Vodafone: Embracing Open Source with Open Arms
In lieu of acquisitions, the British wireless giant is pursuing growth by tapping outsiders' ideas for new goods and services
By Kerry Capell

This is an interesting article on a number of fronts: the importance of open innovation; the challenge of using M&A as the only tool to sustain growth; and the challenge of managing growth in large companies.

Vodafone (VOD) never put much stock in open innovation, or tapping outsiders for ideas. It didn't need to. The company, after all, had grown into the world's biggest wireless telecom operator on its own. But with such interlopers as Google (GOOG) and Nokia (NOK) starting to tromp on its turf, Vodafone became a convert. "We were a bit naive thinking everything could be done in-house," says Chief Executive Vittorio Colao. Now "the only way to create a fertile environment for innovation is to have open platforms and leverage them."

The clearest sign of Vodafone's new philosophy can be found on a Web portal called betavine. The site allows anyone from hobbyists to software pros to create and test one another's mobile applications, which can be downloaded on any wireless network, not just Vodafone's. While developers retain intellectual property rights, the British giant gets insight into the latest trends and ensures that new apps are compatible with its network. Vodafone itself used betavine to enlist those enthusiasts to test a software add-on that enables mobile broadband customers to access the Internet via Linux.

That open-arms strategy may be the way more companies will go in the current economy. Like many industry leaders, Vodafone got to the top largely through acquisitions, buying interests in two dozen phone companies around the world in the past decade, including a 45% stake in Verizon Wireless in 1999 and 70% control of Ghana Telecom last year. The purchases were made mostly to add customers, revenue, and sheer heft; innovation was an afterthought.

But these days, with little stomach for megamergers, companies are relying on existing assets to get bigger. Coming out with new goods and services makes this easier—especially if outsiders chip in with ideas, as Vodafone and other trendsetters such as Apple (APPL) and Nokia are doing. "Smart companies have found that open innovation helps them reduce costs while preserving growth options for the future," says Henry Chesbrough, executive director of the Center for Open Innovation at University of California-Berkeley's Haas School of Business.

THE DELL CONNECTION
Vodafone's shift in strategy coincides with a change in leadership. Colao, 47, moved up from deputy CEO of the company last July. His predecessor, Arun Sarin, prided himself on his wheeling and dealing, moving into such emerging markets as Turkey and India while divesting units in such tapped-out markets as Japan and Sweden. Colao sees his role as making the most of current assets instead of inking big acquisitions.

Scale clearly gives Vodafone an edge. With 289 million customers in 27 countries, the $35 billion company has had no trouble finding help from outsiders who'd love to sell to at least some of this population, too. Among its collaborators: Dell (DELL), which has joined with Vodafone to design laptops and low-priced netbooks with built-in wireless broadband access over Vodafone's network.

Operating subsidiaries and affiliates are becoming another source of new revenue generators. Take M-Pesa, a service that allows people without bank accounts to transfer money by text message. Developed by Kenya's Safaricom, in which Vodafone has a 35% interest, M-Pesa has grown to 5 million customers since its launch in Kenya in 2007. The service is now available in Tanzania and Afghanistan, and analysts expect it to be rolled out in India and South Africa soon.

UP NEXT: AN APPS STORE?
The telecom's next breakthrough may be in the emerging field of mobile health. In December, the company's in-house venture capital arm paid an undisclosed sum for a minority stake in t+ Medical, a British outfit that uses mobile phones as medical tools. Patients with diabetes, for example, transmit information such as blood glucose levels to their doctors, who, in turn, can order changes in treatment based on the freshest data.

Meantime, betavine's ad hoc collection of software writers is producing new apps. Vodafone customers in Germany and Britain can now access real-time train arrivals and departures. In Britain, they also can tap an Amazon.com (AMZN) "widget" personalized with their account details and a second widget with showtimes for movies. Betavine, says Emeka Obiodu, a senior analyst at London telecom consultancy Ovum, "is the most elaborate example of open innovation among all the wireless providers."

A full-fledged apps store may be next, say some analysts. Already, France Telecom's Orange and 02, a British wireless company owned by Spain's Telefónica, run their own app stores. Vodafone would be competing not only with these other network operators, but with Apple and BlackBerry maker Research In Motion (RIMM). Colao says only that he's investigating ways to expand business.

Vodafone's biggest challenge is its size. Its unwieldy corporate structure, with dozens of subsidiaries, joint ventures, and equity interests spread around the globe, makes integrating new products and services tricky. "Every CEO of a large company faces the problem of how to make innovation flow across the corporate hierarchy and borders," Colao says, "and I won't claim we have cracked it." Vodafone also is grappling with how to roll out its new offerings as far and wide and fast as possible, while tailoring products and services to suit each market.

But a decade of empire building, the widening embrace of open innovation, and the global slump may put Vodafone right where it should be. "In the current economic environment, operators, technology firms, handset makers, and application developers all need each other to make sure true innovation emerges," Colao says. "We want to be the guys who make it possible for developers to work with everyone."