THE EVOLUTION OF MOBILE INDUSTRY- MODULAR TO INTEGRAL
by
IPSHITA NAG
ARCHWE
Bachelor of Engineering in Electronics and Telecommunications
Nagpur University, India
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
Submitted to the System Design and Management Program
in Partial Fulfillment of the Requirements for the Degree of
JUL 2 0 2011
MASTER OF SCIENCE IN ENGINEERING AND MANAGEMENT
LIBRARIES
at the
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
DEC 2010
The author hereby grants to MIT permission to reproduce and to distribute publicly
paper and electronic copies of this thesis document in whole or in part in any medium
now known or hereafter created.
Signature of the Author
Certified by
Accepted by
System Design and Management Program
Sr. Lecturer Henry Birdseye Weil
Thesis Supervisor
Technological Innovation, Entrepreneurship, and Strategic Management
MIT Sloan School of Management
Patrick C. Hale
Director, System Design and Management Program
(This page is intentionally left blank)
To
Aadya,
My light and joy
ABSTRACT
This thesis explores the dynamics of the mobile industry in the US. One in every four Americans
owns a smart phone. Smart phones are fuelling the growth of the mobile web and an
ecosystem of mobile applications. As innovative applications and services capture the
marketplace, which factors ensure greater user adoption isessential to building attractive
services. Despite innovation in network technology and billions of dollars invested in evolving
into newer generations of technology, providing high capacity, low latency and high availability,
the mobile network isfast becoming a medium to supply mobile services and is losing the
capacity to distinguish itself based on network features. Many are of the opinion that the
network itself is getting commoditized. The rapid growth in the mobile industry has led to
evolution in the industry value chain.
This thesis addresses the following questions: 1) What makes a product/ service on the mobile
platform attractive for users to adopt them? 2) What has led to commoditization of mobile
network? 3) How has the nature of the industry evolved?
By employing systems tools like stakeholder theory, gear model (value chain mapping) and
system dynamics, the nature of the mobile industry isstudied. Various stakeholders and
components in the value chain are identified to understand what their individual needs are and
how are they met. The thesis conclusions are supported by conducting research from academic
journals, market reports and online journals/ blogs.
Thesis Supervisor:
Henry Birdseye Weil
Title:
Senior Lecturer
Technological Innovation, Entrepreneurship, and Strategic Management
MIT Sloan School of Management
Contents
ABSTRACT......................................................................................................................................................4
6
Ta ble of figures .............................................................................................................................................
Acknow ledgem ents.......................................................................................................................................7
Chapter One: Introduction............................................................................................................................8
1.
Motivation .......................................................................................................................................
2.
Thesis presentation........................................................................................................................11
3.
Approach........................................................................................................................................11
4.
Tools used:.....................................................................................................................................13
8
Chapter tw o: Analysis.................................................................................................................................16
1.
Stakeholder theory ........................................................................................................................
2.
System s theory...............................................................................................................................27
16
a.
Consum er preference dynam ics..............................................................................................
29
b.
Technology and innovation dynam ics ...................................................................................
34
c.
Regulatory dynam ics...................................................................................................................40
d.
Industry structure dynam ics ..................................................................................................
48
e.
Corporate strategy dynam ics...................................................................................................
53
Chapter three: Conclusions.........................................................................................................................58
1.
Evolution of custom er choice .....................................................................................................
58
2.
Com moditization of the mobile network .................................................................................
72
1.
Com petition (Increase in num ber of players)........................................................................
76
2.
Service attractiveness ............................................................................................................
78
3.
Cost to build capacity.............................................................................................................
80
4.
Excess bandw idth decreasing profitability ............................................................................
81
5.
Deregulation leading to low operator service revenues .......................................................
83
Vertical integration ........................................................................................................................
3.
86
1.
Reasons for integration..........................................................................................................
86
2.
Impact of vertical integration on the mobile platform :..........................................................
95
Finally..........................................................................................................................................................98
Bibliography ..............................................................................................................................................
100
Table of figures
Figure 1: Stakeholder diagram
Figure 2: Gear model
Figure 3: Adoption of smartphones
Figure 4: Growth of mobile users vs desktop internet users
Figure 5: Categories of applications used in past 30 days
Figure 6: Mobile device value chain
Figure 7: Mobile network value chain
Figure 8: Mobile industry growth dynamics
Figure 9: iPhone adoption and smartphone fragmentation
Figure 10: US smart phone penetration
Figure 11: Corporate strategy formulation
Figure 12: Customer choice
Figure 13: Mobile TV market
Figure 14: Select mobile behaviors
Figure 15: Commoditization dynamics: industry growth
Figure 16: Commoditization dynamics: increase in number of players
Figure 17 : Commoditization dynamics: service attractiveness
Figure 18: Commoditization dynamics: cost to build capacity
Figure 19: Commoditization dynamics: Excess capacity
Figure 20: Commoditization dynamics: deregulation
Figure 21 Application store comparison
Figure 22: Smartphone market share
Figure 23: Increased service attractiveness through vertical integration
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Acknowledgements
My journey in the MIT SDM program has been an exciting, grilling, challenging and athoroughly
enjoyable one. For this I am deeply grateful to my professors, cohort, my extended circle of
friends and my family. Without you, this journey would not have been what it isand Iam
forever grateful.
For this thesis, I would like to thank my advisor Henry Birdseye Weil, who had so kindly agreed
to advise me through my thesis. I have greatly learned from his wide knowledge and expertise
in the telecom domain. I deeply appreciate Professor Charles Fine, whose phenomenal research
in the nature of technology value chains has provided the foundation for my thesis. I would like
to thank Steve Whittaker, British telecom for our many discussions about the global telecom
issues and Chintan Vaishnav for our enlightening coffee conversations about the mobile
industry. I would like to thank all my teachers and professors, especially Michael Davies and Erik
Brynjolfsson, who are global thought leaders and wonderful teachers. Many thanks go out to
the researchers of CFP (Communication Futures Program) and CSAIL (Computer Science and
Artificial Intelligence Laboratory), especially Natalie Kym, who were so generous as to share
their research freely and openly.
At SDM, I would like to deeply appreciate Pat Hale, under whose exceptional leadership and
guidance SDM has become a close knit, excellence seeking community of people who are
motivated to find holistic solutions to business and technical problems plaguing the globe
today. I would like to thank my SDM09 cohort with whom I have enjoyed solving grueling
assignments and project reports. I am proud to be part of the SDM family and the larger MIT
community.
Finally, I would like to thank all my family members - my parents, aunts and uncles, without
whose constant support MIT would not have been possible. To my little girl Aadya, from whom
I have sadly spent some periods away. I am sure that the skills and experiences gained at MIT
have enriched both of our lives for years to come.
Chapter One: Introduction
1. Motivation
The information and telecommunication industries have been on a superhighway of
growth. Mobile penetration has reached almost 40% of the planet from almost 2%in
the last decade, in more developed countries like South Korea, Japan and United States,
the figure is higher. In developing countries, mobile and broadband penetration has
provided a stimulus for economic growth. The mobile and broadband technologies
provide a platform for delivery of many other value added services to the end user,
delivering value to the end user in the form of improved lifestyle, business productivity
and essential services (healthcare, banking, etc).
Therefore, the mobile industry isexpanding at atremendous rate, in terms of the value
it provides and the stakeholders involved. The value provided by the mobile technology
has grown beyond voice connectivity to data enabled services like business productivity,
education, health, commerce, etc. The mobile platform also provides a lucrative avenue
to provide advertizing services, a key differentiator of this platform isthe capability of
providing location based services/ advertisements.
Social networking has become one of the most important phenomenons of this
millennium. Many websites provide social and professional avenues for people to share
their personal information and in turn build their network of friends and contacts
virtually. This has made the world a smaller and more connected place. Platforms like
twitter provide an excellent mechanism for people to engage in conversations globally
while in the comfort of their own home or offices. It has provided solutions to many
societal problems like help during the Haitian earthquake or finding answers to technical
questions. How have consumers evolved from passive consumers to active participants?
What makes a mobile product/ service attractive?
The mobile platform provides an always-on 'real time' connection. While the online
industry or the internet was considered real-time, it can be made possible through a
medium which isalways on wherever you are through a device which is always
accessible to you. Therefore, even though the internet was widely accepted during the
last decade of the second millennium, its value has been fully realized through the
mobile platform. Therefore, a plethora of new services have led operators and
application providers to ask the question. What are the killer app/ services in the
mobile industry which will drive the future adoption of smart phones?
Entertainment industry was also quick to realize that the consumer behavior was quickly
changing. As the mobile network technology improved by leaps and bounds through
every generation, the latest generation 3G and the 4G provide a large bandwidth to the
end users providing an opportunity to enjoy the services which were hitherto not
possible due to bandwidth limitations. These services and applications were gaming,
video streaming and video conferencing. Gaming companies throughout the world
began to release mobile versions of their games. This enabled a college student in San
Francisco to play with a stay-at-home Mom in Russia, while he was waiting for his
friends at a local park. Forms of videos compatible for the mobile platform began
emerging. Many studios released short clips of popular TV soaps of 2-3 minutes which
were ideal for viewing on the mobile phone. Users could view highlights of games,
movie trailors, and popular clips of their favorite shows while on the move.
The average revenue per user isthe revenue generated per user through the network
services provided by the mobile operator. The network services consist of voice and
data services. As the mobile platform provided a plethora of value added services, voice
became commoditized. In order to provide seamless connectivity for the value added
services, the operator needed to provide a basic level of service which meant a certain
acceptable bandwidth, download speed and latency. This led to the commoditization of
the network itself and therefore raises the following question. Why has the mobile
platform been commoditized and what are its effects?
As a result, we notice that an industry which was earlier about voice and connectivity to
now encompass previously unrelated and independent industries like retail, education,
health and advertizing. As a result, the traditional players in the mobile industry like
operators and network devices manufacturers, designers and integrators are looking
beyond traditional mobile technology value drivers to generate and capture value in the
value chain.
Therefore, as the mobile industry expands in its footprint and value, we notice
companies trying to invest in newer industries, invest in new competencies through
organic and inorganic growth. As the industry isin a flux, the dominant design of the
newer devices like smartphone, netbook have not emerged. Customer preferences are
evolving and consumer trends are moving towards freemium business models,
effectively rendering the basic connectivity commoditized. Therefore, companies are
entering into collaborations so as to build an ecosystem of partners who can help
provide end to end service to the customers. In such a scenario, it is imperative that
value isgenerated for all the players so that it is awin - win situation for all, and not a
'zero sum' game (using the value chain dynamics terminology of Prof. Charles Fine).
This thesis examines in detail the dynamics of the mobile phone industry. It assesses the
driving factors and the causal relationships of the technical, business and policy
conditions existing at this time. How isvertical integration taking place inthe mobile
industry?
Scope: For the case of simplicity and focus, this thesis will explore the mobile industry in
US only.
2. Thesis presentation
The thesis isdivided into three chapters. The first chapter introduces the problem
addressed by the thesis, the overall thesis approach and motivation. The second chapter
analyzes the mobile industry structure and individual components in detail utilizing the
various systems thinking based tools. In the third and final chapter, the conclusion of
the thesis is laid out. These are answers to the three main questions the thesis attempts
to answer.
* Thesis questions
* Scope
Detailed analysis of mobile industry structure
e Stakeholder value Analysis
e Value chain analysis
"System dynamics
e
" Attractiveness of products/ services
" Commoditization
" Vertical integration
3. Approach
In order to perform adetailed analysis of the mobile industry, I use a systems thinking
methodology. 'Systems thinking' isthe process of understanding how things influence one
another in awhole. 'Systems thinking' approaches a problem or situation in a holistic
manner, studying the interaction of the causal effect of inherent components in the existing
ecosystem. Founded in 1956 by MIT professor Jay Forester, 'systems thinking' provides a
unique way of thinking which isfundamentally different from traditional form of analysis.
Traditional analysis focuses on separating the individual pieces of what is being studied.
'Systems thinking', on the other hand, focuses on how the individual pieces interact with
each other, thereby leading to emergent phenomenon.
The emergent behavior arising from the interaction of sub systems is more than the sum of
its parts. 'Systems thinking' is an interdisciplinary field of study applying to problems in
many fields, including but not limited to engineering, biology, management and economics.
Peter Senge, author of 'the Fifth Discipline' and one of the founding thinkers of systems
thinking', proposed that systems thinking integrates all disciplines of a learning
organization, fusing them into a coherent body of theory and practice. The essence of
mastering systems thinking as a management discipline lies in seeing patterns where others
see only events or forces to react to. A system thinking approach directs that the cumulative
working of system ismore than the sum of its parts.
The objective of this thesis isto understand the current nature of the mobile industry in the
light of the business environment, technology dynamics and consumer choices. This thesis
attempts to answer the following questions.
1. What makes a product/ service on the mobile platform attractive for users to adopt
them?
2. What has led to commoditization of mobile network?
3. How has the nature of the industry evolved?
1 "The
fifth discipline: The art and practice of the learning organization" - Senge, Peter
4. Tools used:
Stakeholder theory2: The stakeholder theory believes that the system is greatly influenced by
the stakeholders of the system. Stakeholders are entities whose needs are fulfilled by the
system or its constituent sub systems. Stakeholders may be individuals, groups, organizations,
governments or societies. Some stakeholders exist since the conception of the idea of the
system. They are the ones who initially identify the purpose of the system, including its form,
function and concept. However, as the system matures, more stakeholders are added to the
system. For example, when an entrepreneur conceives an idea of a product/ service, she has
the needs of the customer in mind. A new product/ service is often developed to make an
existing service better or to satisfy a need which has newly developed. Therefore, the initial
stakeholders are the entrepreneur, the customer and the entrepreneur's family and friends
who invest in the idea. As the idea develops, more stakeholders are added to the system in the
form of investors, employees and partners.
Therefore in order to understand the current functioning of the system, one needs to identify
the original needs of the stakeholders, the mechanism by which those needs are fulfilled and
the prioritization of these needs and removal of conflict raised through those needs.
Stakeholders are a group or individuals who are affected by or can affect the achievement of an
organization or system's objectives. The purpose of stakeholder management was to devise
methods to manage the myriad groups and relationships that resulted in a strategic fashion.
Stakeholder theory as applied to an organization, enabled managers to identify the
stakeholders of the firm (which were different from the shareholders), identify their needs and
operate in this environment in a way that is in alignment with the needs of the stakeholders.
The stakeholder theory for corporate management did not merely identify the stakeholders as
entities to be worked with, but viewed these relationships as dynamic engagements which
when managed actively in the right way could provide competitive advantage to an
organization.
2
"Strategic Management: A stakeholder approach"- Freeman, Edward
In his book 'Strategic Management: A Stakeholder Approach', Freeman defines stakeholders as
"any group or individual who affects, or isaffected by, the achievement of the organization's
purpose". Carroll (1993, p.22) later defines stakeholders as "individuals or groups with which
business interacts who have a 'stake', or vested interest, in the firm". This "stake" is also
described as a "claim", "interest", or "right". Starik (1994, p.7) highlights the principal
differences between these two definitions. Freeman, he asserts, indicates that a stakeholding
relationship may exist even if (under Carroll's definition) "no 'claim' is made, no 'interest'
expressed, nor any 'right' asserted". Carroll's more focused definition enables the identification
of groups or constituencies that have astake in a business decision (e.g. managers, employees,
shareholders, customers, suppliers, lenders and society (Haines, 1977)).
The traditional management theory attempted to maximize the value for the shareholders.
Many modern day management and organizational theory thinkers have since argued that this
guideline istoo narrow and exclusive and does not allow the managers to address the many
interests that impact or are impacted by the organization.
Value chain dynamics roadmapping using Gear model3 : The gear model was introduced by
Prof Charles Fine of the Massachusetts Institute of Technology who proposed to understand
the overall dynamics of the system by assessing the dynamics existing in the following areas Corporate Strategy, Consumer preference dynamics, Technology dynamics, Regulatory Policy
dynamics, Industry Structure. These individual elements can be thought of as interlocking gears.
Just like the gears in an automobile align to push the automobile forward, a company exists
among the dynamics across several disciplines. It is by careful maneuvering of the interlocking
gears, that the company moves forward.
3 "Gear
model to support road-mapping of value chain dynamics" - Fine, Charles
System dynamics
System dynamics is a methodology of computer simulation modeling technique for framing,
understanding, and discussing complex issues and problems. Originally developed in the 1950s
to help corporate managers improve their understanding of industrial processes, system
dynamics iscurrently being used throughout the public and private sector for policy analysis
and design. System dynamics is an aspect of systems thinking as a method for understanding
the dynamic behavior of complex systems. The basis of the method isthe recognition that the
structure of any system - the many circular, interlocking, sometimes time-delayed
relationships among its components - is often just as important in determining its behavior as
the individual components themselves.
System dynamics isa method to enhance learning in complex systems.4 Just as airlines use
flight simulators to help pilots learn, system dynamics builds management flight simulators.
These computer simulation models help management learn about dynamics complexity,
understand the sources of policy resistance and design more effective policies. System
dynamics isfundamentally inter-disciplinary. Because we are concerned with the behaviors of
complex systems, system dynamics isgrounded in the concepts of non linear dynamics and
feedback control developed in mathematics, physics and engineering. Because we apply these
tools to human, technical and physical systems, system dynamics isbased on cognitive and
social psychology, economics and other social sciences.
4Business
Dynamics: Systems Thinking and Modeling for a Complex World -Sterman, John
Chapter two: Analysis
This chapter is a descriptive study of the mobile industry utilizing the tools proposed in chapter
one. It explores the mobile industry from a high level and provides the foundation for the
formation of the third chapter -'conclusion'. Someone adept in the mobile industry can read
chapter three - Conclusions which directly addresses answers to the questions my thesis
attempts to address. This is a good read for someone who would like to have a high level view
of the current structure and components of the mobile industry.
1.
Stakeholder theory
The mobile industry has been in a state of constant evolution over the past decades, with the
last few years being those of high transformation. The stakeholder theory when applied to the
mobile industry provides a very effective way of understanding the mobile industry holistically.
The entities identified as stakeholders are those in the value chain which help develop the
product/ service, consume it as well as those entities that are present in the larger economic
and societal environment which create an impact on the mobile industry. This also includes
those entities that are affected by changes in the mobile industry.
The key stakeholders in the mobile industry are:
Customers: These are the end users who consume the services/ products developed by the
mobile industry. Customers are individual consumers as well as enterprises. Customer needs
have evolved from basic voice connectivity to value added services like entertainment, business
productivity, banking, mobile health, etc. This is a result of technological developments and as
the benefits of mobile services became widely known. Typically, when a new or disruptive
technology enters the market place, it isinitially used only by a selected few early adopters or
the lead users. As and when the services become more mature and sophisticated, the
performance increases. As a result of innovative business models and relevant partnerships in
the value chain to drive synergies, prices come down. This leads to acceptance and adoption of
these services by early majority and followers, these services now become part of customer
needs. Most of the Customers are in need of the following services from the industry:
"
Voice services
e
Information based services ( search, local events, restaurants, etc)
" Communication services (Email, text. MMS, etc)
*
Conferencing/ Video conferencing, etc
*
Entertainment: television, sports, movies, videos, music
*
Gaming
*
Value added services like mobile banking, education, health, navigation, etc
Mobile network Operator
Mobile network operators or wireless carriers provide services to be consumed directly by the
customers. The essential requirement of a mobile operator isto acquire a radio spectrum from
the government to operate their mobile network and provide services in a particular wireless
technology (GSM,EDGE, LTE,HSPA, etc). Mobile network operator owns and operates mobile
networks with the exception of mobile virtual network operator (MVNO) which obtains the
network services from an existing operator and provides services through the network rented
for the same.
The mobile network operators are heavily regulated in almost all countries. Some leading
mobile operators in US are AT&T, Verizon (owned by Verizon Communications and Vodafone
group), Sprint Nextel, T-mobile (owned by Deutsche Telekom), Trakfone Wireless (owned by
America Movil), MetroPCS, US Cellular (owned by telephone and data systems), Clearwire
(owned by Sprint Nextel Corporation and Comcast), etc
The mobile operators are under tight regulation imposed by the Federal Communications
Commission so as to guard against anti-competitive behavior, protect consumer interests and
help the government to achieve development plans like the broadband plans. The needs of the
mobile operator are as follows.
" High number of customers
" High ARPU (Average revenue per user)
" Low OPEX and CAPEX
*
Most efficient frequency spectrum to operate
" Value added services for the customer
Chipsets/ component industry
The wireless chipset industry builds the semiconductor components which are embedded into
the network equipment and the mobile phones. The chipsets are an essential component of the
mobile industry as they determine the technology embedded in the system. Through the
technology, one can determine the performance of the network in terms of speed, capacity and
performance.
This stakeholder spearheads the technology innovation efforts in the mobile industry. Whether
it isintroduction of newer technologies in wireless, for e.g. LTE, EVDO, WiMax or
interconnection technologies with convergent networks like authentication technologies (
DIAMETER, RADIUS), the technology isfirst and foremost embedded in the chipsets provides by
these companies. The high bandwidth and connectivity promised through Service Level
Agreements by operators is not possible until the component industry can provide the
embedded technologies capable of the features promised to the consumer.
Also, since major technology innovation occurs in the chipsets industry, the companies
constitute of a large research and development staff. This industry isa leader in analyzing
technology trends and pushing the technology performance envelop to identify technologies
that have the capacity of future growth and evolution. Due to high investment in technology
innovation, they look for entities like operators who can share the uncertainty and risk in the
technology development process. They also form industry wide alliances so as to form an
alliance of companies who will adopt the new technology.
Due to the high technological specialization and capital requirements in research and
development costs, the barriers to entry in this market are very high. Example of companies in
the wireless chipset manufacturers are Qualcomm, Intel (focused more on the tablet and
mobile devices space), Atheros Communications, Analog Devices, Centillium Communications,
Broadcom, Conexant Systems, Freescale semiconductors, Fujitsu, Infinion, Media Tek Inc.,
Metalink Broadband, RF Micro Devices, Skyhook wireless, ST Microelectronics, etc.
The needs of the chipset/component industry are
*
Support to develop new and improved technologies for increased system performance,
feature sets and overall reliability.
*
Low risk and uncertainty involved in developing new technologies.
*
Work with international standards organization to obtain worldwide acceptable
standards of mobile development.
Handset/ Device Manufacturers
The handset manufacturers develop mobile devices like mobile phones (including feature
phones and smart phones), tablets and netbooks. Typical examples of companies in this
industry are Nokia, Apple, Samsung, LG, Motorola, HTC, etc.
Over the past decade, there has been asurge in mobile phones across the world. As per
Forester research, there are 4 billion cell phones compared to a mere 1 billion computers
despite the comparatively later entry of mobile devices as compared to the computers in the
market place. People and companies have found innovative uses for the mobile phone, making
it an all purpose, powerful computing and communication device users like to carry at all times.
The handset manufacturers are looking for
" Adoption by users
*
Risk sharing of technology development
" Ease of providing features through software platforms.
" Improved system software from the embedded devices industry
Software/OS platform
The past decade has seen the growth of multiple mobile operating systems. Through the 80s
and 90s, the PC market was largely dominated by Microsoft whose strategy was to license the
operating system across different hardware platforms. This provided them an advantage
against their foremost competitor Apple whose operating system was embedded in Apple
devices only. The licensing model won in the PC market because many computer manufacturers
did not want to reinvent the wheel and build their own operating system. They found it much
reasonable and financially viable to license the Microsoft Windows Operating System.
However, in the mobile market, the most successful operating system which drove the
adoption of smartphones and innovative services was Apple in the form of the iPhone. iPhone
was a worldwide hit and surpassed the prediction of 1 million phones sold in the first
generation, by selling six million in the first release of the product. Since then there has been
no turning back for Apple iPhone in terms of customer favorability and application developer
preference. However, just like previous Apple operating systems, the iOS (iPhone's mobile
operating system) is integrated with the device, the iOS can run only on the iPhone and not on
any other device.
Due to the lack of a viable and successful mobile operating system, most devices decided to
invest in their own mobile operating system to challenge the iOS. This led to the growth of
many new mobile operating systems including Symbian (by Nokia), Android (acquired by
Google), Windows Mobile (by Microsoft), Blackberry OS (by Research in Motion). The most
important needs of a mobile software platform are
" Ease of application development by developers
" Need to be adopted by majority of phones/ operators
*
Billing platform
Content integrators/Application stores
Mobile application stores provide a platform for developers to sell their applications to end
users. They also work as a content aggregator to aggregate content including games, movies,
music on the application platforms. The application stores have been introduced by devices like
Apple (with the Appstore), Blackberry (with Marketplace) and Nokia (with the Ovi store), and
operators like Verizon and AT&T. As a platform provider they provide a 'two sided' market with
the application developers and content providers on one side and customers on the other side.
Two-sided markets, also called two-sided networks, are economic platforms having two
distinct user groups that provide each other with network benefits. In the words of Valetti, 'The
term two-sided platform refers to products and services that must be used by two (or more)
groups of customers to be of value to them. The platform enables interactionsbetween the
different sides, trying to get the two sides on board,and charging each side". Example markets
include credit cards, composed of cardholders and merchants; HMOs (patients and doctors);
operating systems (end-users and developers), travel reservation services (travelers and
airlines); yellow pages (advertisers and consumers); video games (gamers and game
developers); and communication networks, such as the Internet. Benefits to each group exhibit
demand economies of scale.
Some content aggregators can be third party web aggregators bringing together content from
multiple sources like Hulu, Youtube, etc.
*
Large viewership
e
Easy availability and accessibility to the content
*
Business model based on clear revenue streams
Content Providers
Content providers develop content intended to be consumed on the mobile phones. These are
content (services, applications, video, music) creators and look at finding a broad reach for their
products/ services at the marketplace. Some content providers are Youtube, Glomobi,
Mobilefunster, WebAMG, Thumbplay, Flycell, Glispa and Motricity. The content providers
create professionally generated content as well as user generated content. The needs of these
content providers are as follows.
Professional content
"
Create professional content which can be monetized.
" Sustainable revenues for entities involved in producing content - artists, technicians, etc.
" Quality: Digital rights management
User generated content
*
Freedom of expressing one's ideas/views
*
User friendly Platform which can be used to distribute content to friends/ family
*
Quality: Digital rights management
Application developers
Due to the availability of open mobile platforms for sharing content and services and open
operating systems which provide support to the application developers to easily develop
applications for end users, more and more software developers are adopting the mobile
platform. Application developers monetize their software through micro-payments, as low as
99 cents, from users. The model presents a 'long tail'5 demand - revenue model wherein small
payments paid by a large number of customers can generate high revenue and aviable
business model. The needs of application developers are as follows.
" Ease of use of the software platform
*
Maturity of software platform
*
Wide adoption of the software platform
*
Seamless and secure billing
o High margin for developers per application sold
Technical standards organization:
s (Anderson C., 2004) (Anderson C., 2004) (Anderson C., 2004) (Anderson C., 2004) (Anderson C., 2004)
(Anderson C., 2004)
These organizations define the standards to be utilized by the industry to provide wireless
services. The technical organizations6 define wireless standards for the network. The major
global standards organizations are ITU (International Telecommunications Union), Wifi alliance,
WiMax forum, GSM alliance, 3GPP (3 rd generation partnership project), etc. The international
standards organization defines the standards to be adopted for the mobile industry. However,
they are not directly part of the innovation process but work with semiconductor/ chipset
organizations to define the standards. For example, the GSM alliance defines which technical
features constitute each generation of the wireless protocol like 1G, 2G, 3G, 4G.
The basic needs to the technical standards are:
*
Seamless interconnectivity of international networks. (for example standards defining
flow of messages across international gateways.
*
Common service availability across national/ international borders (for example roaming, messaging, etc)
0
Free and fair availability of technical information to promote innovation for the industry
in general.
6
http://www.networkdictionary.com/who/WirelessTechnologyStandardOrganizations.php
Stakeholder value flow
Content
ApplicationsC
ApprevenwApp
re
vices
Product feature
control
Content
1
RevenueT I
Professional and user
generated content
Revenues TVoice and
data services
a ea
Enhanced platform
tent
Rev enue
venue
Software
development kit
OS license
fee/ revenue
A
.
.
Network and
sharing
--
--
>
Policy
-
Money
IT
Standards
Tech standardization ac ss sub
systems/ modular elem nts
Tech innovation
- Products,
goods and
services
Technology
research &
development
gure 1: Stakeholder dagram
The stakeholder diagram provides the value flow between different stakeholders. This value
flow provides a method to understand the inherent relationships between the stakeholders of a
system. Figure 1 describes the value flow among mobile industry stakeholders. Inorder to
understand the value flow, let us take an example of a smartphone user Tom who uses his
mobile phone Xfor the many voice, data and value added services provided by operator Y.
Tom (customer) obtains his service from the operator in exchange for a monthly fee (for a
postpaid customer) or a prepaid account. The operator in turn provides voice and data services
to Tom. The voice and data services are charged by a tiered usage based pricing structure.
Smartphone customers consume many sources of information and services which can be
directly obtained through the application stores and /or the content aggregators like Hulu,
Youtube, etc.
The application stores provide customers with a variety of entertainment (games, video, etc),
information or utility based applications. Some of these applications are paid while some are
free. The revenue generated through paid applications are distributed between the application
store and the application developer, in most cases the application developer receives 70-80%
share of the revenue. The software platform provides the application developer access to
software development toolkit and support while developing these applications. The application
developer selects the application store based upon the preferred language of software
development, whether the software isopen, easy to use, well supported by the software
communities, the software has good payment options and margins.
The software/ OS platforms license the mobile operating systems to the mobile device
manufacturer in exchange for license fees. In case the OS platform is open source, the device
manufacturer provides some information/ service in return. The operator X depends on the
supplier network (handset/ network device manufacturers) to provide the equipment and
network software operators to obtain the monitoring and control software. The chipsets/
component industry work hand in hand with the technology standard defining organizations
because they provide the standards about network metrics and information about
implementation of technical protocols. The technology standards organizations, in coordination
with multiple independent agencies, form standardization rules across the industry. Once the
standards are agreed upon, the companies are expected to follow them in their network.
Operators also obtain the spectrum to operate the wireless network from the regulatory
organizations. Every technology has an optimal frequency range that it can operate in.The
national regulatory organizations, which in case of US isthe FCC assigns the spectrum to the
wireless operators, either on an auction basis or license fee basis.
Value capture and value flow
The application stores and content aggregators provide a medium to provision new content and
services. Due to the digital nature of content and open architecture of operating systems, the
barriers to entry for application and content developers have reduced. As a result, thousands of
new applications are added per day. On the Apple's Appstore alone, over 600 applications are
added per day. Therefore, significant value is being captured by content/ application
developers and aggregators. Due to the scale of the application market and the economics
(around 70% of the revenues generated from the application revenues flow to the developers
and rest to the application store), a mutually beneficial business model has emerged and
succeeded. Consumers today interact with the quality and engagement of the service
(application/ content/ etc). In section three, 'Evolution of customer choice', I explain in detail
what makes an application/ service attractive to consumers. The underlying network's capacity
and throughput isassumed to be a given feature over which services run. Therefore, the
network itself is becoming highly commoditized due to the lack of product differentiation. The
network performance issimilar across the network technology (3G or 4G) and is largely
independent of any carrier specific differentiation. Section 3.2 explains in detail the reasons for
mobile network commoditization. Even though operators invest billions of dollars in network
upgradation costs, increasing the network capacity multifold, the network itself provides a
backbone for bandwidth intensive services. The customer's willingness to pay reflects the
interest in utilizing the services rather than the network itself. Therefore, operators are unable
to derive direct revenue gain from customer's network usage. In an attempt to capture more
value, operators are trying to move up the value chain and investing in application stores and
content aggregation points. Section three delves into these subjects in detail.
Also, the handset/ device manufacturers are investing in design and manufacturing efforts to
introduce smart phones which are user intuitive, well-designed and based on popular
operating systems to attract the maximum developers. EMarketer, an internet market research
company predicts that smart phone penetration will reach 50% by end of 2011 from the current
penetration of 20%. This growth burst will increase the consumption of services on the smart
phone platform, further increasing the market for mobile apps/ services. Therefore, as the
smart phone penetration increases and leads towards saturation, product differentiation will be
difficult to achieve. Therefore, device vendors need to think strategically about their current
eco-system and the long term viability of the cumulative value provided by them.
2. Systems theory
Systems theory, a core component of systems engineering is based on the theory that
every system, (which maybe be physical, digital, political, educational, etc) exists in a
larger system or system of systems. Also, a system isdependent upon the emergent
behavior of the workings of the sub-systems. For example, afirm which is a system in
itself operates in the context of other systems like political, regulatory, industry,
markets, environment, society, etc. Therefore, in order to holistically understand the
workings of this system, it has to be understood in the context of all these systems.
MIT Professor Charles Fine has devised the 'gear model' which can be used to
understand the various dynamics which drive the growth and behavior of an industry or
product/ service. Inthis section I study the mobile industry as a system of subsystems or
'gears' - Regulatory policy, Industry structure dynamics, corporate strategy, consumer
preference and technology dynamics.
Figure 2: Gear rnodel
Each gear represents a sub system which isgoverned by its own principles, and is
subject to risks and uncertainties arising due to its specific dynamics. The interworking
of each gear gives rise to the emergent behavior of the system. This emergent behavior
is not the sum of the behavior of the sub-systems but rather isa result of the interplay
between each sub-system. This procedure of identifying sub-systems and defining their
individual and cumulative behavior is used to understand the current nature of the
mobile industry, along with its risks and uncertainties. This thesis analyzes the behavior
of each subsystem and makes certain observations regarding the current mobile
industry. Based on the observations and past historical trends, it derives certain
conclusions from this emergent behavior.
a. Consumer preference dynamics
Over the past decade, the adoption of mobile phone and corresponding services has
grown. By 2011, it isexpected that around 5 billion people will own a mobile phone.
The lead users of the mobile phone were professionals on the move who used the
mobile phone as atool to constantly keep in touch with the clients, engineering and
marketing team and were responsible for delivering time sensitive services. During its
introduction, the cost of the subscription and cost to receive and make phone calls
through the mobile phone was very high. Therefore the use of mobile phone was
limited to emergency calls.
However, as the network technology improved and more players entered the market,
the cost of mobile phone services began decreasing. This propelled the growth in mobile
subscription as consumers began adoption of the service for personal use as well.
Adoption of the mobile phones
The early mobile phones were feature phones supporting basic feature like voice calling,
texting, address book and other basic features. In 2005, the smart phone which provides
advanced computing ability and connectivity was introduced. By Q4 2009, 21% of
American wireless subscribers had a smart phone, up from 19% in the previous quarter
and significantly higher than the 14% at the end of 2008 .
More and more users are using the mobile phones to provide services traditionally
provided by alternate channels and platforms. As we notice from the list of services
above, many of these services currently provided on the mobile phones were not
initially envisioned for the mobile phones. Most of these value added services are
possible through the use of smart phones.
Nielson blog
Figure 3 describes the adoption of smart phones as it has occurred in the past five years
using system dynamics8 modeling.
Figure 3: Adoption of smartphones
As per figure 3, Feature phones provide access to voice connectivity on the move
including limited web browsing capability. The smart phone adoption rate depends
upon the need to access innovative apps, affordability and attractiveness of services on
the smart phone. More recently, the availability of the iPhone, a highly successful
product focused on user experience, created a wave of popularity for the device and
attracted many new users to the smart phone. Adetailed analysis of the iPhone and its
impact of the smart phone market is available in Section 2d: Industry Structure
dynamics, figure 9. As people use these smart phones, they download apps for those
services they use frequently. The web remains to be used for infrequent tasks.
Increased cumulative number of smart phones led to economies of scale due to which
the cost of manufacturing, distributing and selling the smart phones by device
8 httD://www.svstemdvnamics.org/
manufacturers decreased. Manufacturers passed on the cost savings to the customer by
way of reduced prices thereby increasing the affordability of smart phones. High
affordability drove the adoption of smart phones further.
Figure 3 demonstrates the smart phone adoption phenomenon over the past years. At
this point, only about 20% of the US population carries a smartphone. As and when
penetration increases, more products enter the market, the price of smartphones will
further decrease making them more affordable. The application store market which is
currently highly fragmented (refer figure 21 ), will introduce newer attractive
applications for the smart phones which would render the smart phone more like a
delivery device. It would remain a challenge for smartphone providers to create
differentiation through their products, so as to avoid commoditization of the product
itself.
By comparing the adoption of iPhone/ iPod to the adoption of previous innovations like
AOL, a team at Morgan Stanley was able to predict that the current generation of
technological innovations is penetrating almost 11 times faster than those of the
previous generations. 3G technology which enables the usage of many of these
products/ services, has recently hit an "inflection point" by being available to more than
20 percent of the world's cellular users (although penetration is only 7 percent in
Central/South America and 13 percent in Asia/Pacific - excluding Japan, where it's 96
percent), as per Morgan Stanley.
0
Figure 4: Growth of mobile uers vs desktop internoet users
Mobile services
Enabled by advancement in wireless technologies, chipsets and application development, the
device and network are now capable of providing a wide range of services. Voice services have
become commoditized. Depending upon customer sophistication, geographies and
demographics, customers look upon a mobile phone to provide a variety of services.
Communications
e
Text
*
Email
" IM clients
"
Mobile web and information clients
" News
" Social network clients
e
On device portals/ Java portals
Entertainment
" On demand video
" Mobile TV
" Sports ( Live and downloadable)
" Mobile games
Productivity
e
Spreadsheets
*
Calculators
e
Diary
*
Notepads
e
Calendars
Value added services
" Banking
" Geo positioning services
*
Finder services ( local restaurants, autoservices, etc)
e
Search
*
Weather
*
City Guides
Development
" Mobile -health
" Mobile - education
*
Mobile governance
The popularity of mobile phone applications is constantly growing and is soon becoming a
critical factor for driving adoption of smart phones. Forrester predicts that 14% of mobile
subscribers have downloaded an app in the last 30 days. The following chart illustrates the
popularity of various apps within US. The most popular applications are games, followed by
social networking, weather and navigation tools.
Categories of Applications Used in the Past 30 Days
pirO
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21%
30%
Sports
20%
250,
15%
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30%
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Figure 5: Categories of applications used in past 30 days
b. Technology and innovation dynamics
The technology landscape has been a place for vast growth and development over the past
couple of years. The technology innovation in the mobile industry has spreads across the
wireless technology evolution (from 2G, 3G to 4G), devices, software operating systems (like
the Apple iOS, Nokia Symbian, Palm PreOS, etc) stores (including the Apple Appstore, Nokia Ovi
and Blackberry Market) and the various technologies for mobile application interface like
HTMLS, AAX and Javascript.
Innovation in the devices value chain
The exponential growth in the mobile industry- in terms of devices, applications as well as
network capacity, has been driven by the technical innovation across all the components of the
value chain.
Customers
Technologies
HTML5,
Open (
Smartphones
AJAX,
Android),
,
Flash Lite
Walled Garden
ebook
Netbooks,
3G, 4G (LTE,
WiMAX)
PalmOSreaders\
Windows,Sym
bian,
Blackberry )
Chips/Component industry: 4G, the latest technology standard for wireless access systems will
greatly transform the mobile landscape and consumer experience on the mobile. As the
Average Revenue per user gets more tightly coupled to data, mobile service providers are going
to make greater effort in bringing more data to the customers in yet higher speeds. The 4G
standard will enable the mobile service provider to provide many high data applications
envisioned by businessmen, entertainment companies and development economists like
mobile TV, video chat, video blogging and crisis management.
The bandwidth requirement for 4G systems is 100 Mbps bandwidth for downlink and 20 Mbps
for uplink while moving; and 1Gbps downlink speed for a stationary mobile system. Two major
technologies- Long Term Evolution (LTE) and WiMax (Worldwide Interoperability for mobile
access) currently fulfill the bandwidth requirements and are competing with each other to be
adopted as the technology of choice for the 4G mobile wireless standard. Long Term Evolution
(LTE) describes standardization work by the Third Generation Partnership Project (3GPP) to
define a new high-speed radio access method for mobile communications systems. WiMax is
the 4G technology developed and supported by IEEE (Institute of Electrical and Electronic
Engineers).
Devices: The smart phone has emerged as a multi-purpose device providing voice calling, data
communication, entertainment and misc services like banking and entertainment, all in one. It
has led to the rise of many other components in the value chain like the OS/ application
platform, application/ content development, etc. The many smartphone devices popular in the
market today are Apply, Blackberry, Nokia, Samsung, LG, etc.
However, the last couple of years have witnessed the growth of ebook readers, netbooks and
tablet PCs. Devices like Amazon's Kindle and Apple's iPad are intelligent devices connected to
the mobile network (wifi, 3G) but do not have the ability of making and receiving calls on those
devices. The iPad can be used to make aSkype call which isavoice call over the data (IP)
network. The interesting phenomenon worthy to be noticed isthat now the mobile network
(which was originally designed for voice calling on the move is being used for applications
totally different from voice. The data services, rather than being a value added service has
become a core service.
Operating system
The mobile operating systems can be categorized into majorly three types -
1. Licensed: The licensed operating systems run on multiple devices while released by a
software company selling the license per device sold. The intent of these operating
systems isto make the application development independent of the device it is running
on and make it solely dependent on the operating system itself. It can be compared to
the similar experience Windows users have regardless of the PC they are using. The
licensed operating systems are Java Micro Edition (Java ME), Binary Run time Edition for
Wireless (BREW) and Windows Mobile.
2. Open: The open operating systems are available freely for downloading on the internet.
They can be modified, upgraded by users and the freely available information reduce
barriers to usage for the developers. The most popular open operating system, the
Android was developed by the Open Handset Alliance (OHA), which was supported by
65 technology companies which supported the acceleration of innovation in the mobile
environment through open environment. Android was purchased by Google in 2005.
3. Closed: Some mobile operating systems are tightly integrated to the corresponding
devices and are unavailable to any other device. Some examples of such operating
systems are Apple iOS. Apple's iOS, one of the most popular operating systems,
maintains a tightly secure walled garden, which includes proprietary operating system,
device and application platforms. This makes the value proposition of the Apple phone
unique to the device and operating system. This protects Apple from competitive
response because the uniqueness of the user experience which isthe USP of Apple
expands upon all three layers - the device, operating system and application platform.
Content/ Application technologies
The mobile Web introduces new components into the web ecosystem including markup
languages and styles optimized for mobile users, MIME types, browser clients and network
proxies that further adapt content to cater to the mobile clients. Bandwidth consumption is
a concern for mobile clients. Web 2.0 technologies like JavaScript frameworks and
asynchronous Javascript ensure that the device battery power is conserved.
Innovation in the network value chain
Technologies
Service
delivery,
bandwidth
management
Service
assurance,
monitoring
and analysis
solutions
IMS, QoS,
Security,
Policy
management
3G, 4G (LTE,
WiMAX)
Figure 7: Mobie net work value chain
The chipsets/ component industry iscommon to both the device value chain as well as the
network value chain. Since it forms the basis of the hardware technology, the innovation on this
component isincremental and leads to better bandwidth capacity every generation (1G, 2G,3G,
4G, etc).
Network components: Each mobile call flows through an interconnection of heterogenous
networks. Even though the access network maybe wireless (based on BTS and BSC systems),
the backhaul most often runs on wireline and / or IPnetworks. The technology which brings
such heterogenous networks together iscalled IP Multimedia subsystem (IMS). The IMS is an
architectural framework for delivering Internet Protocol (IP)multimedia services. It was
originally designed by the wireless standards body 3 'dGeneration Partnership Project (3GPP), as
a part of the vision for evolving mobile networks beyond GSM. Its original formulation (3GPP
R5) represented an approach to delivering "Internet services" over GPRS.
The network components provide high Quality of Service to the applications carried by the
network which implies that the network isintelligent to detect the content of the data carried
and can prioritize data based on content. This implies that if the user isviewing streaming
movies by paying high access services or if defense services are being carried, the network will
ensure that high Quality of Service isguaranteed. New network security protocols like
DIAMETER have emerged which ensure high security and data authentication.
Network Services: The service assurance and monitoring services ensure that the network is
actively monitored for any faults which may arise in the devices or interconnection. This market
is highly fragmented and helps keep the network service levels high. The service delivery
solutions also ensure that the operators can provision, maintain and bill these services
seamlessly.
Customer solutions: Operators provide the customers with bandwidth management services
which provide them the flexibility of choosing the data speed at which they want their
connected devices to operate. The higher data speed they desire, the higher the price. This
service helps the network operators to allow the customers themselves to manage their
bandwidth, thereby avoiding network congestion.
c. Regulatory dynamics
The installation, implementation and maintenance of mobile networks require the
setting up of a regulatory regime which enables the establishment of a framework for
free and fair business environment for all entities in the value chain.
There are two important categories - net neutrality as it applies to the mobile industry
and spectrum regulation.
Net Neutrality
Net Neutrality means no discrimination. Net Neutrality prevents Internet providers
from blocking, speeding up or slowing down Web content based on its source,
ownership or destination.
As FCC Commissioner Michael Copps puts it: "From its inception, the Internet was
designed, as those present during the course of its creation will tell you, to prevent
government or acorporation or anyone else from controlling it. It was designed to
defeat discrimination against users, ideas and technologies."
In 2005, the Federal Communications Commission introduced its Broadband Policy
statement, also known as the internet policy statement, which lists four principles of
open internet. "To encourage broadband deployment and preserve and promote the
open and interconnected nature of the public Internet, consumers are entitled to:"
" Access the lawful Internet content of their choice.
" Run applications and use services of their choice, subject to the needs of law
enforcement.
" Connect their choice of legal devices that do not harm the network.
*
Competition among network providers, application and service providers, and content
providers.
These proponents of net neutrality believe that internet users should be in control of
the content they view and the applications they use on the internet. Individuals who
support net neutrality are the internet founder Tim Berners Lee, Vinton Cerf, Steve
Wonzniac and David Reed.
However, companies, especially the operators and infrastructure equipment companies
are proposing different Quality of service levels by introducing data discrimination
among the information carried on the internet. They argue that in order to ensure
certain urgent information to reach their destination on time and at a faster rate, data
travelling over the internet needs to be discriminated and treated with different service
levels. Technology firms like AT&T, Verizon, 3M and Alcatel and Cisco support this view.
With the high success of smart phone and network devices, the usage of various
applications combined with internet browsing, watching streaming videos from sites like
Youtube.com led to a dramatic increase in the bandwidth utilized by user devices. The
growth of mobile broadband has led to rise of net neutrality debate as applicable to the
mobile networks. The stupendous growth in mobile broadband demand leads to a
pressure on the operator's supply due to problems like network congestion and high
network costs. The operators insist that the mobile networks are unique and should
not be classified inthe same category as broadband access provided by landline
networks. Unlike fiber optic cables which theoretically possess infinite bandwidth, the
wireless networks have limited bandwidth, as constrained by the generation of service
provided (2G, 3G, 4G).
Therefore, the net neutrality debate has the openists on one side - internet software
companies like Yahoo, Ebay, Vonage, Amazon, etc, and the deregulationists like AT&T,
Cisco, Verizon, etc on the other.
1. The 'Openists' theory
From its inception, the internet has had strong proponents for the open internet
proposing the basic incentive of the internet as an open platform for information
sharing and innovative service. Due to the viral growth and adoption of the service and
applications introduced by these services, they have not only taken advantage of the
open internet but have acquired a user-base and established a monopolistic market
share. They have moved innovation from the center of the network to the ends of the
network.
Transparency: The structured openness provides two questions: does it mean end to
end openness and isthe openness provided by service providers actual openness? For
the internet experience to be open to a user, the service or application has to be open/
freely accessible through the local access loop through the service provider's network to
the application provider. The service spans across geographical boundaries. Countries
like China govern the nature of content viewed by its citizens and hence any internet
service ishighly regulated.
The proponents of open internet propose the openness in the following forms.
*
Infrastructure: The infrastructure which includes physical network systems involving
routing and network carrying technology infrastructure to be available in a country. This
infrastructure, either built privately or publically should be available to be used freely by
entities keen to provide internet access and who have procured requisite permissions to
do so.
*
Neutrality: This refers to the definition of net neutrality as defined by Michael Popps
e
End to end concept: recentralized decision-making to the-ends of the network.
Layering and tiering: The open network theory believes that anybody having an internet
connection has the ability to access any application, service they want through the use
of any device given its technological limitations. There will be no classes or layers of the
network within and of itself. Data flowing through the network will not be discriminated
depending upon its content type, origin or type of application.
The open network theory however, does not address the challenges of the expansive
growth of internet brought about by real time data like video. In 2009, Youtube has
generated enough traffic in three months which radio and television sites of the world
combined generate in ayear. With such an expansive growth of data, internet will be
carrying data of the order of exabytes, from petabytes that it carries today. The current
infrastructure of the internet does not have the capacity of carrying the throughput of
such a huge volume of data.
Competition: The open network theory believes in the open market entry and for users
to access any service or application they want. The development and integration of the
network has given to the possibilities of newer services and applications lying at the
edge of the network and are proving to be the actual boon of the network. These
services have been introduced because the internet was open. More recently, Voice
over IPservice implemented by Skype was made possible due to the openness of the
internet. Now this service has revolutionized the communications practices of home
users and enterprises.
2. The 'deregulationists' theory
Deregulation isabout the classified tiered network theory and industry decision making.
It believes that the industry decision making process will monitor anti-competitive
behavior and eliminate the perpetrators of monopolistic behavior. De-regulationsists
are technology realists who believe that technology drives innovation and growth. The
classified tiered theory believes that tiered internet access isthe option to limit
bandwidth usage by offering usage based pricing. Providing low internet users the
opportunity to use the internet at lower prices by opting for fewer services will satisfy
consumer demand. Also, in order to provide high internet users all the services they
desire, including voice, vide and data, the internet bandwidth has to be moderated so as
to provide more priority to real time services. This will created classes of service.
However, these classes are driven by user demand, rather than service provider's
monopolies.
Professor Tim Wu of the Virginia Law School believes that Deregulationists are driven by
the following principles.
1. Propertization principle: A given resource will reach its best use when it is mapped out
as property and assigned owners. Property can be effectively utilized and its usage
monitored when its owners are clearly defined. This will ensure that property rights are
enforced and its is not misused.
2. Incentive principle: Communication networks are expensive networks. Private
companies would build it only when there is an incentive for them to do so in terms of
financial returns.
Layering and tiering: Deregulationists believe that the majority of technical progress will
be from the center of the network and not at the end of the network. It is the
dependence on innovation at the end of the network which is causing the slowing of
technological progress in the last few years. When a company invests billions of dollars
to setup communications infrastructure to provide broadband services, it would like to
grab a larger revenue margin by introducing services bundled with value added services
like telephony, video-on-demand, chat, etc.
The deregulationists believe in the concept of smart pipe wherein the network would be
intelligent to the content of the information flowing through it. Based on the priority of
this information, it will speed the delivery of certain services. This is the basic
requirement for the success of certain real time services like video conferencing and
video on demand.
Transparency: The deregulationists believe in the internet as a transparent medium.
However, this transparency does not need to be brought about by any enforced
regulation. Because of the competitive nature of the internet, customers will reject the
service providers which do not provide atransparent internet. Deregulationists believe
that in order to serve internet users of varying levels of internet savvyness and internet
use, some access based schemes would need to be introduced. Based on the level of
service subscribed by an end user, he/ she will procure access to the internet.
The service providers will be required to provide a transparent view of the bandwidth,
access bandwidth and services that it will provide to the end users. They services and
applications however, will be dependent on the package subscribed by the end user.
Competition: The deregulationists are strong believers in letting the market forces
determine the best situation/ scenario to play. Among the various forces playing in the
market are the evolving user demand, introduction of new services/ applications,
introduction of new players, availability of substitutes and introduction of disruptive
services. By ensuring that the regulations do not favor or inhibit any such force, the
government can encourage the creation of a scenario where the market forces will
evolve to form a balance between supply and demand in away that is acceptable by the
market entities and for public interest.
Spectrum allocationfor 3G and 4G networks
The Radio Act of 1927 established the Federal Radio Commission, and the
Communications Act of 1934, established the Federal Communications Commission
(FCC). The 1934 Act gave the FCC broad regulatory powers in both wire line based
Communications, such as telephone and telegraph systems and radio based
Communications, maritime and aeronautical communications, and experiments that led
to radar and television applications. FCC licenses regulate wireless services as "radio
station authorizations." These permits define what transmissions users can generate,
the equipment used to make them, the location of such equipment, and the services
they may provide.
White Spaces (2007): In its continuing efforts to promote efficient use of spectrum and
to extend the benefits of such use to the public, the Federal Communications
Commission (FCC) today adopted a Second Report and Order (Second R&O) that
establishes rules to allow new, sophisticated wireless devices to operate in broadcast
television spectrum on a secondary basis at locations where that spectrum is open. (This
unused TV spectrum is now commonly referred to as television "white spaces"). The
rules adopted today will allow for the use of these new and innovative types of
unlicensed devices in the unused spectrum to provide broadband data and other
services for consumers and businesses.
The FCC's objective isto reduce artificial scarcity of spectrum and increase the flexibility
of obtaining it. In order to achieve high broadband growth and keep the prices
affordable, the FCC needs to provide adequate spectrum for wireless communications
to operate. A conservative analysis reveals that just 200 MHz of additional spectrum
would lower per-minute wireless charges by about 50% and would lead to a 95%
increase in usage by wireless customers.
http://www.fcc.gov/Bureaus/OPP/working papers/oppwp38chart.pdf
The National Broadband Plan recommended that the Commission make available 500
megahertz (MHz) of new spectrum for wireless broadband, including 300 MHz for
mobile flexible use within five years. In addition, the President directed in aJune 28,
2010, Executive Memorandum that 500 MHz of new spectrum for mobile and fixed
broadband use.
The FCC, (Commission, 2010) in its technical paper titled 'Mobile Broadband- The
benefits of additional spectrum' dated October 2010 proposes, "Our analysis suggests
that the broadband spectrum deficit is likely to approach 300 MHz by 2014, that making
available additional spectrum for mobile broadband would create value in excess of
$100B in the next five years through avoidance of unnecessary costs. This estimate of
value creation is narrow, as it does not account for the broader social value created
through mobile broadband, which some economists estimate as multiples of the private
value. Since making new spectrum available has historically taken between six and
thirteen years, and since mobile data growth trends are expected to continue beyond
the near-term forecast in this paper, these results support the need for timely action to
free spectrum for mobile broadband, consistent with the recommendations of the
National Broadband Plan and the President's directive. "
d.
Industry structure dynamics
Post 1996 era
The Telecom Act of 1996 was monumental in causing a radical shift in the inherent nature
of the telecom industry. The incumbents had to open their networks to competitive
service providers and let go of the monopoly which existed due to the 'closed' carrier
networks. Post 1996 era led to the emergence of many competitive companies and a
market which was competitive and innovative.
This created a 'modular' industry wherein the benefits. As per the MIT Professor
Charles Fine in the book 'Clockspeed' (Fine, 1998), some characteristics of a modular
network are as follows:
o
Functional components that constitute a service are dispersed across the network core
and edges.
o
Each firm controls only asubset of total functionality necessary to constitute a service.
o
Firms compete fiercely.
o
Firms are under pressure to innovate.
o Multi-modal competition among multiple technologies.
o
Customers enjoy greater choice.
Post 2005: The mobile industrv
Growth in the early 2000s was driven by pressure to increase the number of subscribers. The
average revenue per user (ARPU) was dependent upon the voice revenues only. Value added
services in the form of data (including content and communication services) were very limited.
The greatest challenge was to convince customers about the need for a device to make voice
calls while on the move.
Pressure to
increase ARPU
Increase in mobile
phone adoption
Introduce products
setnices attractive to users
Increase in
Pressure of growth on
revenues
moble companies
Subscription based
growth
Value added services based growth
User adoption
Decrease in profitability
due to reduced prices
Increase in number
of players
Increased ARPU
Increase in conpetetive
coectiity plans
Revenne sharing among
strategic partners
Figure 8: Mobile industry growth dynamics
Based on the system dynamics causal loop, increase in mobile phone adoption led to
increase in revenues. As the market seemed more lucrative, many new operators
(MVNOs and operators) entered the market competing for the market share which was
based on the number of subscribers. As competition increased, the connectivity plans
for subscribers became more affordable for consumers due to reduced prices.
As ARPU decreased (which went down to as low as USD 5 in developing countries),
innovation in mobile services and applications increased so as to effectively increase the
ARPU through adoption of value added services. Companies also planned to reduce
costs through efforts like infrastructure sharing (like cell towers sharing, fiber
deployment cost, backhaul deployment, etc).
As the profitability of operators decreased, pressure of growth increased due to which
they focused on introducing new value added services. The value added services
provided a means for service differentiation for operators and increased the ARPU.
itrodluctionof smartl phones
Apple has been agame changer in the mobile industry. Much of the innovation we
observe today has been driven by Apple through a unique combination of device,
application platform and the content available on it. Even though it has been in
existence for more than 25 years, its exponential growth in the past decade has been
the result of a carefully crafted user adoption strategy based on an innovative platform.
Apple introduced iTunes in early 2001 which revolutionized the music distribution
platform. Unlike the other internet platforms like Napster which made music available
for free, Apple provided a platform wherein music needed to be purchased on a user
friendly, dependable platform. Unlike the prevalent practice of purchasing CDs for a
label price of around USD 15, Apple provided the option of purchasing singles for a
competitive price of 99c.
iTunes was a major hit as it paved the way for the application platform which led the
growth of many Apple devices later. Apple then introduced the very popular mp3
player, the iPod family of products. Even though the iPod was not the first mover in the
mp3 industry, it had an innovative design which made the usage of device very intuitive.
Also, the availability of low cost mp3s which could be played on multiple devices and
players, made the iPod very attractive.
Apple's core competency was user experience which was evident in the design of the
Apple iPhone. With no background in mobile phones nor telecom, Apple challenged the
status quo of the mobile industry and demonstrated how a superior device with just the
right form factor and intuitive interface can be drive the industry towards adoption of
not only the iPhone, eventually growth in smart phones. Even though it was priced way
above the market price of similar devices, the iPhone was a huge success.
Figure 9: iPhone adoption and smartphone fragrnentation
Market share of other payers (
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The above system dynamics model demonstrates how the introduction of the Apple iphone has
transformed the mobile landscape. The Apple's innovation loop on the left illustrates the
reinforcing effect of Apple on the adoption of smart phones in the mobile industry. Apple's
success depended on the innovative device, the application store which provided an attractive
business model for developers and a platform which was well-supported and user friendly for
developers to build applications on. This led to high product attractiveness and customer
adoption of the device.
Now, with the iPhone becoming such a massive hit with the users, the Apple market share rose
very steeply. Also, profit margins and revenues of Apple were highest in the industry. This led to
a competitive response from companies of the like of Nokia, Samsung, LG, HTC, etc. There was
pressure to innovate and introduce adevice which not only has the features supported by
iPhone but also a new application platform which attracts developers to create innovative
applications. Therefore, this led to the development of competitive application stores and
operating systems like the Nokia Ovi (Symbian), Palm PreOS, etc. The figure below
demonstrates the growth of smartphones in the past one year.
U.S. Smartphone Penetration
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The fragmented highly competitive market led to the following effects
e
Radical shift in the structure of TME leading to new and disruptive models
* There isalmost no sustainable competitive advantage
*
Rate of technological innovation high
*
Number of products introduced in the market increased
e
Rate of customer adoption isthe key emergent factor which leads to strategies devised
to enable such an adoption
e. Corporate strategy dynamics
Corporate strategy can be defined as the process of identifying the meaning of success
in the organization and the process by which to achieve it. It includes setting of vision
and mission of the organization, which are used to formulate the overall goals. It is also
a process of identifying the corporate value proposition and the means by which to
achieve it. The corporate strategy isexecuted across the organization structure,
business processes and the value chain.
*Product
*Process
-Value chain
C
CORE
C'
DABI ITIES
A%
PROJECT
DESIGN
-Brand equity
*Distribution channels
-Management knowhow
-Expert knowledge
-Access to suppliers
-Access to capital
*Organization structure
-Product benefits
-Low price
-Accessibility
-Service and
maintenance
-Vision and
mission
Ar 'Market share
'Profitability
ION 'Corporate social
responsibility
Figure 11: Corporate strategy formulation
The corporate strategy formulation and execution follows the above structure. The firm
assesses its core capabilities to identify the corporate and customer value that it plans to
provide. The method of achieving these goals isthrough project design.
Core caipabilities:
Afirm's core capabilities are the essential strengths that it possesses which potentially
distinguishes it from the competition. Core capabilities can be in the following areas - brand
equity, distribution channels, management knowhow, expert knowledge, access to suppliers,
and access to capital and organization structure.
Brand equity:
Brand equity isthe intangible value asset of a particular good which is otherwise considered not
unique. Brand equity isthe value associated with the brand which includes such things as
customer loyalty, brand awareness, image, associations and goodwill. In the mobile industry,
the mobile companies struggle with understanding what impacts the brand equity the most.
Every company has limited resources and therefore the importance of identifying the actual
priority to such things as network capacity, customer support and enhanced services.
In an industry where customer needs are very dynamic, marketing struggles with segmenting
and targeting customers which can help create a positive brand image. What is the message
that should be communicated, on which medium and how should it be measured. The right
message can make or break a company's image.
Since the industry has seen an increase in players providing the same services, thereby
increasing competition and reducing costs, brand building becomes an important issue so as to
not let the product category be completely commoditized. Also, companies are now venturing
across other segments in the value chain or into other industries altogether. For example, Nokia
which isessentially a phone manufacturer has set up an application store Ovi which aims at
provide the best entertainment services and applications on its store. Nokia thus faces a
challenge of the brand message that it should create and maintain.
Also, different geographies have different requirements and are at different places in
technology adoption and consumer needs. Therefore, the global brand message needs to be
customized for country wide brand message as well. If south east Asian customers are looking
for youthful 'gaming - friendly' image, the European customer is more conservative and is
focused on productivity of services. Therefore, even though companies are working on multiple
areas to build versatility in their service portfolio, they need to have different messages at
different geographies.
Distribution channels:
Path or 'pipeline' through which goods and services flow in one direction (from vendor to
the consumer), and the payments generated by them flow in the opposite direction (from
consumer to the vendor). A distribution channel can be as short as being direct from the vendor
to the consumer or may include several inter-connected (usually independent but mutually
dependant) intermediaries such as wholesalers, distributors, agents, retailers. Each
intermediary receives the item at one price point and moves it to the next higher price point
until it reaches the final buyer.
In case of mobile manufacturers, the distribution channels are very important because of the
price of the device itself. Since the retail price isvery high for upfront payment of the full
amount, the device manufacturer incentivizes the consumer to pay through a fixed time period
service contract (typically two years). The contract is made through the operator and therefore
it shares the risk of the consumer. This arrangement benefits the operator by providing a
guaranteed consumer lifetime.
With the advent of new devices like the iPad and Google Nexus, device manufacturers
experimented with newer distribution channels. Google Nexus setup a website for selling
phones directly to customers as opposed to selling phones through the manufacturer only. This
was a huge risk because a price of $529 was more than what customers had paid in the past for
a smart phone. However, Google also made the phone available through T-mobile, a local
operator.
Management knowhow and expert knowledge: In a rapidly changing mobile world, the
question boards members ask are - do we have the leadership to surge through the different
competitive and technical challenges the company faces.
When a company faces a market need to invest into a certain technology or area, it depends
upon its current resources to provide the technical talent to achieve the objective. Therefore,
attractive and retaining top talent isvery important for any organization.
Access to suppliers: is an important core-competency for any organization. Long term supplier
relationships and new supplier access (either through existing relationships or through new
market opportunities) becomes a key capability for any company to possess. In an industry
where technology wars are rampant (WiMax vs LTE), the supplier choice entails a keen strategy
towards selecting the technology based on benefits and willingness to support long term.
Access to capital: The rapidity of envisioning, designing and launching new service requires
agility in execution which requires companies to raise capital as soon as possible. Therefore,
companies with a high positive cash flow definitely win in the market where timing ishalf the
battle.
Organization structure: Many companies are now organized so that the workforce is nimble
enough to form groups based on requirements and interests. Little resistance, if any, needs to
be easily dissolved to form new and effective teams. Companies like Google and Facebook are
praised for their teams which possess high technical skills, are more agile.
Custoinervalue prt-oposition
Inthe earlier section, I studied in detail, what makes a service accessible to consumers.
Therefore, from the company's perspective, providing value to consumers includes providing
better product benefits at lower price, while at the same time making the services accessible
and putting in place a reliable servicing and maintenance system.
Customer value can also be increased by enhancing the customer relationship by engaging with
the customer in deeper and more meaningful ways. For example, now many companies are
introducing mobile applications for marketing their products. This provides away for users to
engage with the brand and achieves a twofold objective - develops better relationships and
increases stickiness to the brand.
Corporatevalue proposition
Corporate value was traditionally measured by market share, profitability and overall vision and
mission. Due to a recent survey by Forbes, companies are now looking a more holistic value of a
company through aspects likel* innovation, ability to attract talented employees, alliances,
quality of major processes, products or services, environmental performance, brand
investment, technology and customer satisfaction.
The 'core competency' model described above isan 'inside-out' strategic model wherein
companies' inner competencies are used to determine their business strategy. Since the other
gears in the gear model, i.e. industry dynamics, regulation, consumer dynamics, technology and
innovation dynamics, capital market dynamics determine the external market environment
within which the firm operates, this inside out strategy model is useful complementing the
insights gained from the other 'gears'. However, there are many other models which can
utilized for strategy formulation, including 'outside in' strategy approaches like Porter's five
forces which studies competitive rivalry within the industry in order to formulate strategies.
1 Forbes survey
Chapter three: Conclusions
This chapter is the core of the thesis wherein the thesis questions are directly addressed and
answered. Readers with telecom background can read this section without reading the previous
section. Adequate references are provided to section two, when required.
1. Evolution of customer choice
What constitutes an attractive service/platform isan important challenge many players
are trying to unravel. Inan industry where profit margins have narrowed, companies are
looking at launching compelling services which will drive user adoption and increase
revenues.
However, users have become more sophisticated, partly because of ease of access to
information online. For instance, when users needs a service to help him/ her navigate
better while on the road, they have the option of using the internet to obtain free
downloadable maps/ directions. They could also purchase stand-alone GPS devices
which help in vehicle navigation or purchase a car which has an inbuilt navigation
system. Therefore, in order to build an attractive navigation service on the mobile
phone for which the user iswilling to pay, the service on the mobile phone needs to be
unique in convenience of use, availability of content, interoperability with other
services/features (such as sharing among friends on social networking platforms) and
price of service.
In my thesis, I have attempted to collate a list of important features which make an
application compelling to use. Because this field isvery new and isstill evolving,
theoretical research in terms of academic papers are still not available. However, many
blogs (Mashable Mobile, 2009-2010) (Mashable Mobile, 2009-2010), (O'Reilly, 20092010), (Crunch, 2009-2010)and online journals have explored the evolution of mobile
applications, smartphone adoption and other critical topics concerning the mobile
industry. My research has been based on these important sources as well as industry
analyst reports such as Forrester, Gartner and Comscore. As such, the conclusions of my
research are syntheses of facts and arguments based on these online references. Most
of these references are backed by concrete data published online but the synthesis of
critical factors isan original attempt.
Figure 12: Customer choice
The above list are important features which are a 'must have' for any successful application. I
would like to assert here that the marketing and sales strategy are an important aspect of
making a service 'look' attractive to an end user. Those aspects (marketing/ sales strategy) are
company specific and closely linked to an individual company's corporate strategy. This thesis
looks at the service attractiveness from a larger perspective, excluding corporate/ marketing
strategy issues.
Critical factors determining the attractiveness of a service to a user are:
1. Improved content: The content of the service itself influences majority of the user's
decision in adopting the service. The service/ content should be suitable to be viewed
on the smart phone itself. For example, websites designed for the mobile Internet (they
begin with (http://m.<website>.com) need to be suited for a user with a small screen
mobile display. Therefore, content needs to be presented in a form which iseasily
readable and concise so as to not cause information overload while at the same time
providing all the necessary information.
The information available on the mobile phone is viewed differently as compared to the
information available. For instance, when a newspaper such as The New York Times
makes their content available on the mobile, they need to ensure that the news is
provided in a user friendly form. This requires "News Layering". News Layering isa
technique whereby the first level news content ispresented in an abridged form while
drill down provides access to more detailed content. Also, many applications, such as
the New York Times, are a combination of paid and free models. The mobile content
strategy isto provide some content for free while some content requiring premium paid
membership. The application itself is available for free on various application stores.
Therefore, the user experience architect has to carefully consider how to structure the
mobile display design such that the content authors have the flexibility to use news
layering correctly to garner user interest through the "free content" thereby improving
the odds of the users paying for premium content.
Mobile TV content
As per Nielson's Q4 2009 report on mobile TV, the typical American continues to
increase his/her media time, watching each week on any average almost 35 hrs of TV, 2
hrs of time-shifted TV, 22 minutes of online video and 4 minutes of mobile video, while
also spending 4 hours on the internet.
Mobile TV market by region
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Figure 13: Mobile TV market
As per research by Screen digest, aglobal leader in media focused research, mobile TV
market has been on the increase and will continue to grow to USD 1.75 billion in
revenues by 2011. The steady increase has been due to, among many reasons,
availability of content specific to mobile TV and the availability of better user interfaces
to provide the delivery of the content. In terms of mobile TV content, content has
evolved from re-telecast of popular shows to availability of fresh and improvised
content on TV. Some popular mobile TV content includes highlights of sporting events,
short clips of popular shows and user generated content. Content aggregators like Hulu
have contributed a lot to changing user habits and providing incentives to 'cut the
chord'. Most internet TV viewership plans have mobile TV viewership plan included or
available at a slightly higher price. Therefore, availability of content has greatly
enhanced the mobile TV adoption.
2. Community generation and interaction: The social networking platform Facebook has
more than 500 million users worldwide. Facebook, along with MySpace and Twitter are
leading the way for users to be connected with their friends and followers. Facebook
has a 'Friend' concept wherein individuals can view your profile if they are authorized to
be your friends. Twitter provides a means to broadcast your message to a larger
audience and therefore, isa great way to build a brand with a targeted audience. Social
networking sites contribute to about 50% of the mobile internet traffic. As per Guardian,
UK, Facebook traffic alone accounts for more than 50% of internet traffic. User trends
clearly indicate that mobile applications and platforms which provide a user friendly
means to access the social networking sites will be at an advantage.
Figure 14: Select mobile behaviors
As per Comscore, the US displayed the strongest penetration of social networking on
mobile phones with 21.3 %of mobile users doing so in June 2010. Mobile users in Japan
were most likely to watch TV or video on their phones (22%), whereas Europeans were
most likely to listen to music (24.2%) and play games (24.1%).
As more and more services and applications appear in the marketplace, people will
depend even more on recommendations from their friends. These recommendations
will be provided on social networking platforms, thereby providing people a central
place to follow recommendations about multiple product / service categories. Users are
aware of the benefits of maintaining social connections, therefore they are very active
on their social network, providing recommendations and engaging with product and
services. The success of a product/ service depends upon the level of engagement it is
able to create with the users.
As the user consistently engages with the service by providing recommendations to
friends, providing contents, contributing to fan pages on social networks, users are
becoming more active users of aservice. For example, television viewers have evolved
from the more passive 'lean back' television viewers to the 'lean forward' viewers.
Therefore customers are fast becoming active users rather than passive consumers of
service.
3. Ease of Billing: As consumers use applications and services from multiple players
(including the cell phone service provider, device provider and independent parties on
the internet), billing of these applications will become more and more complicated.
Therefore, it is important that customers can be provided a simple integrated interface
where they can view the bills and pay them at a central point rather than at multiple
places online. Even better than being presented multiple bills on different billing cycles,
customers are likely to prefer a single consolidate itemized bill for all the different
products and services the user consumes every month. Customers purchase mobile
applications like games, music both online (on an internet connected device) as well as
on mobile internet. Availability of a common payment platform is essential in order to
provide ease of payment options. Many of these payment options are in their nascent
stage. Among the multi-platform payment options available are as follows:
1. Mobile application store based: Apple's iTunes isa very popular payment platform
for music, video and applications purchased online and on the mobile platform.
Blackberry has launched its own payment platform. However, since most of the
mobile application stores are framed in walled gardens, the payment options are not
limited to purchase on their stores, like Apple and Blackberry respectively. On Oct
25" 2010, "Starbucks had started testing for the iPhone and Blackberry payment
solutions in their New York stores.
2. Internet based payment platform: The internet based payment mechanisms like
Paypal, Amazon payment, Google checkout and Bing cashback utilize similar
payment mechanisms wherein a consumer can add a bank account to the online
payment system. While shopping online, they make payment using the online
payment systems which in turn charge the credit/ card/ debit card/ bank account of
the user. The internet payment platforms take asmall percentage of the transaction
amount as transaction fees.
3. Operators: are beginning to form their own payment platforms. AT&T 12 just released
their payment platform providing consumers a mechanism to pay for the purchase
and use of services online and on mobile at a central place. AT&T is partnering with
some major payment platforms like BilltoMobile, Boku and Zong AT&T payment to
provide an all inclusive payment platforms.
Even though many options are available for the end user, the dominant payment
platform has not emerged yet. This space is currently witnessing a lot of entrepreneurial
activity due to its prospects and utility.
http:f/www.mobileburn.com/news.jsp?ld=11389
12 http://www.fiercemobilecontent.com/story/t-kicks-multi-partner-mobile-payments-tria
1/2010-10-28
4. High Security: Security in the mobile industry includes security of the network,
device and service. Privacy isand will remain a cause for major concern on online
platforms. As the mobile internet platform isutilized for banking, communication
and social networking platforms, users are concerned about their private
information being shared with third party providers. In case of banking transactions,
the security concerns are even higher and require tighter security for user account
information.
1. Mobile network security isa cause of high concern and research. Many new
and robust technical protocols have emerged as a result of huge R&D
investment funded by OEMs and operators. Technologies like DIAMETER
authentication protocol provide network security for mobile and IPnetworks.
New network technologies like Wi-fi, WiMAX are constantly improving
security standards for the network.
2. Application security: Applications and services utilized on social networking
platforms carry user's personal information which should be kept private,
unless the user specifically allows access. The concern for security continues
to be a barrier for adoption of many new services. Companies, specifically
social networking based application companies, need to take specific steps to
secure user content and effectively communicate to the users that their
information is preserved safely. Facebook is continually under scrutiny due to
privacy issues because Facebook applications share user information among
each other. Recently, Facebook has introduced a new feature called 'Groups'
which would provide users the option of creating groups of friends and make
their updates/status/photos/etc viewable only to acertain groups of friends.
The mobile platform isnot only expected to maintain the web related
security requirements, but also additional location information known to
mobile operators. Even though location based information is lucrative to
advertisers, such advertizing techniques should be utilized only if the user
agrees to participate in the advertizing service. 02, a leading European
operator has introduced this service in Europe by providing customers the
option to 'opt in' to the service.
3. Device security: For asignificant majority, the mobile phone isthe sole point
for storage of addresses and personal information. Therefore, protection
against theft and data isof utmost concern. Google made it easier to manage
Android 2.2 devices from within Google Apps. This makes devices and
accounts more manageable from a central point, thereby better maintaining
the device and ensuring security.
5. Improved service delivery: The adoption of smart phones has led to adeluge of
applications provided by different platforms. However, the delivery of those
applications isan important criterion determining which applications will be
successful. Aservice can be provided using the mobile web or mobile applications.
While applications provide acloser engagement, applications come at a price and
need user information sharing. While delivering a service, for example agame,
application providers need to determine service delivery options based on the level
of user engagement required, changes in user behavior, interaction with smart
phone features like cameras, navigation systems, etc. Along similar lines, many retail
companies utilize the mobile platform for advertizing and promotions based on user
location. It isimportant that the mode of service delivery (SMS, web, applications) is
apt for the targeted demographic.
Garmin, a leader in navigation services has changed their mobile content delivery
strategy from handsets to application stores.13 They would no longer introduce
handsets which have the Garmin technology embedded in the handset itself, though
they will continue supporting mobile phones they have already introduced in 2009.
Moving forward, they will provide the applications on mobile application stores.
Though the details of the application stores are not available yet, this isa huge shift
in service delivery model wherein service providers like Garmin are comfortable in
providing their service as an 'add-on' application rather than as an embedded
application. This demonstrates the maturity of the mobile application platforms.
6. Access and execution speed: This has been a prime concern of users for decades.
Whether a service has a fast or slow response time depends on multiple factors.
These are: the network capacity (this varies depending upon which protocol is being
followed by users -whether it is 3G or 4G), browser capability and the application's
loading capability. On the network side, the availability of 4G technology will make
download speeds of as high as 1Gbps possible. The internet browsers (Windows
13
http://www.fiercemobilecontent.com/story/garmin-shifts-mobile-strategy-handsets-apps/2010-10-26
mobile browser, safari, mobile chrome, etc) need to be light to initialize, upload and
transfer information. The applications also need to be quick to load and navigate.
With the advent of HTML5, AJAX and Javascript, a high download and application
usage speed isgoing to be possible in the near future.
7. Availability of services across different platforms: Application developers need to
be aware that users would be utilizing their applications from multiple platformsranging from their home desktops, laptops to mobile devices. As users move from
one device to another, the change in platform should seem seamless. For example, if
the user iswatching a movie on the desktop on a video sharing site, he can 'pause'
the movie, hop on a train and attempt to watch it on his cell phone while on the
move; the application should be able to play the video from the place that it left off.
In this way content and applications can be consumed across multiple platforms in a
seamless fashion.
8. Convenience of use: Convenience is an all-encompassing concept. Forrester defines
the Convenience Quotient as a single number from -1 to 1that describes the relative
convenience of a product, service, or solution compared with direct and indirect
competitors. It isexpressed in this conceptual equation: Convenience Quotient =
product benefits - barriers to consumer use.
14
In comparing the adoption of iPhone/iPod to the adoption of previous innovations
like AOL, ateam at Morgan Stanley was able to predict that the current generation
of technological innovations is penetrating almost 11 times faster than those of the
February 6, 2009, "Cracking The Convenience Code" report.
previous generations. The adoption helping to drive this is3G technology, which
Morgan Stanley says recently hit an "inflection point" by being available to more
than 20 percent of the world's cellular users (although penetration isonly 7 percent
in Central/South America and 13 percent in Asia/Pacific - excluding Japan, where
it's 96 percent)
Convenience for a mobile application or service isa combination of such things as
how intuitive the user interface is,the relevance of the application, number of clicks
required to reach relevant information on the mobile web, placements of items on
the user interface, etc.
2. Commiioditization of the mobile network
As service attractiveness increases, more users are adopting innovative services on the
mobile phone. These services are provided largely through application stores,
introduced mainly through device companies like Apple (Appstore), Blackberry
(Marketplace) and Nokia (Ovi).
Users make purchasing decisions based on the device they would like to possess
(whether it isthe Apple iphone, Android based phones like Droid or Nokia's E/N series)
and the types of services they would like to have on their mobile phones. The choice of
operator is made only after the device and application portfolio meets the criteria of the
user. As the applications and device define user stickiness and adoption, what role does
the mobile network play? Because the choice of mobile network plays minimal role in
user adoption, many analysts opine that the mobile network itself is providing a utility
or a backbone to enable the delivery of services.
Therefore, since the operator network does not distinguish user choice, isthe mobile
network commoditized? This section studies this question in detail.
Henry Birdseye Weil, of the Massachusetts Institute of Technology Sloan School of
management mentions that a product/ service is commoditizeds when
*
Product differentiation isvery difficult
" Customer loyalty and brand values are low
" Competition is based primarily on price
is Commoditization of technology based products - Henry Birdseye Weil
*
Sustainable advantage comes from cost ( and sometimes quality) leadership
Traditionally, many industries like railroads, electricity, etc, which are indistinguishable
in features among different service providers have become highly commoditized.
Nicholas Carr, of the Harvard Business School proposes that Information technology, the
technical backbone for providing business, education and many other services has
become commoditized. He states that overinvestment in information technology in the
1990s echos the overinvestment in railroads in 1860s. Inthe 1860s, flood of capital led
to enormous overcapacity, devastating entire industries. One of the most salient
characteristics of infrastructure technologies isthe rapidity of their installation. Spurred
by massive investment, capacity soon skyrockets, leading to falling prices, and quickly
commoditization.
In my thesis research, concepts of commoditization in infrastructure technologies have
helped me in researching the dynamics of commoditization. Systems dynamics causal
loops are used to study what led to the commoditization of the network.
1.
Increase in number of players (competition)
2.
Service attractiveness
3.
Cost to build capacity
4.
Excess bandwidth decreasing profitability
5.
Deregulation leading to low operator service revenues
ice revenues for
operators
.--
B
Lack of senice
on
der
idfor mobile
-
network
Demand for high
bandnB
B
Capacity cost
Cost
Investment in incremental .4technologies increasing
capacity
Pressure to increasec
network capacity
bandw
Bandwidth
capacit
Disnptive technologies
entering market
Figure 15: Commoditiz-ation dynamics: industry growth
The above diagram illustrates the different dynamics occurring in the mobile industry which
lead to the emergence of commoditization. In the following paragraphs I discuss how each of
these dynamics when combined together is more than the sum of its parts. The emergent value
is discovered by analysis and integration.
In the heart of the diagram isthe industry growth loop which illustrates the trajectory of
industry growth. The mobile operators depend upon subscriptions to increase their revenues.
Higher revenues, lead to high profitability (the cost isconsidered in another feedback loop).
High profitability leads to more innovation on the mobile platform. The service innovation is
usually not performed by operators because they are traditionally not competent in research
and development. As innovative services are introduced along with compelling devices (Apple
iPhone and RIM's Blackberry), the demand for smart phones increase which lead to a demand
for subscriptions, thereby increasing the demand for mobile connectivity.
1
Conipetition (Increase in nunber of players)
Lack of senice
differentiation on
network
Cost
Excess b
Investment in incremental
techmologies increasing
capacity
Pressure to increase
network capacity
Bandidt
capacity
Disruptive technologies
entering market
Figure 16:
commoditization
dynamics: increase in number of players
One of the major reasons for commoditization is proliferation of players which increase
capacity, reduce prices and decrease profitability. In the mobile industry, increase in
mobile subscriptions, led to an increase in expected growth and profitability. Therefore
multiple players entered the market to provide services at a competitive rate. Even
though mobile operators incur very high fixed costs, the mobile virtual network
operators were able to enter the market by obtaining network capacity from
incumbents. This resale of network capacity transformed the cost model of operators
from fixed to variable cost structure.
Entrance of more players dipped the price down and decreased the overall
profitability of the industry. However innovative price plans were a boon for the
customers as they had more options to choose from. The variety of plans appealed to a
larger segment of customers and played its part in the mobile subscription growth.
2. Service attractiveness
ice revenues for
operators
Service revenue
-
Lack of service
differentiation on
network
Service adoption
Excess bandwidth
B
ise in number
f players
Price
~
Average revenue
per user
attactiveness
Innovative deices
and services
Innovation on
6talht _________________mobile platformDemand for
bandwNidd
Cost
C .cost
Investment in incremental 4
technologies increasmg
capacity
(
Pressure to increase Excess ba
network capacity
Bandwidth
capacity
Disruptive technologies
entering market
Figure 17 : Commoditization dynamics: service attractiveness
As the mobile platform was adopted and profitability grew, the platform was used for
developing attractive services for the customers. Some of this innovation were on the
device itself (including navigation, camera, etc) services and majority of the effort was
concentrated on the software application platforms used for which were developed and
delivered on software application platforms.
The innovative devices and services increased the attractiveness of the mobile platform
itself an incentivized users to adopt the smart phone. For example, innovative uses like
video conferencing for a young father wanting to catch a glimpse of his child while
travelling was an important application and a compelling need for him to purchase a
smart phone. Also, the possibility of a single device performing a plethora of services mp3 player, phone, note taker, camera increased the value of the device and the return
on investment of the smart phone price which on average isaround ten times the cost
of a feature phone.
This led to increase in service revenues and the average revenue per user. However, the
'price' charged by the operator for the subscription remained constant. The operators
used to charge a standard rate for any usage to customers until very recently.
Companies like AT&T and Verizon recently revised their data plans (in September 2010)
into a tiered bandwidth usage. However, this plan was introduced to control user
bandwidth consumption and therefore is not expected to boost operator revenues to a
larger extent.
Therefore, service distinction between operator's service plans isnegligible. Customer
choice isdriven by attractiveness of applications and devices.
3. Cost to build capacity
Lack of service
differentiation on
network
- VA~j
ected growth
profitabi>
Excess bandwidth
Senice
Average revenue
per user
attractiveness
price
and
Increase m
iunber
of players
Inovative devices
and services
Invation on
mobile platfo
Pro
B
Capacity-cost
Cost
ravrft in
incremnental
technologies increasing
capacity
Demand for high
bandw~idth
Pressure to in ecess band%'
netwvork capacity
Bandnidth
capacity
Disruptive technologies
entering market
Figure 18: Cornmoditization dynarmics: cost to build capacity
With adoption of new mobile services, the demand for bandwidth increases. Also, many
mobile applications like mobile TV, gaming, live sports as well as information sharing
applications need high bandwidth. Therefore, chipsets/semiconductor companies like
Intel, Qualcomm, Analog Devices, etc research innovative technologies which can
increase the bandwidth capacity.
Technologies like 4G of mobile protocols promise a high throughput and low latency.
Long term Evolution (LTE) isan incremental technology. Mobile networks have launched
network up gradation projects to the LTE protocol which promises a download speed of
100 Mbps and an upload speed of 50 Mbps.
Increase in capacity requires high capital investment on the part of the operator. High
investment is not expected to increase price for data subscription and usage and
therefore will lead to decrease in profitability for the short term. However, it is
expected that high bandwidth capacity would make many killer applications like video
conferencing on mobile feasible and therefore drive smart phone usage and bandwidth
consumption.
4. Excess bandwidth decreasing profitability
Servicerevenues for ..
Lack of seie
oeprators
,"
Deresuation/
tor,
6a
n.-- -. C-a --mifferenbhaaon
D/1"'
network
on
-~oanmyA
B
Cost
Demand for high
bandwidth
Capacity cost
inPressure
Investment in incremental
techmologies increasing
capacsty
increase
Prneto tocia
xe~s
Bandwidth
capa,*ty
Disruptive technologies
entering market
Figure
19: Co
moditization dynamics: Excess capacity
Many chipsets/ semiconductor companies have been working on disruptive
technologies like WiMAX which isnot a direct evolution from the current mobile
protocols in use. While LTE isan incremental protocol from the current 3G network,
WiMAX or IEEE 802.16 is independent of the current technology. WiMax promises very
high bandwidth but requires setup of a brand new infrastructure based on the new
technology. Therefore, it is not feasible for operators running a network worth billions
of dollars to reinvest in a new network and abandon the current investment in
infrastructure. They need a technology which is incremental in nature and will not
render the current network components worthless.
However, WiMAX has enabled many new operators to deploy 4G services very quickly
and effectively. The first company to deploy WiMAX in US was a company called
Clearwire who setup WiMAX in ajoint venture with Sprint networks. Therefore, this
increased the bandwidth capacity and forced the incumbents to invest in their 4G
network again the mobile operator market will be resplendent with many 4G
connectivity options. Clearwire has introduced their WiMAX plans in many cities across
the US and Verizon will introduce its LTE plans in December 2010 or early 2011.
5. Deregulation leading to low operator service revenues
Lack of service
differentiation on
network
7\ /
:ted growth and
Price
rfitabilit
Increase mn unber
of players
j
f DExcess
bandwidth
Average revenue
Senice
per user
attractiveness
Innovative dev.ices
and senices
Innoation on
mobile platform
Pr
kS)baudw~io
Demand for high
Capacity cost
Cost
Investment in incremental
technologies increasing
capacity
Excess band
Pressure to incr
network capacity
Bandwidth
capacity
Disruptive technologies
entering market
Figure 20: Cornmoditization dynarnics: deregUlation
As noticed in the earlier sections, service attractiveness will drive growth in mobile
industry. However, since the operators do not currently provide innovative services but
only provide the backbone to enable these services, are not in a position to benefit from
this growth. Even though the network isowned by them and service delivery would
have been impossible without the provision of the mobile networks, the operators are
unable to charge for these services.
How to benefit from service delivery and consumption isan important question
operators are grappling with so as to increase their revenues and profitability. 'Net
neutrality' is an important issue with varying opinions across the industry. The
proponents of net neutrality believe that the operators should not distinguish content
on their networks and that all content should be treated alike. Prioritization of content
from one source over another isagainst the basic freedom of the internet which allows
equal access to all internet sites.
However, the FCC (Federal Communications Commission) does not clearly mandate the
net neutrality principle. Proponents in favor of net neutrality are internet companies like
Yahoo, AOL, Google, etc. Those against net neutrality are OEMs like Cisco, Juniper, etc
and operators like AT&T, Verizon, etc. In September 2010, Google and Verizon issued a
common statement requesting the FCC to consider the treatment of net neutrality
different from the wireline broadband network and allow the differentiation of services
at the network level. The proposal has met with a lot of opposition by internet
companies.
Emergent conditions:
The mobile network provides connectivity, a service which does not distinguish itself
among operators. Also, excess capacity is being created as a result of expected demand
and disruptive technologies like WiMAX. Many players have entered the market. Some
of these players (Mobile virtual network operators) do not need sufficient capital to
enter the market, thereby reducing financial constraints and barriers to entry. These
new players sacrifice profits to build share and have different cost structures. Market
liberalization has mandated operators to resell their network to other mobile virtual
network operators and limit the operators from profiting through service
differentiation.
All these conditions, lead to the commoditization of the network. Operators find it hard
to distinguish their services and are therefore trying to form unique partnerships in
order to distinguish themselves. AT&T had partnered with Apple for an exclusive right
on Apple iPhones on the AT&T network. Due to the success of the device, AT&T
increased its market share to lead the operator business, overtaking Verizon. Operators
are also providing 'end to end' business services encompassing a vast plethora of
services including unified communications and cloud computing in order to provide
higher customer value and obtain higher market share and profitability. In the following
chapters I will explain in detail how partnerships and collaborations across value chains
is leading to vertical integration of the industry.
3. Vertical integiation
Vertical integration isthe range to which a firm owns its upstream buyers and
downstream suppliers. By integrating across the value chain, companies attempt to
achieve long term sustainability, low risk and high profitability. The process of
integrating upward in the value chain is called forward integration while the process of
integrating downward the value chain iscalled downstream integration. Firms integrate
in a business environment which is uncertain, frequency of technological change is high
and vertical integration would enable firms to exercise control over the value chain and
reduce risk.
1. Reasons for integration
In the telecom industry, companies face rapid growth in technology, pressure to provide
innovative services, coupled by lower customer willingness to pay for traditional
services. High rate of innovation in core technology and service deployment requires
companies to be more agile so as to adapt more effectively to customer demands and
respond to competitive threats inthe marketplace. Therefore, in order to have access to
innovative technologies and more control over service deployment, companies are
building partnerships above and below the value chains. The following section explains
in detail why vertical integration has become relevant in the value chain.
1. Decrease in carrier profits: In the last chapter, the commoditization of the
mobile network has been explained in detail. The constant growth in services
and bandwidth hogging applications has placed an increasing demand on carriers
to increase the network capacity in terms of bandwidth and speed. The
connectivity requirement is also supplemented by government plans like the
National Broadband plan aim at making broadband a basic amenity available to
all Americans so as to provide a means for professional personal and community
growth (H.Kenneth Cheng, 2007). The provision of network to provide value
added services leads to the data pipes being considered as a utility just like the
energy grid. Even though the technology has grown consistently to meet the
high data transport requirements, many competitors have entered the market
and service differentiation has declined.
The revenues of mobile operators constitute of voice and data revenues. The
current mobile data plans are based on generally a nominal flat fee for the
unlimited data plan. The average cell-phone usage pattern is 70 percent voice,
while the average iPhone is45 percent voice. At NTT DoCoMo, data usage
accounts for 90 percent of network traffic. Morgan Stanley research expects
mobile data traffic to increase by almost 4,000 percent by 2014, for a cumulative
annual growth rate of more than 100 percent.
Therefore, even though carrier revenues have increased due to data traffic, it
has been offset by increase in costs due to new network technology deployment
(like 3G, 4G). Carriers need to constantly upgrade their network due to higher
bandwidth demand. Therefore, lower profits have led the carriers to look for
businesses with higher profitability and therefore, they have moved down the
value chain to capture businesses which have high profit margins. Some
examples of new businesses carriers are venturing into are enterprise
communication services, cloud computing services and application stores.
Verizon and AT&T have both ventured in these services.
2. Fragmentation of Operating Systems and application platforms: In addition to
the dominant operating systems existing in the market today - Apple and
Android, many handset manufacturers are launching their own operating
systems. Samsung is launching its own OS platform, so did Motorola (which
finally did not take off). As noticed in the earlier sections many new operating
systems have been released out of which very few have been successful
(including Apple iOS, Blackberry and Palm PreOS). As per leading research by
Forrester and Gartner, the operating system market is predicted to remain
fragmented. Many operating systems will co-exist and devices will build their
devices around different operating systems. As per the "App store report " of
the Wireless Industry partnership Press release in June 2010, around 80 different
application stores exist worldwide. (Partnership, 2010).
Application
store
Android
Apple
Appstore
Global
actual
potential
device
base
More
than 10
million
More
than 100
million
iphones,
iPods,
I__
Iitouch,
BlackBerry
AppWorld
More
than 20
million
GetJar
Pocketgear/
Handango
Nokia Ovi
store
Windows
Marketplace
More
than 15
million
users per
month (
More
than
2000
phone
supports
More
than 100
million
devices
Not
communi
cated
more
iPad units
Downloa
ds
1 billion
to date
5 billion
to date
Not
communi
cated
than
2000
phones
supporte
d)
More
than 1
billion to
date,
around
60 million
download
s per
More
than 200
million to
date
1.7
million
per day
Not
communi
cated
month
Number
of apps
Consume
r
payment
method
More
than
More
than
More
than
More
than
More
than
More
than
More
than
50000
225000
7000
70000
140000
10000
1500
Google
checkout,
credit/
debit
card and
operator
billing (TMobile
USA)
Credit
Card on
iTunes
account,
prepaid
iTunes
top-up
cards and
PayPal
PayPal
and soon
Blackberr
y
payment
service
Free
Credit
Card and
content
only,
PayPal
payment
solution
to be
introduce
d by the
end of
Credit
Card,
operator
billing
and SIM
card
Credit
Card,
operator
billing
and SIM
card
Blackberr
y device
software
v4.2 min
Android,
Blackberr
y, Java,
Symbian,
Windows
Mobile,
Palm and
Android,
Blackberr
y, Java,
Windows
Mobile,
Palm and
Palm OS
S60, S40,
Maemo,
and soon
Qt and
Meego
Windows
Mobile
6.0 and
above
Between
60% and
80% less
transacti
70%
70%
2010
Operatin
g systems
supports
Android
iOS
Flash Lite
Revenue
share for
third
parties
70%
70%
80%
Free
content
only
I on fees
Figure 21 Applcation store cornparison
16
Gartner report
I
Therefore, in order to ensure that an operating system survives in the long term,
forward integration upward to the devices can ensure that the operating system will be
adopted. Apple is integrated across the value chain on its devices. Companies like
Android and Microsoft are integrating upward into the devices so as to ensure the long
term sustainability of their mobile operating systems.
Smartphone Market Share
01 210 Mobile Insights National (r=11 724'
Prl
OS
-2
3%l
0-0J.)
Apple iPhone
0
Figure 22: Smartphone market share
3. Killer applications: The quintessential 'killer app' isone that makes a compelling
reason for the adoption of a particular technology. A 'killer app' isinstrumental in
providing just the right set of features to a service in a way most attractive to end
users. Inthe case of smart phones, that killer app has been a device (iPhone) which
provided the best set of user features and hence provided a compelling need to the
users. The iPhone drove the adoption of the smartphone and the application stores.
Some key applications which are instrumental in the growth of mobile internet are
social networking sites. Facebook now accounts for more than 50% of all mobile
internet traffic. Some other applications have been those of entertainment,
commerce and education.
However, such a killer app in the next few years ispredicted to be mobile video.
Companies are investing heavily in video content, aggregation and distribution.
Integration across the video value chain will ensure the delivery of the killer app.
Many large internet and mobile companies are venturing into mobile video through
internal research and acquisitions. Google just acquired On2 technologies for its video
compression and encoding software and mobile video technology (through Hantro
technologies).
4.
Lack of dominant design: Dominant design iscombination of technical factors
which make a certain design the de facto standard in the industry. The dominant
design for multiple components in the mobile industry has not clearly and distinctly
emerged. Most smart phones tried to emulate the Apple success story and
incorporated the touch interface on the phone but some realized that some users
prefer the Qwerty keyboard. On the application store, it isstill not clear whether the
device manufacturer model will survive or the operator created one.
Similarly, mobile applications like mobile payments, education, etc do not have a
dominant design either. Mobile payments are still grappling with different payment
options and technologies used on the mobile, whether it will be through the Near
Field Communication (NFC) standard, the application store (iTunes), web payment
mechanisms like Google checkout or Paypal.
Inthe future, many of these methods will prevail, however which one becomes the
dominant standard is unclear at this point. In the lack of adominant design in smart
phones, applications and the delivery of different services, companies are still learning
user preferences by trial and error. In order to achieve innovative design changes, a
company needs to build stability and flexibility in the value chain. One of the
methods of achieving this goal is through vertical integration.
a. Rate of technological change: Mobile technology has grown from IG (first
generation) to 4G (4t generation) in approximately 10 years. The capacity of the
mobile network in these ten years has grown hundred fold. This transformation
has led innovation in devices and services. In an industry driven by such
technological growth, companies run the risk of investing in a technology, only to
find it obsolete in ayear.
For example, chipsets manufacturers constantly invest in technology innovation
like LTE, HSPA, WiMAX. If they can forward integrate through partnerships with
OEMs, they can ensure a market for the chipset technology (LTE, HSPA, WiMAX)
and also risk sharing in new innovation investments.
b. Lack of sustainable competitive advantage: Due to innovation in all the
components of the value chain and customer choice constantly evolving,
companies need to adapt themselves to changing industry standards and
customer choice driven by availability of improved devices/ services. The core
competencies traditionally considered to be consistent like brand equity, capital
assets and intellectual property, no longer are sustainable. As the industry
matures, new and disruptive innovations challenge the existing intellectual
property assets and can render them irrelevant. For example, Nokia had the
largest global market share in mobile phones. However, when Apple introduced
the iPhone and led to the advent of the 'smartphone age', Nokia was unable to
compete in the smartphone market. The essential capabilities of competing in
the smartphone market like providing an attractive application store was a
difficult competency to develop overnight.
c. Intensity incompetition: Companies across the value chain are investing in
newer technology, finding innovative ways to engage with customers and
introducing newer plans for the end users. Companies like Verizon which have a
good subscriber base in the wire-line internet business are introducing combined
connectivity plans so as to ensure customer retention and engagement.
Companies rich in capital are investing across value chains to ensure a larger
portion of business value. Google, an internet company has invested in multiple
components in the value chain, including the mobile operating system through
Android. Apple has integrated across the value chain and iscurrently the most
vertically integrated of the companies in the industry.
Even small players have the capacity of disrupting the market. Acompany called
Toktumi has invented an application called Line2 which isavailable on the Apple
application store. It can add a new line to the iPhone and use the local wireless
connection to provide the phone connection. The calls made on Line2 would not
consume AT&T airtime and therefore would be free (after an initial price of USD
10 for purchasing the application of the Appstore). This application ishighly
disruptive to the operator's revenue model but it isavailable on the application
store and free to be downloaded by iPhone users.
Therefore, vertical integration does not necessarily protect against disruptive
technologies but can enable faster competitive response because of centralized
decision making across value chains.
For the above reasons, companies are increasingly under pressure to operate across the
value chain and engage in areas which were traditionally beyond their control.
Therefore, companies need to think strategically about their actual core competencies,
but at the same time think about how to provide/ deliver those competencies to
customers. The emergent phenomenon is increased presence of companies across the
value chain in the form of alliances/ mergers/acquisitions with other companies.
2.
Impact of vertical integration on the mobile platform
By integrating across the value chain, companies can achieve many advantages including
increased service attractiveness, profitability, core competencies, access to distribution
channels, etc. The impact of vertical integration on product/services delivered on the
mobile platform isdepicted through this system dynamics diagram depicted below.
Tecmical and
management knowhow -
Investment in innovative
roducts and senices
-
-
Companies strike
A
Sharing of risk+prnshs
Price for customer
strategically complementary
partnerships
Service deliverv
Introduce
ionvative services
Attractiveness of
products services
M
Conmunity generation
Common Serices user
experience across plaf
Improved content
i
and interaction
User adoption
Product service input
through user engagement
Figure 23: Increased service attractiveness through vertical integration
By striking strategically complementary partnerships, companies can enhance their
product/ service portfolio. Services like messaging, business, banking, etc need multiple
modes of delivery, including internet, mobile, etc. For a service development and
implementation company, a partnership with newer platforms increases the access to
distribution channels and also gain access to downstream distribution channels which
otherwise would have been inaccessible, thereby increasing service delivery.
Also, partnerships with content developers embellish the content provided by the
service. Better content enhances customer experience and increases their engagement
with the service. The provision of relevant content on multiple platforms by entities
focused on mutual growth and common growth strategy, there is common service/ user
experience across platforms. Mutually beneficial partnerships also lead to increased
technical knowhow among the players (cumulative knowledge resources make the
combined entity more technically adept and in a position to leverage these resources).
By engaging in partnerships, companies can strategically look for competencies which
can complement their current skills and enhance cumulative core competencies. As a
combined entity, companies can share the risk in developing new products/ services.
This can be in the form of shared investment and innovative revenue sharing
opportunities.
By striking complementary partnerships, companies can invest in a broad spectrum of
services and thereby increase the ability to innovate through the cumulative knowledge
and capital resources. As discussed in section 3.1, customers have become more active
users of technology; they engage deeply with the product/ service and play their part in
producing innovative services. Prof Eric Van Hippel of MIT, a leading thinker in 'User
centered innovation', explains the concept, ""When I say that innovation is being
democratized, I mean that users of products and services-both firms and individual
consumers-are increasingly able to innovate for themselves. User-centered
innovation processes offer great advantages over the manufacturer-centric innovation
development systems that have been the mainstay of commerce for hundreds of years.
Users that innovate can develop exactly what they want, rather than relying on
manufacturers to act as their (often very imperfect) agents. Moreover, individual users
do not have to develop everything they need on their own: they can benefit from
innovations developed and freely shared by others. The trend toward democratization
of innovation applies to information products such as software and also to physical
products."
As the community of users is engaged with the products/ services, it not only enhances
the service itself but also provides valuable feedback to the content carried by the
services. The improved content further enhances the attractiveness of the service.
Therefore, we notice feedback dynamics wherein vertical partnerships lead to lower
risk, better technical knowhow, service generation, service delivery and improved
content. Therefore, this enhances the overall viability of the business.
Finally..
Wherever a company lies in the mobile industry value chain, it cannot take the luxury of
focusing on its own core competencies and hope they will serve it in the long term. Not only is
competitive advantage impermanent, in the age of rapid technology growth and industry
convergence, it is highly unlikely that providing end to end user experience can be provided by
the major competencies of any one company. Therefore, as discussed in section 3.3, integrating
across the value chain either through partnerships, mergers or acquisitions, hedges investment
risks, enhances core competencies and increases access to distribution channels.
Many companies like Google and Microsoft are aggressively pursuing a vertical integration
strategy. In the words of Nicholas Carr, former editor of the Harvard business review and a Wall
Street Journal bestselling author, provides his insight about Google, "Here we have the ultimate
internet firm, and it's pursuing a vertical integration strategy so expansive that it would make
Henry Ford dance with delight. It builds its own server computers as well as designing some of
their components, writes its own operating systems, builds and operates its own data centers,
owns much of the fiber-optic cabling through which its data travels, codes and delivers a suite
of applications ranging from search engines to business productivity programs, sells and
delivers ads over various media, operates its own checkout and payments service, writes much
of its internal operating software, generates some of the electricity for its buildings, and
operates the bus system that brings its employees to and from work. And now we hear of its
apparent plans not only to operate a wireless network and make a smartphone but to lay a
communication cable across the floor of the Pacific Ocean."
Most of the work in this thesis has been based on a qualitative understanding of the mobile
industry, supported by professional analyst reports and views of leading thinkers. Vertical
integration of the mobile industry led by commoditization of the network, evolution of
customer choice and rapid advances in technology, lends itself to a doctoral thesis topic where
a detailed data based analysis focusing on key companies can be performed. 'Forms of vertical
alliances as they apply to the mobile industry' isalso a subject of great academic interest to me
and hope to the larger academic community as well. I will be happy to collaborate in further
research in this area.
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