The Carriers Are Stuck In The Innovator’s Dilemma. Just Don’t Tell Them That.

Harvard professor Clayton Christensen, who wrote the book “The Innovator’s Dilemma” that defined such corporate conundrums, described them as arising when a disruptive technology—like a small disk drive or steel mill—becomes so big that it displaces an existing market, sending big, successful businesses to their doom.

Of course, this happens in part because disruptive technologies are often difficult to recognize. This is especially true in the case of telecom, when the disruptive innovation isn’t any particular technology per se, but the rise of smart devices at the edge of carrier networks.

Carriers have embraced this trend, believing that iPhones, iPads, Droids and other smart devices will eventually reduce customer churn and increase the amount of time they spend on the network.

It’s a reasonable approach—but it is contributing to a dramatic shift in the balance of telecom power in the United States. This is particularly obvious in the wake of the holiday season. App makers and device manufacturers like Apple are enjoying blockbuster sales, while carriers are struggling with declining margins and rising capital costs.

In order to profit from the boom, the carriers need to open up their networks to innovation. The challenge is that doing so goes counter to a century of business success—the innovator’s dilemma in action.

For the last one hundred years, telecom has been like a closed black box. Connecting to network resources required esoteric technical knowledge and the ability to cope with an environment that was hostile to rapid business development. Deals were slow to take shape and often seemed to move ahead at whim of the carrier.

But it wasn’t always this way. At the end of the last century, the newborn American telecom industry was celebrating a party of innovation. Across the country, a do-it-yourself networking movement was inspiring farmers and small businessmen to string their own wires, challenging the dominance of Bell Telephone. “Build your own lines by all means in some way,” the Rural New Yorker exhorted.

By 1906, independent telephone companies had connected 3 million phones, compared to Bell Telephones 2.5 million. An industrial battle involving everything from bribery and sabotage to predatory pricing and coercive connection agreements was in full swing.

In 1913, Bell Telephone, now renamed AT&T, responded to a federal antitrust suit, brought on behalf of the independents, with an offer, known as the Kingsbury Commitment, that would end up reshaping the young industry into a protected monopoly that would persist for the next half century.

Citing the need to safeguard the network, AT&T fiercely scrutinized all interconnections with its network. All devices had to be made by Western Electric, its wholly owned subsidiary. Businesses that transgressed got sued, no matter how small or unprofitable.

While regulators finally forced AT&T to open its network in 1968, the qualities that would characterize AT&T and other carriers for the next three decades had already been set. The networks, in practice, would be closed and the devices at their edges would be dumb.

For the next forty years, telecom regulators repeatedly tried and failed to open up the industry to innovation. Decades of antitrust legal activity led to the 1984 Divestiture of AT&T, which was followed by the Telecommunications Act of 1996, a major overhaul of the Communications Act of 1935 so great it inspired more than one business chronicler to foretell the death of AT&T.

But AT&T proved resilient—and so did the black box. In 2001, Consumers Union, the nonprofit publisher of Consumer Reports, concluded that the 1996 act, had failed to create meaningful competition and was a “consumer disaster.”

Then along came Steve Jobs and the iPhone. Jobs not only put a extremely smart device at the edge of the network, he made it a platform for app development. More than 500,000 creative minds responded with new business ideas.

Jobs wasn’t breaking new ground—he was simply remaking the classic technology drama that pits the intelligent network against the intelligent edge. This is just what we saw in the struggle between the mainframe and the PC, the PC and the Internet, and the Internet and peer-to-peer networks.

Shakespearean these dramas may not be, but each of these contests has put billions of dollars into play, and this new face off between the closed network and the smart device is no different.

To survive the innovator’s dilemma, carriers need to increase the intelligence of their networks and open them up for innovation.

If Twilio’s experience is any guide, there are hundreds of thousands of apps waiting to be written on top of an open telecom network. Twilio provides a platform for voice, VoIP, and SMS apps, adding value to existing carrier networks.

During the past four years, developers have built everything from playful musical hotlines, like the Callin’ Oates app that went viral over Christmas, to SMS apps that remind patients to take their medicine and help commuters track the progress of their local bus.

On the corporate side, virtual PBXes are replacing on-premise PBXes and technologies like interactive voice response systems are increasingly moving to the cloud. It turns out there are easier and cheaper ways to do everything from call tracking to click-to-call, voice broadcasting and ID verification.

There is, in fact, a party of innovation among developers of voice, VoIP and SMS apps that is similar in spirit to the early days of DIY telephone networks. It’s time for the carriers to join in.

Jeff Lawson

Jeff Lawson is the CEO of Twilio.

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A Cluster Of Links: Telcos &amp;amp; Innovation &amp;laquo

[...] The Carriers Are Stuck In The Innovatorâ€™s Dilemma. Just Donâ€™t Tell Them That.Jeff Lawson, Pando Daily, February 20th 2012 (the author is founder of Twilio, an example given in the post for innovation using Telco networks) [...]