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Telefónica Looks to Third Parties

Heavy Lifting Analyst Notes
Heavy Lifting Analyst Notes
Heavy Lifting Analyst Notes
6/28/2010

The vast and impressive headquarters of Telefónica SA (NYSE: TEF) – home to 11,000 employees and equipped with its own metro station – on the outskirts of Madrid is testimony to the continuing power of the big telcos. Notwithstanding the many deathbed pronouncements passed on them in the past decade or so, there is little here to suggest here that terminal decline is underway.

Which is not to say there are no storms ahead. At its Industry Analyst Innovations Day in Madrid on June 21, Telefónica set out some of its thinking about the future, and provided a fascinating glimpse into how big-telco thinking has changed and continues to change as a result of the ongoing revolution wrought by the Web.

At one time, most of the presentations at this kind of event would have focused on creating a more efficient set of pipes; now it's much more about applications, Web services, and the platforms that are needed to support their creation, packaging, and delivery. Although Telefónica continues to invest in network-efficiency initiatives (among other things, it set out some interesting ideas about a new type of content delivery network and faster DSL-based access), what's now at the heart of Telefónica's thinking – as it should be – is finding ways to work more effectively with applications developers in the world beyond the corporate campus. "We need an ecosystem in which innovation is truly open, to encourage cooperation with third parties," said COO Julio Linares.

To that end, Telefónica later this year will reveal details of a new and ambitious initiative (now under NDA) to involve third parties more fully in what it does.

Those behind the plan were frank about the size of the task ahead. In research conducted by Telefónica itself, it found that most applications developers didn't understand what new value telcos could bring them – and worse, saw telcos as greedy corporations that are not prepared to share fairly with third parties. Fixing that perception by introducing a broader and more flexible set of revenue-sharing principles is at the heart of Telefónica's new plans in this area.

Although the Spanish giant is continuing to develop products itself – and revealed some interesting ideas here, especially in the areas of health care and financial services – the truth, as it acknowledged, is that almost all of the consumer service innovation is now happening on the Web. And in practice, that means the big-iron network investments in LTE and FTTH and the rest are inextricably linked to finding new business models that engage better with developers and – by implication – persuade end users that there is more to the telco than a pipe.

Whether that proposed business model can be deployed without alienating either end users or Internet applications developers is the big question, and finding a positive answer will require some real organizational change inside telcos, backed by the board and by large-scale investment. Telefónica's plans suggest that maybe that more fruitful future is coming. But as the big telcos continue to plow through increasingly difficult waters, it will require an enormous effort of will to set a new course.

— Graham Finnie, Chief Analyst, Heavy Reading

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