Overview

As with marriage, partnerships between startups and telcos start off with high expectations on both sides but often end in disappointment. After looking into why operators embrace OTTs in ourfirst article, we will now focus on cultural differences between these partners and how they impact the partnership.

OTTs have proven their ability to innovate and disrupt time and time again. WhatsApp rendered SMS obsolete, Netflix and Spotify changed the way we consume media completely.

There are a few ways in which a telco can respond to this threat: ignore it; try to create competing in-house services; or partner up. Deutsche Telekom (DT) has chosen the latter path and other telcos such as Telefonica (tef) with its Line deal, are increasingly following suit: Out of 720 OTT / Telco partnerships in the past five years, 327 have been announced in 2015.

Some of those partnerships were quite successful. We experienced partnerships in the music streaming business that resulted in increased customer satisfaction, greater demand for bandwidth and even a 22% percent ARPU increase. Today, almost a third of the companies with an annual revenue of over 250 Million Euros partner with startups (Manager Magazine, 2016) On top, DAX 30 companies like Siemens, Metro or Daimler increasingly buy into startups themselves, with a total investment volume of 5bn. € in Germany. Yet, around 80% of those partnerships are not successful.

Implementation: When vision meets reality

In our projects, we started to notice common denominators for successful partnerships. Based on our experience in the telco sector and the in-depth analyses we conducted, we developed the OTT Partnering Success Formula. Whereas utility and customer experience are the key factors for achieving an OTT partnering success, the denominator’s factors, culture and processes, can hamper a partnership from becoming successful.

We experienced that the potential success of an OTT partnership is driven by utility, i.e. the overall usefulness of the partner proposition as well as the experience it provides to new customers when using and activating the service. The challenge with regards to the utility of a certain proposition is that it is not fixed – it actually depends very much on the proposition’s timing in its hype cycle. Note taking apps, such as Evernote, were a great proposition when there were just a few of them available – by now, however, successful differentiation is not achieved by offering customers one of these apps “exclusively”. It is rather having exclusive access (maybe even for free) to HBO Go for instance that makes propositions attractive – and useful.

The customer experience accounts for the app itself – the best partner is not worth anything if the registration experience for the service is not working – but also the overall integration handover between both partners. When for instance Spotify was launched in its first partnership with Deutsche Telekom (DT), DT’s customers had to activate the new service manually to receive free access. Registration was neither intuitive nor clear and left users uncertain about whether the service was actually free of charge or not.

Meanwhile, cultural differences between both parties as well as the readiness to partner can effectively destroy any value the proposition might have generated. It took some operators two years or more to integrate OTT partners into their processes and systems. With the rapid changes in the OTT economies (who would have predicted another Pokémon craze 6 months ago?), any integration that takes more than 6 months is limiting a partnership’s potential drastically.

The integration phase is especially prone to cultural challenges. The organizational structures of big companies are hardly ever compatible with the fast and flexible processes of startups and OTT players. Considering that most startups are scarce on finances, time to market is a critical factor.

Paul Gumienny, CEO of Groopdoo, (a German fintech startup) recalls his experience with a German bank: “Although they had the perfect customer base for us to partner with, we could not work with them. At the first meeting, we encountered lots of people referring to incredibly complex internal processes. In the end, we just went with Paypal as the ideal partner”.

While entrepreneurs are scared of the rigid complexity, corporations are used to their processes. Managers are unwilling to change processes which might have been in place for most of their career. IT specialists at German bank felt so threatened by the speed, ideas and expectations towards a new start up their company was partnering with, that they delayed the order of new servers for almost a year. Without those servers, the new software could not be implemented and the partnership failed. Organizational rigidity, especially at stock listed companies, is a challenge to all OTT partnerships. Companies without a solution to these challenges will face continuous partnership failures.

**Three building blocks to implement cultural change ** We identified three building blocks to implement the cultural change for partnering: Senior management focus, individual empowerment and innovation governance and organization.

CxO commitment on the partnering strategy and vision is the core of any partnering success. Without the commitment from the top, the organization will fail to acknowledge the need to partner in the first place. Tim Höttges, CEO of Deutsche Telekom AG, famously addressed this by putting partnering on his strategic agenda when introducing his strategy as CEO.

He then went on to establish several key initiatives (for example coining “Steckerleiste”, the German word for a power strip, as a symbol for being easy to partner) that lay the foundation for a mind-change within DT.

Ideally, top management reconciles the different cultures of a long-established company and young startup within the organization and supports the collaboration. If top management emphasizes that both the startup and the members of the organization are crucial for the success and the future of the company, the cooperation will be more likely to thrive.

Loosening the tight knots of these hierarchical heavyweights has proven extremely successful. At Tesla, Elon Musk makes sure his employees are driving the business with a beneficial mindset, enabling them to innovate on a constant basis. Carved into a small number of corporate culture principles, the employees' focus is built around ownership. They are encouraged to think like entrepreneurs, taking responsibility and accountability and ideally transform their idea into a product. Furthermore, the company’s on-paper-structure does not restrain peoples’ actions with hierarchical limitations, as the entire company acts as one unified team, delivering the best customer experience while constantly improving the business.

In a similar approach, Gore, best known for its Gore-Tex material, turns every employee into an entrepreneur. The structures ensure a flat hierarchy, removing reporting layers and striving for efficient peer-to-peer collaboration. Gore sees itself as an ameba – internally solidified, externally adaptable. By splitting the organization into sub-teams agility and pace are kept high.

Corporations have an exaggerated tendency to avoid risks and failures at any cost. Startups, on the other hand, often favor a different approach. Failure is not only permitted, it is almost asked for. Taking away this anxiety of failure by creating a failure-friendly environment will encourage more people within the organization to try something “new“. Concepts like rapid prototyping define the way how successful product development is executed. James Dyson – founder of the cleaner and blower products – claimed that most of his company’s ideas are born out of errors, testing and every so often failure. Tim Höttges laid out a similar principle – saying “no” in the face of superior pressure – in a town hall meeting this summer. For DT - a former bureaucracy - this almost amounts to a “viva la revolución”.

People - Empower the Entrepreneur

Integrating the partner in the daily operations is crucial. For innovation partnerships, it is especially important to ensure an exchange of ideas, knowledge and capabilities. This way both sides avoid isolation and learn from each other. In the best case they develop services, products or strategies to bring those to the market successfully.

These ideas flow between both parties by themselves – they often just require a little nudge to start growing. In our experience, embedded team members or an exchange program are an effective way to start spreading a different mindset.

In this “ambassador program”, a selected group of volunteers will join the startup on a temporary basis. Upon return to their original units, they will inject new thinking and approaches. While networking, they will encourage additional employees to join these exchanges – or to even start thinking entrepreneurial. This approach also has the potential to lower the rejection of innovation and risk averseness in the company, resulting in a bottom-up driven change of mind.

We had significant success in establishing physical exchange platforms between partners – often with strong adversaries from within both organizations. Team meetings with informal settings, i.e. mixing both parties across shared houses proved particularly helpful. Apparently, the informal setting of preparing dinner or having breakfast together as “roommates” helps to break up old conceptions. These roommates, later on, were significantly less afraid of taking risks and operating together. In other words, employees started to think as a cross-company team and would act as ambassadors to the remaining organizations.

Organizational Set-Up

Even though management leadership and entrepreneurial-minded employees are crucial to any partnership and the development of innovation, it is not sufficient. How innovation is embedded in the organization is crucial. The company’s organization must foster collaboration, not competition. Since types and purpose of partnerships differ, we present a range of organizational approaches to cooperate with OTTs. The pros and cons of each of those approaches must be weighed to find the most adequate setup.

Most companies operate fully integrated, which is ideal for minimizing time to market for internal propositions and leveraging existing assets and capabilities. For the external innovation power that a partner can provide, this approach will most likely fail.

In our experience, a dedicated partnering spin-off will enable the flexibility and freedom of resources (people and funding) required to grow. Deutsche Telekom, for example, tries to develop innovation by using several means of collaboration with startups and OTT player. Next to giving full management support to internally developing innovation through partnerships, Deutsche Telekom set up DT Capital Partners. Additionally, it supports selected startups in their foundation by setting up an incubator (hub:raum) for these companies. Here, ideas are encouraged from an early stage until market launch with financial support as well as internal and external expertise.

Incubation serves as an extension to traditional in-house innovation and takes advantage of external intelligence or combines existing internal with external knowledge. Venture funding is a way of outsourcing innovation to build upon and grow an existing business.

Choosing the most appropriate organizational set- up is important for the success of innovation. It will also be a trade-off between exploiting synergies while avoiding alignment conflicts with core units when the innovation unit is rather separated from the organization.

Way to go…

OTT players have come to stay and telcos have started to realize that partnering is the way forward. We believe that the best operators in the future are those who are best partners. Decreasing revenue streams of operators can be compensated through those partnerships. Especially with players like Google and Apple entering the carrier business, operators have to watch out not to be left behind for good. Once the adequate partnering model is chosen, operators need to address organizational challenges and start implementing an environment that embraces change and risk. Being an attractive partner is important to attract the right talents and strategic partners.

Once the operator is in a cooperative relationship with a startup, the three building blocks of a successful innovation environment need to be in place: I. A leadership team supporting an innovation culture within the organization; II. Entrepreneurial-minded employees; III. An organizational set-up that fosters innovation and collaboration

Only then the development of innovative ideas, products and services through a mutual exchange of capabilities and know-how can be ensured.

Authors Klaus Newen, Riem Silvia Jalajel, Alexander Hardt