe throw some additional ideas into the pot that Huawei can then circulate back with its telco customers.

“Will the telco be the dumb pipe? Or will it have some other, more important role to play? That’s really where the battle is.”

Knowledge@Wharton: Anything you see happening in three to five years that people aren’t focusing on that could be a big deal or a potential big deal?

Creaner: At one level, of course, you can’t predict what’s going to be a big deal in three- to five-years’ time. You couldn’t have seen Airbnb five years ago, or Uber five years ago, or the success of WhatsApp. So I don’t spend too much time trying to predict where those things are going to go. I suppose I look more at how do you build a flexible environment that’s able to take advantage of what’s going to be really important?

My vision for the future of the telco, as I say, is the telco moves from being the guy who focuses on just providing you voice and data services, messaging services — areas which are falling in terms of revenue — to being the guy who provides the platform that enables other people to get to market. So the telco provides something useful to the next Uber, it provides something useful to the next Airbnb, to the next WhatsApp. It provides a capability that takes advantage of the good things a telco can do, and takes a slice of revenue from that. That’s really the answer I’m looking for from spending time with Wharton — a vision of what that flexibility looks like, rather than a vision of what’s the next Uber. Now if somebody can tell me what’s the next Uber, I’d love to know that, as well. But I don’t hold out too many hopes for that.

Knowledge@Wharton: Here in the U.S., Verizon is making a big bet on the Internet of Things, on becoming a carrier that will connect all the Internet-enabled devices, even cars. Where are you when it comes to the Internet of things? And is that becoming popular in China?

Creaner: Absolutely. I mean, it’s huge. Maybe not so much on the connected car front, though connected cars are, of course, very important everywhere in the world. But things like smart cities and smart homes, and the Internet of Things devices that drive them — there’s a huge investment in those areas going on right across the world, in China, in Europe, in the U.S. And every telco that you talk to is deeply embedded in trialing out technologies and business models in each one of those areas — smart city, smart home, connected car. You know, drones for agriculture, healthcare systems, connecting to smart devices and wearables for healthcare and wellness — there’s a whole load of trials going on across the world now.

I think the technology is probably already there. What isn’t yet there are the business models and the market structures and the ecosystems that need to cooperate with each other, need to be orchestrated in order to turn these things into a real business. I have no doubt it’s going to happen. On any given day, there’s a conference on this topic, there are 20 interesting white  papers being published on this topic, there’s an announcement by a company on its level of investment in IoT, related to connected cars or smart cities or whatever.

But as of yet, I’m still waiting to see exactly where it’s going to shake out, and who’s going to make the money. Who’s going to really control the ecosystem, and who are going to be the bit players? The telecoms are definitely going to be in the mix because all of these things are going to require connectivity. But will the telco be the dumb pipe? Or will it have some other, more important role to play? That’s really where the battle is.

“You have to diversify your thinking and not just focus on trying to change internally. You add in change agents from different geographies.”

Knowledge@Wharton: How do you keep innovation alive at Huawei, and what are some of the challenges in doing that?

Creaner: Huawei’s only about 20 years old, and it has grown to be a very successful $60 billion or so company by excellence in engineering. So I think the biggest challenges might be identifying what the market needs, being a fast follower, and then executing brilliantly in terms of engineering. In technical terms, that’s sustaining innovation rather than disruptive innovation. Based on that model, Huawei has grown to become the market leader.

When you become the market leader, it’s very hard to just keep being a fast follower. You have to become the leader. So, the challenge for Huawei is how to transition to being that leader and no longer being a fast follower. Huawei is hugely innovative at the moment in the devices world, in phones and wearables, smart watches and so on, and that business is growing hand over fist within China and around the world.

Huawei is learning how to be the innovator, rather than to be the fast follower. But it’s a learning process, as well. To take a company that thrived and grew into a couple hundred thousand people based on fast following, and start shifting that mindset to become the innovative leader — there are a whole lot of cultural challenges. It’s nothing to do with whether it’s a Chinese cultural challenge; it’s just a corporate cultural challenge.

“When you become the market leader, it’s very hard to just keep being a fast follower. You have to become the leader.”

Knowledge@Wharton: How do you tackle a corporate cultural challenge?

Creaner: You can look at the way Huawei has, over the last five years, grown a lot of research centers outside of China. There’s probably 10 or so across Europe. There are research centers on the West Coast of the U.S. in Santa Clara (Calif.), there are research centers in other countries that tap into different types of resources, different types of thinking, people who haven’t necessarily grown up with the original culture. That’s one element of how you do it. You have to diversify your thinking and not just focus on trying to change internally. You add in change agents from different geographies. I think that’s maybe one of the key areas.

Of course, it has to come from the leadership, as well. Huawei has actually got three rotating CEOs. And one of the rotating CEOs, Eric Xu, is very much focused on what is the next vision for the company. So I think if you’ve got leadership that is really beginning to try and drive innovation, and you’ve developed a whole load of ideas across the spectrum, in different research centers, in different geographies that are entirely different from the original gene pool of Huawei, I think those are two elements of how you do it. I’m sure there are many more elements that we will learn as we go on.

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