The Brazilian Opportunity and Telefonica's case (Microsoft IOP conference - Madrid - 2011)

0Brazil Innovation Center

The Brazilian OpportunityTelefonica’s innovation story in Brazil

November 17th, 2011

Cristiano CairoliInnovation Center Brazil


Let’s talk about Brazil...


Brazil’s potential is quite obvious

5th largest country in the worldBigger than the entire European continent

Exuberant Natural ResourcesWorld’s greatest biodiversity Petroleum ReservesHidro-electricity and Ethanol

190 million inhabitants19 MM in São Paulo metropolitan area8 other regions with +3 MMDiverse culture from secular immigration and Miscegenation

7th largest GDP of the worldUS$ 2.09 trillion (2010 IMF)

Source: International Monetary Fund


Source: Goldman Sachs. Global Economics. Commodities and Strategy Research. Global Economics Paper No: 192. The Long-Term Outlook for the BRICs and N-11 Post Crisis. Dec 2009. UNCTAD

Brazil got the investment grade

During 2008 global economic crisis:

Steady GDP Growth5th largest consumer market

5th biggest FDI destination

3rd world stock market in value

GDP per capita more than tripled since 2002

Ernest Young; UKTI.gov.uk

Is it Finally Happening?


Still a long way to go

Room (and need) for improvement

#54 in Global Competitiveness Report, only #6 in South America

Gaps in basic Infrastructure, specially transportation

Bureaucracy, high tax burden and interest rate spread discourage entrepreneurship

A country of Contrasts

21.4% of the population below poverty line in 2009.

#84 in HDI (human development index), #7 in South America

Public safety improving, but still a major concern

Source: IPEA


Middle classes are already 50% of the population, 10 p.p. more than 5 years ago

30 million people (16% of the population) have surpassed the US$2/day poverty basin in the last 5 years

GINI coefficient for income distribution had a significant decrease in the last years, reaching 0.530 in 2010

The expanding middle

**

GINI Coefficient

0,596 0,589 0,5830,572 0,569 0,563 0,556

0,548

2001 2002 2003 2004 2005 2006 2007 2008

Sources FVG: IBGE, IPEA** Estimated

The good news: Brazil’s Growth is being accompanied by a better income distribution


Sources: Innovalatino based on data from Pyramid research

Growth of Fixed, Mobile and Internet User in Latin America

(as % of population)

How connected is Brazil now

Teleco – nov/10 ; relatório Vivo

55,7%

65,0%

70,6%

0,3%

1,3%

44,1%

44,2%

Oper E

Oper D

Oper C

Oper B

Oper A

Vivo

Total

3G Coverage (as % of population - 2010)

Smartphones representnow 5,8% of sales, versus

3,4% in 2010.

Mobile Apps usage up369% in 1 year, #6 rate in

the world Flury – China the new mobile app dragon


The one thing Brazilians are keen on?

?


5th largest internet presence in the worldNumber of internet users and internet hosts

Social Networking

Highest percentage (86%) of Internet users visiting social networks

An average of 5h/month on social networks and blogs

Sources: Nielsen

Inside FacebookInternetworldstats.com

Orkut is no longer king in Brazil

327% growth of Facebook user base since Sept 2010, reaching 25.8 MM users.

Source: Ernest Young; UKTI.gov.uk

Brazilian internet users are the #1 in use of social networks


“Classe C” is driving growth – of the internet as well

“Classe C is the majority of the population– and the fastest growing. Theyunderstand that the educational system in their country is awful and so they are working extremely hard to educatethemselves. More than any other class, they are adding skills and moving up theeconomic ladder the fastest. And the maindriving force of all of this is the Internet and digital media.”

They are the ones impulsingcomsumption in most industries fromtelecom to tourism

They are the ones buying computersand ADSL lines.

They know and explore the value ofthe internet.

From 2009, half of the Brazilianinternet users already belong to

the emerging classes.

Lan Houses still represent 15% ofuse, but loosing space to cheaper

smartphones and data plans

“Classe C” de conectados – DataPopular“The Stampede” RazorFish and Terra

Fecomercio -Joe Crump, Senior VP Razorfish


So what is it like to innovate in Brazil?

Telefonica’s story


Telefonica in Brazil

Operating since 1998

More than US$ 100 Billion invested in Latam

4th largest company – R$ 45 Bi in revenues (*)

Now the group’s largest operation in the world

(*) http://exame.abril.com.br/negocios/noticias-melhores-e-maiores/noticias/as-50-maiores


Why go beyond the core business?

Back in 2006, most profit stil came from a saturated fixed telephonyservice (Vivo was a separated joint venture)

Operation was fully focused on growing fixed broadband and fightingcompetitors.

Innitiatives with potential to go beyond access and infrastructure were notbeing prioritized

Telefonica Brazil decides to create a Strategic Innovation area, withindependent funding and focused in new, high potential products

beyond, but leveraged by, the core business.


Innovating in a big company is not exactly easy

We tried thisbefore

This has notworked in mature

markets

It’s not our culture

It’s not goingto work

Another area hasthe “same” project

I think our VP won’t like this Too late to enter

this market

We are too slow to compete

This projectkeeps changing

I see possiblecannibalization

I want to see thenumbers first

It’s too risky

Let’s keep doing it, we already got this

far

It’s not our core business


Telefonica Brazil’s initial approach on Innovation

A business Focus: Innovation = different + promissing + profitable

Traditional “stage-gate” process, where products could be“incubated” until ready for OB or spin-off.

Identify people with the desireable entrepreneaurial skills andprovide them ownership of the project.

Still part of Telefonica, but with a “license” to escape companysystems and processes when necessary (and possible).

Colisãode idéias

Priorizaçãodos temas

Busca deinformações W

orkshopsIteraçãocontínu

a

Justaposição

de fragmentos


Telefonica Brazil’s model for incubation

Strategy and Perspectives

Scientific Research Ideas

GenerationIncubation

Technology Transfer Incubation

Innovation Area

Proof of Concept

Ideas To OB orSpin/off

Continuous and interactive innovation process

Test the product with real customers as soon as possible

Forget, Borrow, Learn fast

The fastest way to succeedis to double your failure rate.

Thomas J. Watson Sr.,fundador da IBM


Banda Larga Popular – Broadband for low income customers

Wi-Mesh Technology with ADSL or Cablebackend. Lower A

Prepaid service, through customized cardssold at local commerce.

R$ 29,80 per 1 month, no fixed linerequirement

+70k Households covered

+10k Customers, with little advertising.

Successfully being handed-over to OB, for scale.

WI-MESHADSL

CABLE


Successful new lines of business were developed using the incubation model

Audio, Video and Computers support

2011 figures: 50 K packages / month

Forecasted revenue for 2011: R$ 40 MM

Home AutomationHome automation services (audio, video, ambiences, security) for high-end residential buildings.

More than 2.000 projects sold in the first year (2010)

Specialized support


Telefonica Digital and the new innovation centre in Brazil


1 . The potential target area of innovation dramatically increased

82 MM

Combined Customers

Important changes had great impact on this innovation model


2 . Telefonica R&D expansion beyond Spain

UK

Brazil

Brazil innovation center is focused on technology differentiation to create

global products and services, within the framework of an Open Innovation model.

Innovation area joins forces with a new, reorganized, Telefonica I+D

Tel Aviv


3 . Telefonica’s new approach – Telefonica Digital

“Im honoured to have been asked by César to lead the new Telefónica Digital unit. Its

mission is simple:

create the power for Telefónicato outperform in the digital world,

significantly boosting our growth potential.”

Mathew Key, 5th September 201


Three things are necessary to make great things happen

CustomerCustomerDesirabilityDesirability

TechnologicalDifferentiation

Business Viability

Leading edge researchDifferentiated technologyExcellence in software developmentAgile methodologies versus waterfal

Customer InsightsCo-creationBest customerexperienceCustomerDriven InnovationStrong UX team

Market researchBusiness casesUnderstanding of Operating Business priorities


A new methodology: Agile customer driven innovation


ü Customized solution that fulfills the Brazilian market requirements

ü Know how in the Brazil Innovation Center

ü Ability and technology to develop new projects

Engagement of projects with the OpCo,

using R+D existing technology / solutions s

PROJECT

R+D SOLUTION

SET UP OF

LOCAL TEAM

KNOW HOW R+D

Temporary transfer of R+D people to Brazil, to manage

projects and to transfer know-how

Creation of a local team in Brazil to implement the

project

Transferring know how from Spain to the local team to develop / customize solutions for the Brazilian Market


The process generates expertise, with focus in the highest potential areas for the Brazilian market

eHEALTHFINANCIAL SERVICESM2M

VIDEO SERVICES

• 190 MM Habitants

• 227,0 MM mobile phones

• 15,2 MM Fixed Wideband

• Only 11,9 MM pay TV

Customers

Source Teleco – 3Q 2011

• Cisco: 15 Billion connected devices

by 2015 ww

• Gartner: 30 / 40 percent growth yoy in the near

future

• Big opportunity in a big country

Source Larry Lannon - B/ossinsider blog

• 79% of adult population (115,2 MM) have relationship with financial Institutions

(+27% than 2006)

• 37,8 MM customers use internet banking

(+38% than 2006)

•628 MM credit / debit cards (+61% than 2006)

• Big market, bigger growth

Source Febraban June 2011

• Private Sector: 60,1 MM users,

31.000 MM Euros revenue (+75% than

2006)

• 130 MM users served by the public sector

• Opportunity for a better service at a lower cost

Source ANS


Video: On-demand Content through broadband

Example –developments in video

“Guia Imagine” – a TV Guide for mobile phones with enhanced social features


Adding R&D to existing incubations

Home automation control by hands

movement


Fostering Open Innovation more than ever…


Universities

Entrepreneurs

Innovators

Venture Capitals

Developers

Research Associations

Incubators

.. to establish Telefonica as a strong player in the Brazilian innovation eco-system


…having Wayra as one of the fundamental initiatives

Start up acceleration initiative

Capture Latin America talent in Latin America

Develop the full entrepreneurship potential of the region

Colombia Spain Mexico Argentina Venezuela Chile Peru Brazil


In summary, our challenge is to..

Fuel Innovation in Telefonica Brazil, with business orientation and technologically differentiation.

Use open Innovation to create roots in the Brazilian innovation eco-system, thus leveraging Telefonica’sinnovation power

Create the power for Telefonica to outperform in thedigital world


Thank You!

Cristiano Cairoli

[email protected]

@cairoli

The Brazilian Opportunity and Telefonica's case (Microsoft IOP conference - Madrid - 2011)

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