IBM Institute for Business Value Mobile portal strategy: When did business partnerships become so critical to customer value? In tomorrow’s market, profits will be driven by the ability of wireless carriers to offer services that their customers value. To be successful in a quickly evolving industry, wireless carriers must adopt new business strategies — and new methods of partnering — to help ensure the fusion of technology, service and support that customers expect. By Darryl Sterling IBM Institute for Business Value Contents At a crossroads The wireless industry is at a crossroads as it struggles through the transition from a mature voice business to a nascent data market. Mobile portals have been the key carrier strategy to embrace the emerging data opportunity. Despite the importance of mobile portal strategy to the industry, very few wireless carriers have been successful in offering profitable mobile portal services that their customers value. Mobile portals require innovative business plans and strategies that package technologies and service in new ways to create customer value. According to a recent study at the IBM Institute for Business Value, a mobile portal strategy that includes the creation of a business ecosystem of companies working toward a common goal of enhancing the end-user experience can increase operating income in as little as three years. 1 At a crossroads 1 Wireless or less wired? 1 How important are mobile portals to the wireless industry? 2 What makes mobile portals attractive to the end user? 3 What is a successful mobile portal strategy? 6 The collaborative ecosystem 8 At the center of the ecosystem: Wireless carriers Wireless or less wired? 10 The bottom line: A financial model Mary is a single working mother with two school-aged children. When she was promoted last year and 12 Conclusion started having to spend more time at the office, she decided to get a cell phone. The contract with her 13 Goals to grow on wireless service provider lets her choose between extra minutes or free Web browser service. It would 13 Path forward be great to be able to get text messages from the kids or the babysitter — that way they could get 14 About the author important messages through even when she was in a meeting. Now that Mary has had the phone for a while, however, her Web browsing feature hasn’t lived up to her expectations. Mary had envisioned how convenient it would be if she could access the Internet, just like she did at home, from her mobile phone when she was commuting or shopping. But in reality, every time she tries to get on her wireless Web browser, she gets an error message. Because of this, she’s often skeptical that her Web browser would work if the kids did have to reach her in an emergency. She has become so frustrated with the browser service that she never even thinks to use it. When her contract is up with her present carrier, Mary has decided that she will go with a cheaper plan that she saw advertised, take the extra minutes and forget about wireless Internet. How important are mobile portals to the wireless industry? With the exception of a few specific markets, the global wireless industry is currently considered to be in a state of stagnation or even decline. Despite strong global subscriber growth, several factors have challenged the key assumptions of the wireless carrier business model. Investment requirements are rising; at the same time, investment dollars are harder to find and operating expenses are increasing. Technology in the industry is evolving faster than it can be assimilated, threatening to displace current wireless capabilities. To continue the service of legacy technologies and keep up with new technologies as they emerge, carriers could have to support as many as three different network technologies at once. Add to that the fierce competition of fewer but stronger players in the industry, and for most wireless carriers the demand for cash becomes a formidable obstacle to continued profitability, not to mention growth. 1 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value Given the context of the market, mobile portals are a critical service strategy for generating the additional cash flow that is necessary to fund the industry’s next phase of growth. In fact, the time span for wireless carriers to implement an effective mobile portal strategy, before their businesses succumb to market forces, is shrinking. To fuel subscriber growth and the customer loyalty necessary to create additional cash flow, the wireless carrier’s ultimate goal for its mobile portal strategy must be to develop a service that has traction in the marketplace and reduces customer churn. Customer control — though highly prized — has no shareholder value if the portal does not offer services that customers want to buy. That means the mobile portal must offer customers what they want, when they want it, at a price that they accept. What makes mobile portals attractive to the end user? John is an executive for a global consulting firm. His work regularly takes him abroad, and his daily schedule is so hectic when he’s in the U.S. that he rarely has time to access his company’s LAN to download e-mail, not to mention that he has little time to keep up with world events. Today, he is flying from Paris to New York for meetings with an important client. While walking through JFK airport on his way to baggage claim, his mobile phone beeps, letting him know he received an urgent e-mail while in flight. It is his assistant informing him that the scheduled meeting location has been changed. Also, his assistant reminds him that it is his boss’ birthday. In the taxi on the way to the new meeting location, John accesses the local sports scores he has missed while abroad. He sees that the New York Knicks — his favorite basketball team — are headed for the championship. Knowing his boss is an even bigger fan than he is, John accesses his address book on his personal Internet account, locating the e-mail address and phone number of a friend who can always get last-minute tickets to games. Though he leaves a phone message, John’s text message reaches his friend first. By the time the taxi pulls up in front of the new location where he is to meet his clients, John has secured two courtside seats to the Knicks game. In a recent Nielsen Norman Group study that tracked the experiences of mobile phone users over one week, users responded that while they knew the information that they accessed through mobile portals would not look the same as the information that they accessed on the Internet, they expected the same level of information. For 90 percent of those users, that was not the case. As a result of this and other disappointments with Web browsing on wireless networks, nine out of ten respondents reported that they would not likely purchase wireless devices that year.1 2 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value Many customers have seen promising advertisements in the media that feature e-mail, instant messaging, access to news and entertainment listings and the purchase of goods through mobile portals on wireless-enabled devices. But these services are valuable to the customer only if they are easier to use than conventional methods like the telephone and home- or business-based Internet service. Mobile portals must offer customers constant connectivity and time-sensitive information accessed through highly mobile, individually owned, inexpensive equipment. Other critical features are location awareness, social interaction and high transaction functionality. As the industry matures, these features will become the basic requirements for any wireless carrier to compete. However, while many wireless carriers offer these features, few currently offer the level of service necessary for the features to create revenue. Wireless carrier service will achieve differentiation only when critical features are combined with excellence of service, quick adoption of new technologies and services, and an offering price that is perceived as justifiable for the service provided. Mobile portals can generate increased revenue, but only when they elicit changes in user habits by offering the ease of use and seamless functionality that improves the quality of life for the customer. Therefore, successful offerings will need to change customer perception and practices. What is a successful mobile portal strategy? Wireless carriers have typically attempted to create offerings within the confines of their traditional business; however, the data communications and service creation expertise necessary are not typically core competencies for wireless carriers, and the offerings have achieved limited success. Mobile portals require increased collaboration across internal technology, service and network organizations — the resources for which are not usually available in the wireless enterprise. In addition, many companies have been operating under a “build it and they will come” philosophy — designing wireless services based on what is available instead of on actual customer needs — and have underestimated both the shrewdness and the intelligence of their customers with regard to services that they want to use and are willing to purchase. 3 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value The challenges that wireless carriers face in creating a successful mobile portal fall under four key strategic elements: Customer strategy Customer strategy involves the aspects that make it easier to create incentives for customers to use mobile portals. This strategy is deeply rooted in the reasons why customers adopt consumer electronics in general: because they are convenient, affordable and easy to use. Mobile portal customer strategy for the wireless carrier includes providing open access and open availability, improving user-interface and customer-experience design, offering services that are convenient and easy to use, and clarifying the pricing strategy to offer affordable yet valuable service. Content provider strategy Many mobile portal offerings are currently “walled gardens,” where users can access only limited information through the mobile portal. This approach compromises a fundamental value to end users that effectively drives them away from mobile portal service offerings. The initiatives of the wireless carrier need to be aligned with the content and applications provider to create an open-access offering for customers. Although this strategy appears to be heavily focused on the customer, it is rooted in the mechanics of the business relationship between the wireless carrier and the content and applications provider. Content provider strategy determines not only what content and applications will be made available to end users, but how content and application contributors will be compensated and how brands will be represented. While traditional wireless business models derived a portion of their value from infrastructure, in new business models, the value shifts from infrastructure to the content itself (see Figure 1). That means that how content is created, presented and distributed through mobile portals will be the true revenue driver for new wireless carrier business models. 4 Mobile portal strategy IBM Institute for Business Value Infrastructure framework Content framework IBM Institute for Business Value User interface Layout and navigation Content logic Relational and contextual Content database Content Integration Middleware Operating system Access devices Hardware Networking Distribution network Physical Figure 1. Content and infrastructure are the fundamental components in the new business models. Source: IBM Institute for Business Value. Technology strategy Technology strategy requires service providers to look beyond the confines of the global wireless market, and even the global telecom market, to recognize general trends in technology and apply them to wireless businesses. Although wireless businesses tend to be technologically savvy, a wireless company must also be able to discover and assess the impact of global trends, both in technology and urban culture. Technology developments can be grouped into four main categories: communications, computing (including processing, storage and operating systems), applications and integration. From a communications perspective, mobile portals need to be supported by packet-based network architecture. In the areas of computing and applications, an open development platform, like Java™, Linux, Web services or other Internet standards, makes it much easier for mobile portals to create value for end users and partners. But perhaps the most important aspect of technology strategy is the ability to tightly integrate and coordinate various components of technology, including software, device and network solutions, in a way that enhances the user experience and encourages increased use by creating real value. 5 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value In the year 2000, wireless Network strategy service providers in Japan Network strategy is the way that a wireless carrier creates the business partnerships and seamless interworking between partners in the mobile portal to create value for end users. Examples of network strategy initiatives include: generated 65 percent of global 2,3 wireless Internet revenue. Why are these wireless carriers so successful? Businesses in • Adopting a Web services business model for content distribution Japan typically view joint • Providing end-to-end bandwidth solutions to partner companies, including security-rich features, authentication, and billing and payment services ventures as channels that provide the opportunity for • Developing tools to better understand network architecture, bandwidth and trafficmanagement solutions each partner to increase their own individual revenue; • Providing an open-access network within the security framework whether or not the joint venture • Offering value-added network services, such as location-based services. itself makes money is much less important. Wireless Until recently, wireless carriers have enjoyed a certain amount of isolation in their industry. But as market forces and the economy continue to exert pressure, wireless carriers will have to look for new business models to drive perceived customer value and realize desired revenue. For many carriers, this means learning to share the market with companies they previously had not considered competitors, much less possible partners. These new partners might include content providers, device providers, and billing and payment service providers. carriers in Japan have proven to be more adept at building the types of revenue-sharing business arrangements that encourage strong mobile portals than their counterparts The collaborative ecosystem in other parts of the world. A “collaborative ecosystem” is a community of businesses that work together to create value for customers in a way that is mutually beneficial for each business within the ecosystem. Each of the businesses involved in the system collaborates to leverage its unique resources, capabilities and economies of scale to create value for the customer, grow the overall revenue and properly allocate revenue among the entities in the ecosystem. 6 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value When each of the components of value is combined in the end service or product, it is difficult to replicate by competing business communities. Each contributor in the mobile portal collaborative ecosystem has value to offer in the areas of specific expertise or capability, revenue model and assumed risk. Figure 2 explores how each of the players in the collaborative ecosystem contributes to the success of the mobile portal. Wireless carrier Content provider Device manufacturer Value position Revenue mechanism Risks and benefits • • • • Network bandwidth Network quality of service Customer access and relationship Primary customer service and support provider • • • • • Airtime fees Transaction fees Subscription fees Advertising revenue Network services revenue Risks: • Idle bandwidth • Cost of network expansion • Flexibility in content development • Ability to respond quickly to market changes • Access to different types of content • Content development guidelines • • • • Licensing fees Revenue sharing Advertising fees Subscription fees Risks: • Product adoption and success • Competing content developers • User interface design • Large impact on customer experience • Quality original equipment manufacturer (OEM) components • Units sold Benefits: • New revenues • Competitive offerings • Brand image Benefits: • Brand strength and customer base Risks: • Cost of R&D and product design • Product adoption and sales • Handset replacement cycles • Product life cycle Benefits: • Competition in consumer electronics sector Billing and payment services provider • Easy payment for services over network • Customer finances linked with new purchasing medium • Preexisting security features on trusted system • Transaction fees • Percent of transaction value Risks: • Threat of new purchasing mechanism cannibalizing business • Low credit or debit card penetration in certain countries Benefits: • Prepaid and cash economies Figure 2. Contributions of members in the collaborative ecosystem. Source: IBM Institute for Business Value. 7 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value At the center of the ecosystem: Wireless carriers The wireless carrier is at the center of the collaborative ecosystem. While the company benefits from customer control and a core competency in network operation, without the enhanced value of the offering created by the collaborative ecosystem, customer control is extremely difficult to convert into profit. Within the mobile portal collaborative ecosystem, wireless carriers create two key types of value, customer-facing value and back-office value. Customer-facing value includes services that the customer can see; back-office value encompasses the behind the scenes processes and platforms that are invisible to the customer (see Figures 3 and 4). Device or software vendor - Device design - Device intergration and interoperability - Customer experience design - Device purchases Customer - Packaging - Customer experience design - Subscription fees - Airtime fees - Transaction fees Carrier Inside content provider - Content design - Content accessibility - Network availability - Subscription-fee profit sharing - Transaction fees Value levers Outside content provider - Content design - Content accessibility - Network availability - Purchasing platform - Subscription fees - Transaction fees - Bandwidth expense Revenue levers Figure 3. Customer-facing value is governed by four key relationships. Source: IBM Institute for Business Value. 8 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value Carrier Carrier value - Network-based services - Service packaging and design - Service offering evaluation and assessment - Network service fees - Service offering fees Device or software vendor Technology vendor value - Device intergration and interoperability - Customer experience design - Device replacement cycle - Device unit sales - Licensing fees Value levers Content provider Content provider value - Breadth of content - Content design - Multichannel integration - Advertising fees - Licensing fees - Profit sharing Revenue levers Advertisers Advertising value - Customer access, targeting and segmentation - Partial funding of customer value creation - Advertising fees Direct relationship Figure 4. Back-office value: The mobile portal ecosystem should be seamless and transparent to the customer. Source: IBM Institute for Business Value. The collaborative ecosystem defends against customer churn, but the strength of the ecosystem is almost wholly dependent on the wireless carrier’s ability to create solid relationships within the network of players. In the context of the ecosystem, the carrier’s goal is to satisfy customers by providing value and satisfy ecosystem participants by providing percentages of revenue. 9 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value With that goal in mind, the wireless carrier can undertake several directives: • Create incentives for the mobile portal collaborative ecosystem to develop better value for end customers. • Develop a revenue structure that enables content providers to share equitably in the success or failure of the ecosystem. • Diversify the business portfolio by looking for revenue streams beyond those generated directly by the customer. • Develop value-added network-operation capabilities that the carrier can use to create value that drives subscriber growth and customer value. Examples include location-based services, advanced security features, network management, bandwidth management and advanced billing capabilities. • Assess the benefits of outsourcing to a third party to gain even greater economies of scale. The bottom line: A financial model How is it possible for wireless carriers to share their profits with ecosystem partners while at the same time increasing their own profit? The collaborative ecosystem financial model demonstrates that wireless carriers might sacrifice a small portion of operating income in the short term (that is, 18-24 months), but they will gain significant rewards in the long term. It is estimated that dispersing 30 percent of data revenue would result in improved operating income in as few as three years, and growth in operating income from 9.2 percent up to 14.4 percent over the next six years.4 Making a case for collaboration In an effort to illustrate the power of a collaborative ecosystem at a financial level, IBM has conducted a simple analysis of how mobile portal strategies affect wireless carrier financial models. To determine the monetary impact of developing a successful collaborative ecosystem, IBM ran multiple scenarios against a sample financial model based on a typical U.S. wireless carrier where the following variables were assumed: • 10 million subscribers at year-end 2001 • Nationwide network covering 95 percent of the U.S. population • Uses a single wireless network technology • All subscribers are postpaid • All data subscribers have voice service as well. 10 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value The model also makes some basic assumptions about customer activity as a result of the availability of collaborative mobile portal services. It projects that by increasing the allocation of wireless data revenue to other participants in the ecosystem, wireless carriers should realize an increased amount of overall revenue manifested in the following ways: • Increasing subscriber growth • Increasing subscriber uptake of data services • Decreasing subscriber churn • Increasing subscriber usage. To compare the bottom-line effects of a collaborative ecosystem, we ran two financial scenarios (see Figures 5 and 6): • Scenario A assumed that the U.S. wireless carrier does not share any revenue with collaborative ecosystem partners. • Scenario B assumes that the U.S. wireless carrier shares 30 percent of its revenue with content providers and sees a proportional improvement in other business metrics. Although several assumptions were made to create the “base case” wireless carrier model, only the variables directly influenced by portal strategy were adjusted for purposes of this analysis. Scenario A: No revenue shared Scenario B: 30 percent of revenue shared Total revenue before sharing Voice revenue/total revenue Data revenue/total revenue $6,205,820 92.3% 7.7% $7,000,558 85.3% 14.7% +13% Total revenue after sharing Percent of data revenue shared $6,205,820 0.0% $6,690,861 30.0% +8% Operating expenses Operating expense/revenue $1,635,337 26.4% $1,899,772 28.4% Gross profit $4,570,483 $4,791,090 General and administrative expense General and administrative/revenue $1,377,569 22.2% $1,404,058 21.0% Income before marketing $3,192,914 $3,387,032 Marketing expense Marketing/revenue $480,843 7.7% $526,386 7.9% +3% Operating income (EBITDA) $2,712,071 $2,860,645 +5% Operating margin year four 43.7% 40.9% -6% Change +8% -5% Figure 5. Estimated financial performance year four. Source: IBM Institute for Business Value. Scenarios A and B assume a compound annual-growth rate of 7.4 percent and 8.2 percent, respectively, for the number of subscribers. Both scenarios assume a compound annual-adoption rate of 48.7 percent for data services. 11 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value Scenario A: No revenue shared Scenario B: 30 percent of revenue shared Total revenue before sharing Voice revenue/total revenue Data revenue/total revenue $8,668,246 82.0% 18.0% $12,869,365 64.0% 36.0% +48% Total revenue after sharing Percent of data revenue shared $8,668,246 0.0% $11,480,888 30.0% +32% Operating expenses Operating expense/revenue $2,255,466 26.0% $3,559,481 31.0% Gross profit $6,412,780 $7,921,407 General and administrative expense General and administrative/revenue $1,835,091 21.2% $1,958,744 17.1% Income before marketing $4,577,689 $5,962,663 Marketing expense Marketing/revenue $613,778 7.1% $720,926 6.3% -11% Operating income (EBITDA) $3,963,911 $5,241,736 +32% Operating margin year eight 45.7% 40.7% -11% Change +19% -19% Figure 6. Estimated financial performance year eight. Source: IBM Institute for Business Value. Scenarios A and B assume a compound annual-growth rate of 7.4 percent and 8.2 percent, respectively, for the number of subscribers. Both scenarios assume a compound annual-adoption rate of 48.7 percent for data services. Conclusion The revenue opportunity for mobile portal services might still be uncertain, but the real value of these offerings is in how they affect customer actions, how they create future businessgrowth opportunities and how they change the operating expense structure for wireless carriers. In the end, the numbers indicate that it makes more sense for wireless carriers to share a percentage of their profits as allies who offer increased levels of service across the various aspects of the mobile portal. After all, a smaller percentage of a large revenue increase is better than a larger percentage of a small revenue increase. The collaborative ecosystem is one strategy that will allow wireless carriers to create a winning price-value proposition for end consumers that will continue to drive the growth of the market. 12 Mobile portal strategy IBM Institute for Business Value IBM Institute for Business Value Goals to grow on Without a mobile portal strategy that includes symbiotic partnering focused on improving the customer experience, wireless carriers will lose customers to the competition. The list of strategic goals and initiatives in Figure 7 highlights the results that wireless carriers should target to decrease customer churn and increase their collaborative business networks. Customer strategy Content provider strategy Technology strategy Network strategy Goals Strategic initiatives • Grow the data-subscriber customer base. • Increase the number and length of subscriber content sessions. • Strengthen content-partnering programs. • Invest in user interface design. • Gain revenue by providing value-added service to partners. • Increase the availability of content. • Develop solutions to help partners make money. • Increase the percentage of revenue shared with partners or agree to higher licensing fees. • Adopt an open-access content policy. • Increase the number of content provider relationships. • Adopt new technologies and services that create value. • Learn more about customer needs. • • • • • Increase the number and quality of relationships with key vendors and service providers. • Make it easy to create unique value by leveraging the partners in the ecosystem. • Develop tightly integrated products and services. • Standardize middleware, security platform and management solutions among the partners in the ecosystem. Adopt open standard, interoperable platforms. Increase R&D investment in experimental technologies. Invest in resources for capturing customer metrics. Develop a preliminary CRM strategy. Figure 7. Strategic goals and initiatives for wireless carriers. Path forward Creating a successful mobile portal means learning to play a new game, where winning depends as much on your company’s vision and strategy as it does on the allies that you choose. To explore how our communications industry consultants can help you create a strategy that encourages business collaboration and joint revenue growth, contact us at insights@us.ibm.com. To browse additional resources for business executives, we invite you to visit our Web site at ibm.com/services/insights 13 Mobile portal strategy IBM Institute for Business Value About the author Darryl Sterling is an Industry Strategist at the IBM Institute for Business Value. Darryl can be contacted by e-mail at dsterlin@us.ibm.com. The IBM Institute for Business Value develops fact-based strategic insights for senior business executives around critical industry-specific and cross-industry issues. Clients in the Institute’s member programs — the IBM Business Value Alliance and the IBM Institute for Knowledge-based Organizations — benefit from access to in-depth consulting studies, a community of peers, and dialogue with IBM strategic advisors. These programs help executives realize business value in an environment of rapid, technology-enabled competitive change. You may contact the author or send an e-mail to bva@us.ibm.com for more information on these programs. © Copyright IBM Corporation 2002 IBM Global Services Route 100 Somers, NY 10589 U.S.A. Produced in the United States of America 04-02 All Rights Reserved IBM and the IBM logo are registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Java and all Java-based trademarks and logos are trademarks of Sun Microsystems, Inc. in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. Contributors Charles Gerlach, Communications Sector Leader, IBM Institute for Business Value Matthew Ross, Strategy and Change Consultant, IBM Global Services References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. References 1 Ramsay, Marc and Jakob Nielsen. WAP Usability, Déjà Vu: 1994 All Over Again. The Nielsen Norman Group. December 2000. 2 Telecommunications Carrier Association. http://www.tca.or.jp 3 IBM Institute for Business Value analysis. 4 Ibid. G510-1656-00