Report v29

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M-Commerce
Creating a new market with Instant Auctions
Hjörtur Stefánsson
Masih Nikdar
Supervisors
Christian Stahl
Leif Bloch Rasmussen
1
Preface
This project is not done in co-operation with any other companies and is purely
based on our own interest in the field. The product we will be designing is only for
our own use and we have planned to continue the work after the thesis.
Not done!
2
Table of contents
1
INTRODUCTION
7
1.1 BACKGROUND
RESEARCH PROBLEM
1.1.1 MAIN RESEARCH QUESTION:
1.2 OBJECTIVES OF THE STUDY
1.3 DELIMITATIONS
1.4 METHODOLOGY
1.4.1 QUALITATIVE RESEARCH METHOD
1.4.2 QUANTITATIVE RESEARCH METHOD
1.4.3 OUR APPROACH
1.5 THESIS OUTLINE
7
10
10
11
11
13
13
14
14
17
2
20
THEORETICAL FRAMEWORK
2.1
2.2
2.2.1
2.3
2.3.1
2.3.2
2.3.3
2.3.4
2.3.5
2.4
2.5
2.6
2.7
2.7.1
2.7.2
2.7.3
2.8
2.9
2.9.1
2.9.2
2.9.3
2.9.4
2.9.5
2.9.6
2.10
3
INTRODUCTION
MOBILE DEVICES
CHALLENGES IN MOBILE USABILITY
NETWORK TECHNOLOGIES
GSM
GPRS (2.5G)
EDGE (2.75G)
3GSM (3G)
WI-FI
OPERATING SYSTEMS
MOBILE BROWSING
XML
XSLT
WAP
XHTML
XHTML-MP (WAP 2.0)
M-COMMERCE IN OPPOSITION TO E-COMMERCE
BUSINESS
BUSINESS MODEL
BUSINESS STRATEGY
TRADITIONAL BUSINESS STRATEGY MODELS
BRANDING
REVOLUTIONARY BUSINESS STRATEGY MODELS
ECONOMICS OF INFORMATION TECHNOLOGY
SUMMARIZING THEORIES AND THEIR PURPOSE
20
20
21
23
23
23
24
25
25
27
28
29
30
31
35
36
38
41
41
42
44
48
51
55
66
THE MATURITY OF MOBILE TECHNOLOGY
68
3.1 MOBILE PHONES ON THE MARKET
3.1.1 SECURITY
3.1.2 NETWORKS
3.2 DANISH M-COMMERCE MARKET
3.2.1 TODAY – MARKET OVERVIEW
3.2.2 PAYMENT
68
71
72
74
74
75
3
3.2.3
3.2.4
3.2.5
3.3
3.4
3.4.1
3.4.2
3.4.3
3.4.4
3.4.5
3.5
3.5.1
3.6
3.7
4
MARKET SHARES AT THE DANISH MARKET
3G ROLLOUT
DRIVERS FOR ADOPTION
SUB-CONCLUSION
EBAY
THE ECONOMICS OF EBAY
EBAY MOBILE
EBAY BUSINESS MODEL
THE EBAY AFFILIATE PROGRAM
EBAY’S SUCCESS
M-COMMERCE LEVIER TO CHANGE STRATEGY
CREATE A BLUE OCEAN FOR INSTANT AUCTIONS
INSTANT AUCTIONS – INTRODUCTION
THE CONCEPT OF INSTANT AUCTIONS
76
76
79
79
82
82
88
89
91
92
92
93
95
96
SYSTEM ARCHITECTURE
99
4.1 PAYMENT
4.2 INSTANT AUCTIONS VS. EBAY
4.3 TECHNICAL CONSIDERATIONS
4.3.1 SECURITY
4.3.2 USABILITY
102
102
103
103
103
5
104
5.1
5.2
5.3
5.4
6
THE ECONOMICS OF INSTANT AUCTIONS
SWITCHING COSTS
MARKET STRUCTURE
WHY AUCTIONS?
BUSINESS MODEL
FINDINGS AND CONCLUSION
105
105
106
106
109
4
List of figures
Figure 1 - Hype cycle for m-commerce .............................................................................. 8
Figure 2 - Thesis approach ................................................................................................ 17
Figure 3 – The WAP 1.1 Stack. Source www.topxml.com .............................................. 31
Figure 4 – WAP network model. The WAP Gateway is an important difference from the
traditional Internet Model. Source: www.itsec.gov.cn ............................................. 32
Figure 5 – the evolution of Mobile Browsing. Source: forums.nokia.com ...................... 36
Figure 4 - Porter's five forces ........................................................................................... 46
Figure 5 - Red ocean versus blue ocean strategy .............................................................. 52
Figure 7 - The six principles of the Blue Ocean Strategy ................................................. 55
Figure 8 - A service branding model ................................................................................ 49
Figure 9 - Network effect ........................................................................................ 59
Figure 10 - Positive feedback. Shapiro & Varian, 1999:177 ..................... 60
Figure 11 a summary of the 4 market structures and their characteristics ...................... 64
Figure 12 Mixed loss ..................................................Error! Bookmark not defined.
Figure 16 – The Sony Ericsson W850 .............................................................................. 70
Figure 17 – The Nokia N92 .............................................................................................. 70
Figure 18 - WAP vs. XHTML communications. Source: forums.nokia.com .................. 72
Figure 19 - Distribution of market shares at the Danish Market ...................................... 76
List of tables
Table 1 - E-commerce vs. M-commerce........................................................................... 40
5
Part 1
Introduction
6
1 Introduction
This chapter will present an overview of the chosen subject, Mobile Commerce (MCommerce), and its evolution from Electronic Commerce (e-commerce) to mcommerce. Among the contents in this chapter include the problem formulation,
objectives of the thesis and our delimitations. Finally the methodology and an outline
of the thesis will be presented.
Background
Information and communication technologies open up countless new opportunities in
today’s business world. With the introduction of the Word Wide Web, e-commerce
has revolutionized the way people do business. Transactions through the Internet
continue to impact the global business environment profoundly and its technologies
and applications are beginning to focus more on mobile computing and the wireless
web. Wireless data networks have become widespread in m-commerce1 compared to
the fixed wires in e-commerce. The recent growth of m-commerce is to a large part
due to users that want to do business, communicate and share information without
the use of a computer (Kalkota & Robinson, 2001)2.
Even though m-commerce can be considered as an extension of electronic
commerce, it has a number of distinctive features and complexities, as it involves a
considerable amount of emerging technologies. Just a few years ago, many experts
announced that m-commerce had arrived and would shortly provide unique
commercial functionality to the masses. Cell phone users were expected to be
routinely accessing data online and speedy third-generation cellular standards would
soon solve associated bandwidth difficulties. It has not quite worked that way. All
technologies go through a hype cycle and m-commerce is no different in this regard.
According to Gartner Group, the adoption of new technologies is a process with
defined stages. They point out that all new technologies go through a set hype cycle,
but at different paces. Once a significant breakthrough has occurred, the technology
goes into a stage of unrealistic projections. This is a time when the technology does
The use of mobile handheld devices to communicate, inform, transact and entertain via an always on
connection to public and private networks
2
M-business – The race to mobility
1
7
not live up to the inflated expectations. Only afterwards is there a true
understanding of the technology and only then can the real benefits of the new trend
be realized.
Figure 1 - Hype cycle for m-commerce
Although the technology has existed for many years, it is still evolving and according
to the hype cycle presented above, now should be an interesting time to look into
the subject of m-commerce and see if the technology has matured enough and if the
market is at all ready.
We feel that there are many opportunities for new services in mobile commerce
today, but we have decided to focus mostly on the online auctions market, where we
will analyze the biggest player on the market, eBay. The reason for choosing this
area is because we find it extremely interesting and firmly believe that this is exactly
the kind of situations where users would gain great advantage of the mobility of a
mobile auction service. We have come up with an idea of how online auctions can be
8
modified in order to allow users to take even greater advantage of the mobility than
before, and will describe our idea later in the analysis.
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Research problem
Similar to other emerging industries, m-commerce is characterized by a large
number of uncertainties at different levels, in particular concerning technology,
business strategy and consumer demand.
Over the years, numerous attempts have been made to simply transfer successful
web-based business models to mobile devices. The problem was that the technology
was not mature enough nor was the market ready to accept this new hype. Many
companies rushed out to become the first mover regarding m-commerce services,
but due to the technology and market limitations, the initial outcome of m-commerce
services was not good as expected and many dismissed the whole hype as a failure.
Main research question:
The goal of the project is to look at the mobile technology available today and see if it
has matured enough to allow m-commerce services that can benefit today’s demanding
end-users and use the benefits of an emerging technology to gain a competitive advantage
over similar e-commerce services on the market, such as the online auction site eBay.
The goal is also to create a new, innovative business model within the field of Mobile
Commerce, by using the advantages of e-commerce combined with the many
advantages of mobility. Here is the main research question followed by two subproblems:
Given a new technology, how is it possible to penetrate a competitive market
offering online auctions, by analyzing the existing business models and creating a
new one for m-commerce that can give a competitive advantage?
Sub-problems:
1. Has the technology matured enough?
2. Is the market at all ready for services that take use of this emerging technology?
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Objectives of the study
The goal of this study is to contribute to our knowledge on how m-commerce has
developed in the past years and to investigate whether the technology and market are
ready for m-commerce services. In particular, our interest will be focused on how this
emerging technology will allow an auction service for mobile devices, which can
compete on a more equal footing with traditional online auctions.
The study would seek to analyze and evaluate the level of maturity of mobile technology
and market opportunity. An m-commerce business model for a mobile auction system
would also be suggested based on the study and literature available. Generally speaking,
these are the objectives we will seek to achieve:

To investigate the technological maturity of m-commerce

To investigate the market maturity of m-commerce services

To design a m-commerce business model and a strategy for a mobile auction
service

To design the technical basics of a mobile auction service
In order to solve these objectives we will have to apply a design-oriented perspective.
Delimitations
The IT University of Copenhagen is a state-recognized higher education institution
under the Danish Ministry of Science, Technology and Innovation. The mission of the
IT University if Copenhagen is through research and teaching to contribute to
qualified use of information technology within the three corners of the IT University’s
triangle as illustrated in the figure below.
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Figure 2 - ITU's triangle
Based on the triangle presented above, we will focus on the Science and Business
corners of the triangle and the relationship between. The science part will cover mcommerce and the technologies that facilitate it while the business part will focus on
business models, strategy and economics.
The scope of this thesis is wide and this is why there are several delimitations to
keep the work manageable. The technology part will not focus on the standard
Internet protocols and hardware specifications, but mainly focus on the technologies
surrounding mobile commerce. We will not go in to much detail when describing the
technologies, but try to keep things moderately easy to read for non-technical
readers. Other reason for choosing this approach is because the technology part is
closely in line with the business part and readers shouldn’t have any difficulties
switching over from the technology discussion to the business discussion. It should
also be mentioned that in our discussion surrounding mobile devices, we only focus
on mobile phones, and leave out other mobile devices such as PDA’s.
The business part will not focus on other business models, beside the brokerage
business model which is used by online auction sites for example. Under strategy, we
will not be looking at tools such as value chain analysis in order to maintain a market
position, but focus on the traditional and new revolutionary strategies to enter a
competitive market. In our analysis regarding the strategy we will only use selected
parts of the theories, but still follow the basic fundamentals of the strategy since the
rapport is not purely strategic. The economic part of the thesis will not include any
calculations regarding return on investment, revenues, costs etc. It will however
include a discussion regarding the economics of information technology in mobile
commerce such as network externalities, switching costs and lock in.
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We will use eBay as a case in order to analyze their business models and how they
entered the market, but not to copy their strategy.
We will not create a full version of the underlying application, but only discuss the
logical functionality of it in technical terms and present basic design ideas which
should give the reader a clear picture of our vision for the service we intend to offer.
In our analysis we will not do any research regarding consumer demand for mobile
auctions, but only focus on the general acceptance of mobile services in today’s
market.
Methodology
Most methods in research hold either a qualitative or quantitative approach, and
sometime even both can be applied. Bouma and Atkinson (1995) give the following
description of the two approaches:
The difference might be summarized by saying that quantitative is structures, logical,
measured, and wide. Qualitative research is more intuitive, subjective and deep. This
implies that some subjects are best investigated using quantitative whilst in others,
qualitative approaches will give better results. In some cases both methods can be
used”. (Bouma and Aktinson 1995:208)
Qualitative research method
The purpose of qualitative research is to examine the characteristics of a
phenomenon in order to identify it. The focus of qualitative research is not on
numbers but rather on words, and observation.3
Qualitative methods are used to show how the social world is interpreted,
understood, experienced or produced. The focus is more on holism rather than on
breaking down components to patterns. The methods used for generation of data
should be seen as flexible as well as sensitive to the social context where data are
3
W. G. Zinkmund 2000, p 103 (Business research method)
13
produced. The methods for analyzing and explaining are based on the understanding
of complexity, detail and context. So, by using qualitative methods the researcher
tries to offer some sort of social explanation to the researcher phenomenon.
Research techniques
Generally qualitative research studies rely on three basic data gathering techniques:

Participant observation

Interviews

Content analysis
Quantitative research method
The purpose of quantitative research is to determine the quantity or extent of some
phenomenon in the form of numbers. (Zinkmund)
In contrast to the qualitative method, the main purpose of quantitative methods is to
make valid and objective descriptions of a phenomenon. The researcher attempts to
show how he by manipulating variables can control the phenomenon. Attempts are
made to discover principles and laws that can be generated to the larger population.
Furthermore, the researcher tries to achieve objectivity by not letting his personal
bias influence the analysis and interpretations of the data. Personal contacts with the
subject are kept at minimum. The researcher seeks to understand a phenomenon by
isolating and examining the interrelationship among and between variables in a
controlled setting.4
Research techniques
Our approach
The choice of qualitative or quantitative research approach naturally depends on the
research question and the data needed to answer the research question. Since the
objective of this thesis is to “design” an m-commerce service, both methods are seen
as rewarding methods to apply.
4
Taylor
14
Our main domain is m-commerce, which is quite complex based on the fact that it is
an emerging discipline and therefore literature on the various segments is currently
scarce. In order to design the kind of system which would compete with other ecommerce services, there needs to be a clear picture of the technologies on the
market, as well as similar products. We therefore felt that both qualitative and
quantitative approaches suited our study very well because a qualitative research
gives us a detailed picture on how to design m-commerce services (business and
technology).
In quantitative research we classify features, count them and construct statistical
models in an attempt to explain what is observed. Gartner Group and National IT
and Telecom Agency provide some good quantitative data around the adoption of
wireless data services and m-commerce throughout the world and in the region.
Because our data is retrieved from those statistic companies, such as Gartner Group
and National IT and Telecom Agency, we don’t feel the need to collect our own
statistics since those are already analyzed and structured.
We are aware that in order to be able to answer the research questions we need to
have a clear understanding of all three corners of the triangle presented in figure 2
since our thesis is design orientated.
Case study approach
In order to be able to collect as much valuable information on the topic as possible,
we have decided to go with the case study approach. We motivate this choice by
quoting Combes (2001):
“Case study inquiry enables you to collect “rich”, detailed information across a wide
range of dimensions about one particular case or a small number of cases. A good
case study, therefore, highlights the numerous factors governing managed
communication in a particular setting, portraying something of its uniqueness while
also –but not always – attempting to offer insights that have wider relevance.”
(Combes 2001:43)
The most common types of research questions are formulated as who, what, where,
how and why questions. When how- or why- questions are used, the researcher can
15
benefit by using case studies, experiments, or historical studies. The design of a case
study can either be a single-case study or a multiple case study (Yin, 2003).
A single case study investigates a single entity in the form of one industry, company,
or district in depth.
The purpose of this study is to find information to answer a “how” question. For us a
single case study with a qualitative approach has been seen as the most rewarding
method to apply in our research. The reason why we have not chosen a multiple
case study is because we don’t intend to build the project around the case study
(eBay) but instead use it to support our argument regarding the mobile market and
technology available.
Literature study
Our empirical study will be preceded by a literature study. This study will enhance and
facilitate our understanding in the area of interest. It will also enable us to get a wider
view of the subject and an insight into earlier researches conducted within the problem
area. Our problem is perceived to be an emerging discipline, which is also under a rather
dynamic technological evolution. We shall therefore make use of articles and materials in
the technology, science and business arenas. Our literature study will serve both as the
foundation for our theoretical framework and a base for the design and development of
the questionnaire for the empirical study. The knowledge and understanding obtained
from the literature study will be the guiding precepts during the formulation of the
purpose of our study and the research questions. The literature will consist of books,
articles, white papers and journals on m-commerce services and technology.
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Thesis outline
This thesis is divided into 5 main chapters, with several subchapters. In the first
chapter, the reader has received an introduction to m-commerce, followed by the
research problem, delimitation and the methodology.
The next chapter introduces
the reader to the theoretical framework of the thesis, which is structured according
to our model displayed below.
Figure 3 - Thesis approach. Source: Own production
The reason why we have designed the model in this way is because we need to know
the available technologies before we can realize the possibilities for m-commerce as
a business. These possibilities can then affect the way of building a strategy for
entering a competitive market. Having this new strategy can inspire the creation of
new business models and will eventually impact the IT-strategy of new entrants on
the market. The same structure applies for the chapter after, which is the analysis
portion of the thesis. The last 2 chapters are the discussion and the final conclusion.
That gives us the following basic outline:
17
Chapter 1 – Introduction – In our opening chapter, we provide the background to
our thesis and also introduce the subject. The chapter also highlights the research
question and the purpose and objectives of the thesis. The chapter ends on the
delimitations and disposition of our thesis.
Chapter 2 – Theoretical framework – We present relevant theoretical findings in
this chapter. We begin with the emerging mobile technologies today and the
evolution of e-commerce to m-commerce. We continue to look at business models,
different strategies to enter new markets, branding and conclude the chapter on
economics of information technology.
Chapter 3 – Analysis – The analysis is initiated by looking at the maturity level of
mobile technology today followed by an examination of the mobile market and it’s
acceptance to mobile services. We will then look at eBay and the services they offer
in order to compare our system with eBay later in the thesis. At the end of this
chapter we will be able to answer the two sub-problems presented in the problem
formulation.
Chapter 4 – Design – Here we will describe an idea for our own new mobile auction
system. Then we will choose an optimal strategy for entering a competitive market
as well as create a business model for our service. We will also describe the technical
perspective of the system.
Chapter 5 – Conclusion – After both the analysis and design chapter we will have
enough data and information to fully answer the main research question.
Chapter 6 – Futer
How to read this thesis
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Part 2
Theory
19
2 Theoretical framework
Here we present the theoretical framework that we will use in our analysis and
design.
Introduction
The mobile phone has developed so much in the last years, that it is no longer just a
device for simple communication. Mobile phones have become mini-computers that
contain rich user interface with full color, allowing everything from internet browsing
to playing media on the device. We will now go through the most important
technological enablers to mobile services and m-commerce on mobile phones.
We will start by looking at the devices on the market today and the possibilities they
give us. Then we will discuss the technologies regarding connections and thirdly we
will discuss the operative systems on the mobile phones. This will then be followed
by a description of the markup languages and a discussion concerning security when
browsing the internet through a mobile web browser.
Mobile Devices
In order for developers to design user-friendly applications and mobile websites, they
need to fully understand the huge variety of mobile handsets available on the market
today. Not only do the screens come in different sizes and variations, but also handset
support for pictures, music and other content can vary greatly. Some handsets have bad
image support, don’t support XHTML, don’t have color or can simply crash easily when
the content of a web page is too big.
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Challenges in mobile usability
“Much of a mobile user’s first impression of the application will be formed by his or
her interaction with the device, therefore the success of mobile commerce
applications is greatly dependent on how easy they are to use” (Mehdi KhosrowPour, 2006:835)
Usability is the measure of the quality of a user's experience when interacting with a
product or system - whether it is a web site, software application, mobile technology,
or any user-operated device. The word "usability" also refers to methods for
improving ease-of-use during the product development. It incorporates many
factors: design, functionality, structure, information architecture, and more. 5 With
good usability, it is guaranteed that end users will be happier with the product and
the change of the user using it again increases.
The most important precondition for the success of e-commerce and m-commerce
service sites is ensuring that the customer’s experience, via the interface, satisfies
both their sensory and functional needs. Past studies have shown that user interface
features, such as page and content design, are a key determinant of sales in online
stores. M-commerce, in contrast to e-commerce, poses new challenges and
questions. There are a number of issues that need to be taken into consideration
before implementing an application for mobile devices, since these differ dramatically
from normal computers:6

Mobile devices have smaller displays, as well as a wide variety of display
sizes.

Current mobile devices with color displays support up to 262.144 colors while
some PCs are able to display over 16 million colors (32-bit). Secondly, color
displays haven been available in the mobile domain for only a handful of
years now.

Text inputting is slower in mobile devices than it is with a full PC keyboard.

Mobile devices usually have no mouse for activating an object, which limits
the possible user interface components and slows down object activation.
Forum Nokia. http://www.forum.nokia.com/usability. Seen 24.6.2005
Nokia. http://sw.nokia.com/id/cbbd251d-bec2-4bab-8701e4c01c54c37d/Creating_Web_Content_For_Mobile_And_PC_Browsing_v1_0_en.pdf. Seen 24.5.2006
5
6
21

Some mobile devices and/or browser view modes support only vertical
scrolling.

Soft keys are used for activating commands in mobile devices; the number
and purpose of soft keys vary between devices from different manufacturers.

Connection establishment and data transfer between the terminal and the
server is slower than in a fixed domain.

The amount of cookie data that can be stored in a mobile device is limited.

The context of use cannot be predicted as easily as with, for example, an
office PC application.

Mobile users may have to pay for each piece of transferred data.
There have been many texts written regarding usability guidelines and we will not go
into much detail regarding these guidelines. The main point is that developing
applications for mobile phones is different and many new design principles apply.
Also, usability tests should always be performed to insure optimal user experience to
the end user.
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Network technologies
Not only have the mobile devices evolved to a great extent, so have the network
technologies that give us the opportunity to use the mobile phones to connect to the
internet. In this section, we will have a look at the current network technologies
available on the market today in order to be able to fully realize the potential for mcommerce today.
GSM
The Global System for Mobile Communications (GSM) is the most popular standard
for mobile phones in the world. Right now there are an estimated 1.965.351.890
global GSM & 3GSM connections in the world, and this number grows by
approximately 1000 connections per minute. That counts for an estimated 29% of
the global population and 82% of the global mobile market. 7
GSM is a cellular network, which means that mobile phones connect to it by
searching for cells in the immediate vicinity.8 The networks operate at different radio
frequencies. Most operate on the 900 MHz and the 1900 MHz, but in America it is
usually 850 MHz and 1900 MHz. Most new handsets support multiple frequencies
that allow easier roaming between countries (extending of connectivity service in a
location that is different from the home location where the service was registered).
Roaming requires that contracts are made between the operators, and those
contracts are called roaming agreements.
GPRS (2.5G)
General Packet Radio Service (GPRS) is a packet switched wireless protocol as
defined in the GSM standard. Packet switched means that multiple users share the
same transmission channel, only transmitting when they have data to send. This
means that the total available bandwidth can be immediately dedicated to those
users who are actually sending at any given moment, providing higher utilization
where users only send or receive data intermittently.9 GPRS is available to users of
GSM mobile phones and often described as 2.5G (while 2G is GSM).
7
8
9
GSM World . http://www.gsmworld.com/index.shtml. Seen 25.5.2006
Wikipedia. http://en.wikipedia.org/wiki/GSM. Seen 25.5.2006
Wikipedia. http://en.wikipedia.org/wiki/GPRS. Seen 25.5.2006
23
GPRS differs from the old circuit switched technology in 2G and instead of users
paying by the second as with 2G, users only pay for the amount of data transferred
(this usually doesn’t apply to normal telephony where regular minute prices apply for
each operator). GPRS connection is “always on”, meaning that the network capacity
is only used when data is actually transmitted. With throughput rates of up to
40kbit/s, users can have a similar speed to that of a dial-up modem.10
Packet-switched data under GPRS is achieved by allocating unused cell bandwidth to
transmit data. As dedicated voice (or data) channels are setup by phones, the
bandwidth available for packet switched data shrinks. A consequence of this is that
packet switched data has a poor bit rate in busy cells. The theoretical limit for packet
switched data is approx. 160.0 kbit/s (using 8 time slots and CS-4). A realistic bit
rate is 30–80 kbit/s, because it is possible to use max 4 time slots for downlink. 11
EDGE (2.75G)
EDGE is a yet another enchantment of the GSM network. It can provide up to three
times the data capacity of GPRS and by using EDGE, operators can handle three
times the number of subscribers than with GPRS. EDGE can be overlaid directly onto
an existing GSM network and for many existing GSM/GPRS networks it is simply a
matter of a simple software-upgrade.
With EDGE, it is possible to offer more advanced mobile services, such as
downloading of video and music clips, higher speed internet access, email and more.
As of April 2006, there were 139 commercial GSM/EDGE networks in 78 countries,
out of a total of 192 EDGE deployments in 102 countries. 12
10
11
12
GSM World. http://www.gsmworld.com/technology/gprs/index.shtml. Seen 25.6.2006
Wikipedia. http://en.wikipedia.org/wiki/GPRS
GSM World. http://www.gsmworld.com/technology/edge/index.shtml. Seen 25.6.2006
24
3GSM (3G)
3G is an abbreviation for the third-generation of mobile technology. It has drastically
improved data transfer speeds up to 300 kbit/s and provides more efficient systems
for over-the-air transmission of existing services, such as voice, text and data. 13 The
technology’s that is used most often in Europe and Asia is called UMTS, but since
that could create confusion in the market; the technology is most often referred to
as 3G. There is another standard available that is incompatible to UMTS, called
CDMA2000. This standard is used in the USA. While UMTS is built upon the GSM
infrastructure, CDMA2000 is built upon CDMA (Code division multiple access), which
is the technology that competes against GSM in USA. 14 We will mainly be focusing on
UMTS in the rest of the report and refer to it as 3G.15
3G was extremely hyped before it was first launched in Asia, and this hype created a
certain euphoria, which led to huge spectrum-licensing fees in many countries,
especially in Europe. Since these fees were collected years before any income could
be expected, many operators got into financial difficulties since starting up a 3G
network involves enormous investments on top of the high licensing fees. This has
greatly delayed 3G implementation in all countries except Japan and South Korea,
where these fees were avoided because of the high priority set in national IT
infrastructure development in these countries.16
In the beginning, video-calling was thought of as the “killer-application” for 3G, but
the experience in Asia has shown that not to be the case. Instead, music
downloading and streaming seems to have the highest demand from customers.
According to Mobile Youth, young people in the UK are spending around £165m a
year on mobile music at present, with the figure expected to nearly double to £311
by 2007, according to new research. The figures, from the Mobile Youth 2005 report,
revealed that on average, young people in the UK spend about £1.08 a month on
music downloads with the figure set to almost double.17
GSM World. http://www.gsmworld.com/technology/3g/faq.shtml. Seen 26.5.2006
Cellular Online. http://www.cellular.co.za/cdma.htm. Seen 1.6.2006
15
CDMA2000 1x, the most popular CDMA2000 standard, is also often referred to as 2.5 or 2.75G, since it
supports maximum download speeds closer to EDGE rather then UMTS and just barely qualifies as a 3G
technology on paper. (Source: http://en.wikipedia.org/wiki/CDMA2000).
16
Wikipedia. http://en.wikipedia.org/wiki/3g. Seen 26.5.2006
17
SMS.AC. http://corporate.sms.ac/industryresources/mobile_music.htm. Seen 28.8.2006
13
14
25
Wi-Fi
Since many new handsets are being equipped with Wi-Fi capabilities, we find it
neccesary to give a short description of that technology.
Wi-Fi (short for Wireless Fidelity) is a term established by the Wi-Fi Alliance for
describing the standards based on the IEEE 802.11 specifications, that are used in
wireless networks (WLAN). The Wi-Fi alliance administrates tests that are used to
certify compatibility of products so that all products that have the official Wi-Fi logo
can work together with other Wi-Fi certified brands. 18
Figure 4 WI-FI logo. Source: www.wi-fi.org
From the 802.11 standard, there are mainly 3 protocols used, all operating within
different range and frequency and with significant speed limits. Those three protocols
are shown in the following table
Name
Frequency
Maximum speed
Range
802.11a
5 GHz (5.725 to
54 Mbit/s
Ca. 20 m.
11 Mbit/s
Ca. 50 m.
54 Mbit/s
Ca. 50 m.
5.850)
802.11b
2,4 GHz (2.4 to
2.4835)
802.11g
2,4 GHz (2.4 to
2.4835)
Figure 5 The Wi-Fi protocols
Today the most widespread protocols are 802.11b and 802.11g, where 802.11g is
backwards compatible with 802.11b.
WI-FI Alliance .http://www.wi-fi.org/OpenSection/why_Wi-Fi.asp#Wi-Fi_CERTIFIED=Confidence. Seen
20.6.2006
18
26
A Wi-Fi network can be used to connect Wi-Fi enabled devices (computers, Wi-Fi
phones, DVD players etc.) to each other, to the Internet, and to wired networks.
With the increasing sales of laptop computers, wireless hotspots have been growing
significantly in most big cities and can normally be found in coffee shops, hotels,
airports and such places.
There are mainly two commercial encryption protocols available, WEP and WPA. WPA
is generally considered to be much safer since numerous vulnerabilities have been
discovered in the WEP protocol, and a WEP encryption key can easily be broken by a
laptop equipped with a Wi-Fi card and a free program such as Airsnort. These
programs usually operate by passively monitoring transmissions and computing the
encryption key when enough packets have been gathered. 19
Operating systems
The operating system for mobile terminals is not standardized and currently there is
an ongoing battle to become the technology standard for the future. Each of the
operating systems is gathering a number of application developers around them,
who mostly develop their products for one OS only. There are two major players,
who have each developed their own operating systems in the field of mobile devices.
The two major makers of phone operating systems are Symbian and Microsoft.
Microsoft has developed a lighter version of its Windows operating system, simply
called Windows Mobile. Its latest version is powered by Windows CE 5.0 and uses the
.NET Compact Framework 1.0 SP2.20
Windows Mobile is best described as a subset of platforms based on Windows CE
underpinning. Currently, Pocket PC (now called Windows Mobile), Smartphone21, and
Portable Media Center are the three main platforms under the Windows Mobile
Umbrella. Each platform utilizes different components of Windows CE, as well as
supplemental features and applications suited for their respective devices. 22
Airsnort. http://airsnort.shmoo.com/. Seen 20.6.2006
Windows CE (sometimes abbreviated WinCE) is a variation of Microsoft's Windows operating system for
minimalistic computers and embedded systems.
21
A smartphone is any electronic handheld device that integrates the functionality of a mobile phone,
personal digital assistant (PDA) or other information appliance. This is often achieved by adding telephone
functions to an existing PDA (PDA Phone)or putting "smart" capabilities, such as PDA functions, into a
mobile phone (source: http://en.wikipedia.org/wiki/Smartphones)
22
Wikipedia. http://en.wikipedia.org/wiki/Windows_Mobile. Seen 20.6.2006
19
20
27
Windows Mobile is designed to be somewhat similar to the desktop version of
Windows XP and allows the users to run programs written for the .NET mobile
platform.
The Symbian operating systems supports a wide variety of smartphones from
manufactures such as Nokia, Samsung, Siemens and Sony Ericsson. Theses mobile
phones offer Java applications, audio, video and imaging capabilities, providing a
hybrid of phone/PDA capabilities to support frontline activities. The Symbian
operating system is especially designed for two types of wireless information
devices:

Smartphones (mobile phones with add-on applications and PC connectivity)

Communicators (handheld computers with connectivity to or built-in mobile
phones)
Symbian is a consortium of leading mobile handset manufactures whose main goal is to
develop a common operating system that would ensure device interoperability.
Mobile Browsing
As the technology progresses, so does the need for mobile browsing. Many bigger
mobile operators serve a mobile portal to their customers with interesting content for
browsing at a rate set by the operators. This kind of content can be anything from
the daily news and weather, finance reports, dating, horoscope, ringtone downloads
to simply browsing your web based mail.
In this chapter, we will present the technology that started it all, WAP, and briefly
point out the flaws thereof. This is for the reader to be able to realize what went
wrong with WAP and the potential of the newer technology, XHTML. Then we will
present the XHTML markup language and how it can take mobile browsing to new
heights. We will start by describing two widely used standards, XML and XSLT. XML
is the basis for the markup languages used in mobile browsing and XSLT will be used
by our application to transform the content stored as XML to valid markup
languages.
28
XML
XML, or Extensible Markup Language, is a W3C recommended markup language for
documents containing structured information.23 In other words, it can be used to create
other markup languages (WML, XHTML etc.) that are capable of describing any form of
data. XML can also be used to store data, just like a database.
XML is tree-structured and needs to follow a specific set of rules to be considered valid.
In the following description we will use students at ITU as an example for the data. First
of all, any XML document needs to start with a header declaration, defined as such:
<?xml version="1.0" encoding="utf-8"?>
This basically tells what XML version is being used and the character encoding used.
After the header declaration a root element needs to be defined:
<students>
Just like an average tree-structure, there can only be one root element. When all childnodes of the document have been defined, the root tag needs to be closed. That is done by
adding a slash infront of the word in brackets. Our example then looks like this:
<students>
</students>
The child nodes can be both defined as attributes and elements. The root element above is
called an element and it can define as many other elements and attributes as needed. If we
add a bit more to the example we come up with the following XML document (the
structure of the document is of course hypothetical) :
<?xml version="1.0" encoding="utf-8"?>
<students id="123" cpr="121280-4321"><!--2 attributes-->
<name>Johnny</name>
<address>Hørhusvej 11</address><!--Since XML supports unicode, it
allows almost any text in any language to be used-->
<city>Copenhagen</city>
<postalcode>2300</postalcode>
<current-courses>
<course id="B14">
<name>Economics of Information Society</name>
<decription>An introductionary course in Economics</decription>
<teacher id="23"/>
<!--Elements can also be self-closing-->
</course>
<course id="B19">
23
XML.COM. http://www.xml.com/pub/a/98/10/guide0.html?page=2. Seen 19.4.2006
29
<name>IT-Strategy</name>
<description>A course in IT-Strategy</description>
<teacher id="12"/>
</course>
</current-courses>
</students>
The following are the basic set of rules that any XML document must follow:
1. All XML elements must have a closing tag
2. XML tags are case-sensitive
3. All XML elements must be properly nested
a. For example: <b><i>some text</b></i> is not legal XML. It needs to be
<b><i>Some text</i></b>
4. All XML documents must have a root element
5. Attribute values must always be quoted24
One of the biggest advantage of XML is that it is platform independent and based on
open, international standards. It is also simultaneously machine- and human-readable (in
comparision to the old EDIFACT standard25, this is a big plus) and because of the strict
syntax rules, XML parsing algorythms can be quite robust and efficient. As mentioned
before, unicode support also allows any language and characters to be included in XML
documents.
XSLT
XSLT (XSL26 Transformations) is a tool that is designed to transform XML documents
into other XML documents. These documents can be XHTML, WML or just about any
other XML document desirable. XSL is a web standard and became a W3C
recommendation on the 16th of November 1999.
24
25
26
W3Schools.com. http://www.w3schools.com/xml/xml_syntax.asp. Seen 20.4.2006
Wikipedia. http://en.wikipedia.org/wiki/EDIFACT. Seen 20.4.2006
Extensible Stylesheet Language
30
In the transformation process, XSLT uses XPath27 to define parts of the source document
that should match one or more predefined templates. When a match is found, XSLT will
transform the matching part of the source document into the result document. We will not
dig further into the XSLT syntax since that is outside the scope of this project.
WAP
The WAP (Wireless Application Protocol) specification was created in 1997, when the
key players on the mobile market (Nokia, Ericson, Motorola and Unwired Planet –
now known as Phone.com) created the so-called WAP forum, which developed the
de-facto world standard of wireless communication and telephony services. WAP was
based on previously used internet standards, such as IP and XML. 28 Despite the
name, WAP is actually not a protocol in the same sense as HTTP and IP, but more of
a collection of protocols that involve a complete network architecture capable of
delivering wireless content.29
Figure 6 – The WAP 1.1 Stack. Source www.topxml.com
The picture above displays the WAP stack. The top layer is the presentation layer
(WML, WMLScript & WBMP), following that are the Binary Presentation formats
(WBXML & WMLScriptc), then the Session layer (WSP/B & WSP), then the
Transaction layer (WTP) and the last two layers are the Security layer (WTLS) and
the Data Transport layer (WDP).30 We will not look at the complete stack here, but
touch upon a few issues and flaws in some of the protocols in the WAP stack.
XPath (XML Path Language) is a terse (non-XML) syntax for addressing portions of an XML document.
Src: WikiPedia.org
28
W3Schools. http://www.w3schools.com/wap/wap_forum.asp. Seen 26.4.2006
29
About.com. http://compnetworking.about.com/od/wirelesswap/l/aa123000a.htm. Seen 26.4.2006
30
TopXML. http://www.topxml.com/wap/articles/wapart2/default.asp. Seen 26. 4. 2006
27
31
Figure 7 – WAP network model. The WAP Gateway is an important difference from the traditional
Internet Model. Source: www.itsec.gov.cn
In the beginning, WAP was heavily hyped with the launch of the first WAP enabled
devices and hundreds of industry firms tried to push the standard, as the next big
thing to allow the technology to become widely adopted. The first
WAP services offered were mostly news feeds, stock quotes and
weather reports. Due to the extremely slow loading times, lack of
useful mobile services and clumsy user interfaces due to device
limitations, the technology never really took off. WAP is also not
packet switched, so users have to pay on a time basis, instead of
paying for the content downloaded. With those poor loading times,
trying to surf WML pages could become quite expensive for the end
users. This, however, changed when GPRS was introduced, which
allowed
a
packet
switched
“always-on”
connection
with
an
improvement in speed as well. However when that happened, many people had
already dismissed WAP as a failure.
If we start by looking at the presentation layer, we have WML (Wireless Markup
Language) and WMLScript (a scripting language similar to javascript). Although WML
shares some similarities with the more known HTML, it is not quite the same. HTML
is not based on XML and is therefore more “forgiving” to badly written pages. WML
pages however, don’t allow such mistakes and won’t parse properly unless they
match up to the WML schema. In WML, an application is delivered to the handset as
a deck, which allocates a corresponding pool of storage space for variables.
Individual cards are executed on entry and exit to render the handset screen: they
32
can fill in (shared) variables, re-render on external event notifications (e.g. call
completed), and bind further actions to a small set of buttons. The display calls
themselves are essentially character-cell oriented, with tab alignment and bold,
italic, underline, big, and small fonts. Tables, frames, colors, and so on are not
supported.31
WML is really a scripting language and borrows some DOM 32-like functions for
describing a global navigation history and browser-control operation. For example, it
hijacks the ‘$’ character from all other XML and URL escaping rules to indicate
variable references. The deck is not a way to bundle independently meaningful cards
in a single transmission, but it defines a program thread, complete with timers. The
program then shares its stack with other decks on the handset which raises security
concerns, such as variable values can be overridden by similarly named elements in
the card-scope.33 The older handsets also had serious size limitations, and the total
size of a WML page (deck with cards) is calculated from the total size of the deck,
but not the current card showed. Therefore, having many cards on a deck reduces
the possibility of the total content of the deck.
Session handling in WAP is also quite a problem. Sessions are used a lot on the
Internet, whenever a user needs to log in to a service. The Session then stores the
user in memory, allowing him to access the content without having to enter the
password again and again. The process for session handling with log in on websites
is usually this:

User enters username and password

Application on server checks the database if any username and password in
the database matches the input

If a match is found, the user is then stored in a Session

Whenever the user access pages that require user-authentication, the server
application checks if the Session != null

If the Session has the user information the user may proceed, otherwise he is
forwarded to a page that requires him to log in.
Sessions can also have numerous other uses, such as storing XML or variable values.
With the Wireless Session Protocol (WSP), an attempt is made to replace the HTTP
31
32
33
Khare, Rohit. 1999
Document Object Model
Khare, Rohit. 1999
33
(Hypertext Transfer Protocol). Session implementation with WAP however, is very
limited, mostly due to poor cookies support. It is however possible, for example by
encoding the SessionID and sending it as a parameter in the query string, but this is
not considered to be very safe.34
The WTLS (Wireless Transport Layer Security) protocol was designed to provide
privacy, data integrity and authentication for wireless terminals.35 On the surface, it
is quite similar to TLS and SSL, but a number of changes have been made by the
WAP forum to apply to the special requirements of wireless communications. These
requirements are for example to be able to support datagram 36 and connection
oriented transport layer protocols, long round-trip times, low bandwidth by some
bearers and low processing power / memory of many mobile terminals.
But even
though this looks quite promising, many flaws very discovered early on in the
protocols design.
One of the biggest problems with WAP and WTLS, lies in fact within the WAP
gateway. This is where the separation from the wireless world from the wired world
takes place and therefore a complete protocol conversion needs to be performed on
the gateway (converting from WSTL to SSL/TSL and vice versa). When this
decryption and re-encryption takes place, the date is available in clear text. And
since the WAP gateways are normally located within the network provider, this would
not be acceptable for banking applications and other applications dealing with user
sensitive data.37
Other weaknesses in the protocol are for example the very weak (just 35 bit key
length) DES encryption and plaintext leaks but those will not be discussed here
further.
Khare, Rohit. 1999.
Saarinen, Markku-Juhani
36
A datagram is a self-contained packet, one which contains enough information in the header to allow
the network to forward it to the destination independently of previous or future datagrams. Source:
http://en.wikipedia.org/wiki/Datagram. Seen 27.4.2006
37
Schmidt, Michael
34
35
34
XHTML
XHTML (Extensible HyperText Markup Language) is a W3C38 recommendation that is
set to replace HTML in the near future. It was first recommended by the W3C on the
26th of January 2000. What this means is that the specification is stable, that it has
been reviewed by the W3C membership and is now a web standard. 39 XHTML is also
compatible with the latest version of HTML (version 4.0.1) and is therefore
compatible with all new browsers.
XHTML is much stricter and cleaner than the traditional HTML and follows the same
set of rules as a traditional XML document. This fact should reduce drastically bad
HTML coding since HTML is much more forgiving to bad structure than XHTML is.
Even though this example here would be considered “bad” HTML would not validate
against a validation engine, it would still parse in a browser, whereas an XHTML
document would not:
<html>
<head>
<title>This is bad HTML</title>
<body>
<h1>Bad HTML
</body>
Since today’s users not only use browsers on their computers, but also on their
mobile phones and PDA’s. Those browsers normally do not have the power or
resources to interpret bad markup language, and therefore the rules must be very
strict and apply to a commonly known standard. By using XHTML, the documents will
be well-formed and also backward-browser compatible.40
Most new handsets today support XHTML and that gives us much more possibilities
than we had with WML. With XHTML, tables, colors, fonts, positioning, text
attributes, borders, margin, padding, alignment and flow are supported and CSS can
also be used to easily control the look of the document.
The World Wide Web Consortium (W3C) is an international consortium where member organizations, a
full-time staff, and the public, work together to develop standards for the World Wide Web.
39
W3Schools. http://www.w3schools.com/xhtml/xhtml_intro.asp. Seen 5.5.2006
40
W3Schools. http://www.w3schools.com/xhtml/xhtml_intro.asp. Seen 5.5.2006
38
35
Figure 8 – the evolution of Mobile Browsing. Source: forums.nokia.com
XHTML-MP (WAP 2.0)
The XHTML Mobile Profile is a subset of XHTML 1.1 Basic, which was designed to be
used on small devices. XHTML-MP was developed by the Open Mobile Alliance (OMA)
and is the markup language of WAP 2.041. OMA was established in June 2002 and its
members include wireless industry players such as Nokia, Siemens, Samsung, Sony
Ericsson,
Philips,
Motorola,
Microsystems, IBM and Oracle.
Vodafone,
Orange,
T-Mobile,
Microsoft,
Sun
42
XHTML-MP can also be used along with WAP-CSS (WAP Cascading Style Sheet) that
can help the developers to easily control the look and feel of a mobile web site in the
same way that most web developers use for standard websites.
With XHTML-MP, the markup language of the wireless world and the wired world
finally converges. XHTML-MP and WAP CSS give wireless Internet application
developers more and better control of the presentation layer than previously
available. There is also the added advantage of being able to view the pages in any
41
42
WAP 2.0 is the most recent mobile services specification created by the OMA.
Wikipedia. http://en.wikipedia.org/wiki/Open_Mobile_Alliance. Seen 8.5.2006
36
web browsers, instead of having to go through a WAP emulator when designing
mobile web pages.43
With WAP 2.0, the WAP stack his no longer used and all communications run using
standard TCP/IP. And since the WAP 2.0 model is much more similar to the standard
internet model, the protocol conversion on the WAP gateway can be eliminated,
allowing even greater security than before.
Openwave Developer Network.
http://developer.openwave.com/dvl/support/documentation/guides_and_references/xhtmlmp_style_guide/chapter1.htm. Seen 19.6.2006
43
37
M-commerce in opposition to e-commerce
Mobile commerce, or m-commerce, is the new type of e-commerce business that is
conducted through mobile devices using wireless telecommunications network and
other unwired e-commerce technologies.
“Mobile commerce is about delivering the right information to the right place at the
right time. It gives users the ability to access the Internet from any location at any
time, capability to pinpoint an individual mobile terminal user’s location, the
functionality to access information at the point of need, and a need based
data/information update capability.” (Lim, 2003:2)44
While most of existing e-commerce application can be modified to run in wireless
environment, m-commerce also involves many more new applications that become
possible only due to the wireless infrastructure, such as location based services. It is
rapidly evolving arena, both strategically and technologically. M-commerce is
considered as an effective way of delivering e-commerce to consumers regardless
the location. M-commerce has three unique characteristics: convenience and
accessibility, localization, and personalization. In today’s mobile world, people are
not constrained by time and location. With technologies like Global Positioning
System (GPS) or Time of Arrival (TOA), m-commerce will enable users to access
information and services specific to their location. Where the PC is often shared
across multiple users, mobile devices are typically operated by and configured for a
single user.
Lim, Ee-Peng (Editor) (2003) – Advances in mobile commerce technologies. Hershey, PA, USA, Idea
Group Inc.
44
38
Location
Time
Personalization
Figure 9 - M-commerce characteristics
In many aspects e-commerce and m-commerce are two concepts not too distant
from each other. They both aim to make use of business-related opportunities via
electronic technologies. While e-commerce is connected to data and information via
Internet access, m-commerce is concerned with using unwired technology and
various portable devices to access information and data through both the mobile
network and the Internet. Whereas e-commerce serves customers and clients that
are stationary, m-commerce customers are moving and dependent upon a portable
PC, such as a mobile phone or a personal digital assistant (PDA).
The similarities between e-commerce and m-commerce have led many people to
refer to m-commerce as “mobile e-commerce” (Elliot and Phillips, 2004).45 This
however, according to Elliot and Phillips, restricts the m-commerce definition too
much. There are a number of essential differences between e-commerce and mcommerce. One example is how m-commerce enables location-based services and
products. Furthermore, mobility is treated as an asset, rather than a by-product of
the technological domain (e.g. no more need to wait in line at airport check-in desk,
etc.). In addition, the Mobile Internet does not pretend to duplicate the wired
Internet. The Mobile Internet is constrained by a number of factors, such as display
Elliot, G., Phillips, N. (2004) Mobile commerce and Wireless Computing Systems. Pearson education
Limited, Edinburgh.
45
39
screen size and memory capacity. (Elliot and Philips, 2004:20). Table XX offers a
comparison of some of the factors that distinguish the idea of e-commerce from that
of m-commerce.
Factor
E-commerce
M-commerce
Product or services focus
Product focus
Service focus
Product or service provision
Wired global access
Wireless global access
Product or service assets
Static information and data
Dynamic location-based data and
Product or service attraction
Fixed non-time-constrained access
information
Mobility and portability of access
Table 1 - E-commerce vs. M-commerce
Ee-Peng Lim (2003) points out that mobile commerce has features not available to
traditional
e-commerce.
These
are:
ubiquity,
reach
ability,
localization,
personalization and dissemination. This means that the fundamental nature of mobile
commerce builds on the idea of reaching customers, suppliers and employees
regardless of where they are located; hence m-commerce is about delivering the
right information to the right place at the right time.
40
Business
This chapter aims to give the reader a basic knowledge of mobile business models
and mobile strategy. Both the traditional models and revolutionary models will be
described in this chapter. Furthermore the theory for creating brand equity will be
described together with the economics of information technology.
Business model
The design of an m-commerce system application is not primarily an IT-oriented
activity. Rather, it consists of very different types of design problems and the most
important of these is the design of the business model, which highlights the way of
doing business.
Although the concept of a business model is widely used and seen as important,
there isn’t any generally accepted definition of what a business model is. A business
model describes the logic of a “business system” for creating value that lies behind
the actual processes. It can be seen as a detailed conceptualization of an enterprise’s
strategy at an abstract level, which serves as a base for the implementation of
business processes. (HUSK REFERANCE)
A business model is:

A value chain that connects participants

The path of goods in supply chain

The path of transactions in an exchange

The path of information in a value chain

Interdependencies / paths in a “value web”

Ultimately, how you expect to make money
Overall a business model is a method of doing business by which a company can
generate revenue to sustain itself.46
In other words the business model spells-out how a company makes money by specifying
where it is positioned in the value chain. Some business models are quite simple, for
example an Internet company provides a service and sells it to the customers. If all goes
46
Timmers – business model(s).pdf
41
well, the revenues from sales exceed the cost of operation and the company realizes a
profit. Other models can be more complex. Typical business models in e-commerce are
for instance online direct marketing and online auctions. These are the cornerstone
of a business strategy. More
specifically an e-commerce business model fits in with
web based technological solutions implemented as means of supporting the e-commerce
strategy and the company’s value chain operations, including it relations with its business
partners, in an effort to create value for the company and its clients.
Brokerage business model
There are different types of business models, but the one we will focus on in this
thesis, is the brokerage business model.
In the brokerage business model, the brokers are market-makers. They bring buyers
and sellers together and facilitate transactions. Brokers play a frequent role in
business-to-business (B2B), business-to-consumer (B2C), or consumer-to-consumer
(C2C) markets. Usually a broker charges a fee or commission for each transaction it
enables and the formula for fees can vary depending on the service which is
provided. Brokerage model include: Transaction broker: This broker provides a thirdparty payment mechanism for buyers and sellers to settle a transaction. (PayPal)
Auction Broker: This broker conducts auctions for sellers (Individuals or merchants).
Broker charges the seller a listing fee and commission scaled with the value of the
transaction. Auctions vary widely in terms if the offering and bidding rules (eBay).
Business strategy
In order to create a business model it needs to be a well defined business strategy.
The business strategy focuses on how to compete in product or service markets. The
business strategy determines the way that allows the firm to create value for its
clients and set itself apart from its competitors. Based on this logic, we can state
that an e-business strategy determines the means by which an organization can
create value for its client and distinguish itself from its competitors thanks to the
deployment of technological solution.
42
43
Traditional business strategy models
SWOT:
SWOT stands for strengths, weaknesses, opportunities and threats. The model is
a way to examine the key issues regarding the business environment and
strategic capabilities, which are likely to impact the strategy development for an
organization. This information can then be important for the company when it
comes to future actions for them. The main purpose with the SWOT analysis is to
identify how the strength and weaknesses inside the company can deal with the
opportunities and threats from the business environment. (Johnson & Scholes,
2002 & Kotler et. Al. 2002)47.
In the context of strengths and weakness, only the main features inside the
company should be listed. Here it is important to base the strengths on facts and
compare it to competitor. It is also recommended not to put something as
strength if there are competitors who are better. The weaknesses can be that the
company organization has a poor profit performance, unknown brand name or a
relatively low advertising budget etc. (Johnson & Scholes, 2002 & Kotler et. Al.
2002)48.
When it comes to the opportunities and threats in the SWOT analysis, these are
the external influences for the organization. Opportunities and threats for the
organization arise in the environment for many reasons. It could for example be
the technology, market, politics, demographic changes or the economic climate,
which influences the organization. However, not all the treats have to be of
concern for the company, instead it is important for managers to assess the
potential damage of each of the treats and prepare plans to meet them in
advance. Concerning the opportunities, the manager should do the same as with
threats and assess the opportunity’s potential and the attractiveness for the
Johnson G, Scholes K. (2002). Exploring Corporate Strategy. Peason education Limited. & Kotler, P.
(2002) Principles of Marketing. Prentice Hall, Third edition.
48
Johnson G, Scholes K. (2002). Exploring Corporate Strategy. Peason education Limited. & Kotler, P.
(2002) Principles of Marketing. Prentice Hall, Third edition.
47
44
company. (Johnson & Scholes, 2002 & Kotler et. Al. 2002)49.
Five Forces:
The intensity of competition and profitability in a certain industry is determined by
many features. Porter’s five forces model is a useful framework for classifying and
analysing factors in the external environment. This model is used to explain an
industry’s
attractiveness
and
the
rules
of
competition
that
affects
a
firm.
Furthermore the approach can help the company to develop an advantage over rival
firms by understanding the industry’s environment. The five forces that influence the
industry are (Grant 1995)50:

Intensity of rivalry amongst existing competitors

Threat of entry by new competitors

Pressure from substitute products

Bargaining power of buyers (customers)

Bargaining power of suppliers
The five forces of competition can be divided into a horizontal and vertical
perspective. The horizontal competition includes competition from suppliers, of
substitutes, the threat of competition from entrant and competition from established
producers. Vertical competition includes the bargaining power of suppliers and
buyers. The interaction between these forces is illustrated in figure XX.
Johnson G, Scholes K. (2002). Exploring Corporate Strategy. Peason education Limited. & Kotler, P.
(2002) Principles of Marketing. Prentice Hall, Third edition.
50
Grant, R. (1995). Contemporary Strategy Analysis. Blackwell Publishers Ltd, United Kingdom
49
45
Figure 10 - Porter's five forces
Industry Competition and the Internet
In 2001 Porter modernized his framework of industry competition to embrace the
Internet. Figure XXX displays how the Internet has affected industry structure. Porter
observed that the Internet is a new and extremely important technology. Porter
observed problems with the Internet, "Some companies have used Internet
technology to shift the basis of competition away from quality, features, and service,
towards price, making it harder for anyone in their industries to turn a profit". 51
51
Porter 2001 p. 63: Strategy and the Internet
46
Figure 11 - How the Internet influence industry structure
Porter observed that gaining competitive advantages through the Internet does not
require a radically new approach to business, "It requires building on the proven
principles of effective strategy. The Internet per se will rarely be a competitive
advantage. Many of the companies that succeed will be ones that use the Internet as
a complement to traditional ways of competing, not those that set their Internet
initiatives apart from their established operations".
Six Principles of strategic positioning
According to Porter a company needs to follow six fundamental principles in order to
establish and maintain a distinctive strategic positioning.
1. The company must start with the right goal. Only a strategy based on a longterm return on investment will generate real economic value. Poor strategies
is often a result of goals defined in terms of volume or market share, or when
strategies are set in accordance to perceived desires of investors, with
assumed to follow.
47
2. It is essential to compete in a way that provides unique value in a particular
set of uses for a particular set of customers. The strategy must make possible
a value proposition different from competitors’ offerings.
3. The strategy needs to be reflected in a distinctive value chain. A company
must configure its way of conducting business differently from competitors
and tailored to its unique value proposition. By adopting best practices the
company will simply end up copying competitors’ business, making it hard
gaining an advantage.
4. Robust strategies involve trade-offs. Trying to be all things to all customers
almost guarantee that a company will lack any advantage. A company must
abandon some aspects of their business in order to be unique in other
aspects. Choosing a unique position is not enough to guarantee a sustainable
advantage, since competitors are likely to copy parts of it.
5. Positioning choices determine not only which activities a company will
perform, but also how these activities relate to one another. A strategy must
define how define how these activities are fitted together into a distinctive
value proposition, making it harder for competitors to copy practices. By
creating a fit between activities that enhances the overall business, a
competitive advantage and superior profitability is created.
6. Strategy involves continuity of direction. A distinctive value proposition must
be pursued, even if it means leaving out certain opportunities. Only by
pursuing a clear strategic direction, a company can develop unique skills or
build strong reputations with customers.
Branding52
One theory that might be important for m-commerce, both in the traditional and the
revolutionary business strategies is branding, which is a very important tool to all
companies in order to distinguish their services from those of their competitors. A
Berry, L. L. (2000). Cultivating Service brand equity. Journal of the Academy of Marketing Science. 28,
1. Page 128-137
52
48
strong brand offers many advantages in the mobile service industry and when
evaluating the strength of the brand, the concept of brand equity is used.
Service branding
Berry has developed a model for creating brand equity for services. He identifies
brand equity as “the differential effect of brand awareness and brand meaning
combined on customer response to the marketing of the brand”, which is his
interpretation of Keller’s definition of brand equity53. In Berry’s model, brand equity
is based on brand awareness and brand meaning, where brand meaning has a grater
influence on brand equity than awareness. Brand awareness is primarily composed of
the presented brand, but is also affected by external brand communication. Brand
meaning is foremost affected by the customer’s experience with the company, but
also indirectly affected by external brand communication and the presented brand.
Figure 12 - A service branding model
Brand awareness
Brand awareness has to do with the levels of knowledge customers have about a
brand. According to Berry’s service model, brand awareness can be said to be built
up by two elements: company’s presented brand and external brand communication.
Brand meaning
53
Keller
49
Brand meaning is what immediately comes into the customer’s mind when exposed
to a brand. It is the customer’s perception, the impressions and associations of the
brand which gives that brand a special meaning to the customer. As mentioned
above, brand meaning is created primarily based on the customer’s experience with
the brand, but also the presented brand and external brand communication
contribute to the brand meaning. According to Berry, the presented brand and the
external brand communication have greater impact on new customers, since these
are the only signs to the customer of what the brand represents. Berry claims that
when the customer has actually experienced the service, this experience becomes
disproportionately influential and hence has a greater impact on the brand meaning.
Company’s Presented Brand
The company’s presented can be said to be the communication that the company
controls and that is intended for the customers to see. This communication is how
the company wants to portray its image through its advertising, the service facilities
and appearance of service providers. The first thing that customers come into
contact with is the company’s name. Other core elements of the presented brand are
advertising and symbolic associations.
External brand communications
When Berry discusses external brand communication, he is referring to the
information about the service company that is uncontrolled by the company itself.
The external brand communications can influence both the awareness and the
meaning of the brand. The awareness of the brand may not only be derived from the
presented brand, but also from communications about the company obtainable by
independent sources. Since these communications are not intended by the company
as a mean of strengthening the brand, they do not have the same effect on brand
awareness and brand meaning, therefore the dotted lines. Berry indicates that in
extreme
cases,
when
word-of-mouth
becomes
extensive
and
publicity
gets
widespread and receives a lot of attention, the dotted lines can turn into bold. The
two most common forms of external brand communication that Berry points out are
word-of-mouth and publicity.
Word-of-mouth:
50
According to Berry, word-of-mouth is common in services due to the service
characteristic of intangibility. Since services are harder than products to evaluate
before the actual purchase, the customer is more likely to rely on experience based
information from other customers.
Publicity:
Publicity is a marketing technique using free advertising outlets such as press
releases intended for one or more audiences with the purpose of influencing their
opinions or decisions.
Customer experience with company
The customer experience with the company has the most influential impact on brand
meaning and can be affected by several factors. The components most often brought
up as influencing the experience are the employees and the customers, and the
relationship between the two. Here is the interaction between employees and
customers or customer-to-customer, the most important factor. It is the customer’s
psychological reactions to the employee that is the service experience.
Revolutionary business strategy models
Until now we have described different models, which deal with developing strategy
for competing in existing markets.
Blue ocean strategy
Blue ocean strategy is based on the idea of creating new markets where none
previously existed. Compared with Porter’s five forces, which is a classic red ocean
strategy, blue ocean strategy challenges companies to break out of the red ocean of
bloody
competition
by
creating
uncontested
market
space
that
makes
the
competition irrelevant. HUSK REFERANCE!!!
From small to big service companies, successful businesses are often built on the
idea of filling an unmet need. A majority of new products and services, however,
simply copy a competitor’s example, with the result that most of them fail. As the
authors of Blue Ocean Strategy put it, these businesses are just jumping into “the
red ocean of bloody competition”. Instead W. Chan Kim and Renee Mauborgne, the
authors of Blue Ocean strategy: How to create Uncontested Market Space and Make
51
the Competition Irrelevant, conclude that success comes from creating blue oceans –
new markets that are primed for fresh business opportunities.
But how is it possible to create blue oceans and break out of the red ocean of bloody
competition? In order to answer that we need to fully understand the difference
between the two oceans and their characteristics.
Red ocean versus blue ocean strategy
Red oceans represent all the industries in existence today. This is a known market
space, where industry boundaries are defined and accepted. In red oceans,
companies try to outperform their rivals to grab a greater share of existing demand.
But as the market space gets crowded, competition turns the red ocean bloody. Red
oceans are the standard competitive strategy, a carefully calculated balance between
price and value to beat the competition.
Blue oceans in contrast denote all the industries not in existence today. This is the
unknown and untapped market space, where demand is being created for the first
time. So, it stays blue with no stains of any bloody competition. Blue oceans are
entirely new markets created by throwing out old assumptions and resulting in the
ability to drive both price and value together. The following table shows the
difference between the two oceans. FIGURE XXX.
Red Ocean strategy
Blue ocean strategy
Compete in existing market space.
Create uncontested market space.
Beat the competition.
Make the competition irrelevant.
Exploit existing demand.
Create and capture new demand.
Make the value-cost trade-off.
Break the value-cost trade-off.
Align the whole system of a firm’s
Align the whole system of a firm’s
activities with its strategic choice of
activities in pursuit of differentiation and
differentiation or low cost.
low cost.
Figure 13 - Red ocean versus blue ocean strategy54
Value innovation
54
Blue ocean strategy – page 18
52
The most important feature of blue ocean strategy is that it rejects the fundamental
principle of conventional strategy: that a tradeoff exists between value and cost. The
value innovation is the foundation of the blue ocean strategy, because instead of
focusing on beating the competition, you focus on making the competition irrelevant
by creating a leap in value for buyers and your company and thereby opening up
new and uncontested market space. The important side of value innovation is just
what the name implies: to place equal emphasis on value and innovation. Innovation
without value tends to be technology-driven and value without innovation tends to
focus on value creation on an incremental scale, something that improves value but
is not sufficient to make for instance a mobile service stand out in the marketplace55.
Value innovation closely links customer value with technology innovation. Technology
innovation on its own does not address buyer value, thus a new technology might
not be accepted in the market as having value for the customer. Technology
innovation tends to focus on solutions, whereas value innovation focuses on
redefining the problem. While technology innovation can create an exclusive market
for a new product, for example via patent protection, this avenue is not open to all
organizations. Service organizations, for example, create value for their customers
by integrating a range of items (products, service and environment). Thus, such
organizations are open to competitors copying their approach. To minimize this
“free-riding” and become a value innovator organizations musk ask two questions:
Are we offering customers radically superior value?
Is our price level accessible to the mass of buyers in our target market?
Organizations that can combine value innovations with technology innovation are
true value creators. Such organizations will enjoy sustainable growth and profit.
55
Blue ocean strategy – page 13
53
Cost
Value
Innovation
Buyer Value
Figure 14 - Value innovation
According to the authors of Blue Ocean, there are two ways to create blue oceans.
One is to launch a completely new industry, as eBay did with online auctions or
create a blue ocean from within a red ocean when a company expands the
boundaries of an existing industry.
Six principles of the Blue ocean strategy
The risks inherent in a traditional, red ocean-based business strategy are well
known. Managers now need to know the principles – and risks – that underlie the
ocean strategy, because there is no such a thing as a strategy without risks.
The six principles of Blue Ocean Strategy
Formulation principles:
Risk factor each principle attenuates
1. Reconstruct market boundaries
 Search risk
2. Focus on the big picture
 Planning risk
3. Reach beyond existing demand
 Scale risk
4. Get the strategic sequence right
 Business model risk
Execution principles
Risk factor each principle attenuates
5. Overcome key organizational hurdles
 Organizational risk
54
6. Build execution into strategy
 Management risk
Figure 15 - The six principles of the Blue Ocean Strategy56
1. Reconstruct market boundaries:
2. Focus on the big picture
3. Reach beyond existing demand:
4. Get the strategic sequence right:
5. Overcome key organizational right:
6. Build execution into strategy:
Creating blue oceans builds brands. So powerful is blue ocean strategy that a blue
ocean strategic move can create brand equity.
………NOT DONE!!!!!
Economics of Information Technology
We have now looked at different theories that cover both the traditional and the
revolutionary strategies. In order to facilitate these theories we have selected a number of
theories from economics of information technology. This theory helps in strengthening
our discussion regarding m-commerce since it goes against the neo-classical economical
way of thinking. In other words, this is a whole other perspective than we have
previously discussed, but it will be essential both as an analytical tool and design tool
when it comes to analysing the eBay business model and create our own business strategy
and business model.
First we will discuss the different auction models available and then move on to discuss
the problem of asymmetric information. After that we will explain network externalities
56
Blue ocean strategy – page 21
55
and positive feedback and market structures. Finally we will describe the concept of
switching costs and lock-in.
Auction Models
With the introduction of eBay in 1995, the traditional auction models were suddenly
challenged by this new form. The main advantage with web based auctions is that it
removes the physical auction house as an intermediary and makes it a lot easier for
anyone to sell and buy items via an auction.
Even though there are still charged fees from the online web auction companies,
those fees are still substantially lower than those of the traditional ones. Web based
auctions usually also take longer time than the traditional ones, that might
sometimes only last a few minutes, where the web based auctions can run for many
days until it ends. Web based auctions also eliminate the need for face-to-face
interaction since all parts of it can be conducted over the Internet.
Although there are some differences in the online and offline auction models, there
are still two types of auctions that are most commonly mentioned in both worlds.
Those are the English auctions and the Dutch auctions. Since the online and offline
versions are similar in theory (apart from the basic differences previously mentioned)
we will only focus on describing the online auctions models here.
English auctions are the most common type of auction models. They function in a
way that a seller puts an item up to be auctioned and sets the start price of the
auction. This is usually the reserve price that the seller sets for the item, although
some eBay for example allow their sellers to start the auction at a lower price then
their reserve price57, and therefore the sellers are not obliged to sell the item if the
auction doesn’t reach this reserve price.
Buyers bid on the item and with every bid made, the price goes up. The highest
bidder when the auction time runs out is the winner of the auction, unless a reserve
price higher than the final price has been set.
A reserve price is the price that the seller sets as the minimum price he/she is willing to sell the item
for.
57
56
Dutch auctions are almost the opposite of that. The name is taken from the Dutch
tulip market where sellers would put large quantities of flowers up for auction. In
order for the sellers to get rid of their stock, this auction model was developed in
order to move large quantities of items at once. Dutch auctions work in a way that
the sellers start the auction by setting a start price for the auction. With time, the
price drops incrementally and the buyers then wait to make a bid until the price per
item falls to an amount suitable to them. When the desired price is reached, the
buyer then makes his bid, along with the quantity of items he wishes to purchase.
When a buyer has made his bid, he instantly becomes the winner of the specific
amount of items for the given price. There are many variations of Dutch auctions
available and the eBay model differs slightly from this description.
Information asymmetry
The term of Information asymmetry was first described by Kenneth J. Arrow in a
seminal article on health care in 1963 entitled "Uncertainty and the Welfare
Economics of Medical Care," in the American Economic Review.
The term basically means that an asymmetry of information normally arises when
one party of a transaction has more or better information of a product or service
than the other party58. This becomes quite important for us in creating our solution,
since there is a high level of information asymmetry, because all sales will go
through an electronic medium without any face to face contact. We need to know
what is meant by the concept and how we can minimize its effect in the design of our
system.
The most famous example of this term was used in an article written by George
Akerlof in 1971, entitled “The Market for ‘Lemons’: Quality Uncertainty and the
Market Mechanism”, where Akerlof uses the used-cars market as an example of how
asymmetric information can effect the market by driving the average value of a
commodity down, independent of quality.
59
To further explain this example let’s look at the scenario with the used-cars market.
Usually, the seller would have more and
better information regarding the
functionality and the history of the vehicle than the buyer. He therefore can be said
58
59
Wikipedia. http://en.wikipedia.org/wiki/Information_asymmetry. Seen 2.3.2006
Akerlof, George A. 1970
57
to have an advantage over the buyer and it can be stated that there is an
asymmetry in the information the two parties have. Therefore it is near impossible
for the buyer to know if the car is in fact a lemon or a cherry (in the USA bad cars
are sometimes referred to as lemons and the good ones as cherries). And because
the buyer can’t tell the difference, lemons will be priced equally high as the cherries,
and in the end the lemons will drive out the cherries since there will be more lemons
sold60.
In online auctions there is a definite asymmetry of information, since the seller will
always have more information than the buyer regarding the product offered and
because of the lack of face-to-face contact. However it shall be noted that the
internet has also helped with the problem of asymmetric information since the end
user now has nearly endless ways of acquiring information regarding a specific
product, with unbiased reviews, descriptions and usually more information than ever
possible in a store – except for the face-to-face connection.
Network externalities and positive feedback
Before explaining the concepts of network effects / externalities, we must first
establish what is meant by the concept of a network. We are all familiar with the
physical networks, such as airline networks, railroad networks, telephone networks
and of course computer networks. But networks can also exist in a more “virtual”
manner, where there are no physical links between the nodes on the network, for
example the network of Apple users or the users of a web portal. It is very important
to realize this effect when it comes to implementing a new business strategy, since
our concept is built up on a network.
But, whether networks are real or virtual, they have a fundamental economic
characteristic. That is that the value of connecting to a network depends on the
number of other people already connected to it.61 The most famous example is
probably the fax machine or telephone. One fax machine is basically useless but as
the number of fax machines on a network grows, so does the value62 of using it.
Akerlof, George A. 1970:3
Shapiro C. & Varian H. 1999:174
62
Although the notion of "value" is inevitably somewhat vague, the idea is that a network is more valuable
the more people you can call or write to or the more Web pages you can link to.
60
61
58
Figure 16 - Network effect. Source: Wikipedia.org
Most people have experienced audio feedback, where loud audio signal becomes
deafening through repeated amplification, for example by placing a microphone next
to a speaker. The audio signal then feeds off itself until it reaches the limits of either
the system or the human ear.
This effect can be seen in the marketplace as well, where the feedback leads to
extreme outcomes, dominance of the market by a single firm or technology.63 In a
positive feedback market, the strong get stronger and the weak get weaker. It
should therefore not be mistaken with growth as such since there will always be
winners and losers in the market. Take for example the battle between Netscape and
Microsoft Internet Explorer. Since Microsoft could bundle their browser with their
highly popular operating system, they received more and more positive feedback and
their market share would grow constantly. Netscape, on the other hand, were in an
awful situation since they were selling a product at a fixed price that was already
being offered by Microsoft for free.
63
Shapiro C. & Varian H. 1999:176
59
Figure 17 - Positive feedback. Source: Shapiro & Varian, 1999:177
As the Internet works today, positive feedback can translate into rapid growth,
where success feeds on itself as a virtuous cycle. But when the product can be seen
as failing (as the case of Netscape), the virtuous cycle of growth can easily change to
a vicious cycle of collapse, where the weak get weaker. This kind of market, where
two or more firms compete where there is a strong positive feedback, only one may
emerge as the winner. Economists refer to this kind of a market as a tippy market,
meaning that it can tip in favour of one player or another. 64 In its most extreme
form, positive feedback can lead to a winner-take-all market, where the winner
eliminates the competition. The Netscape vs. Microsoft Internet Explorer is an
obvious example. However, it will be interesting to watch the progress on that
market with the rising popularity of free open source browsers such as Mozilla
Firefox.
The notion of negative feedback should also be mentioned in this context. Negative
feedback is basically the opposite, where the strong get weaker and the weak get
stronger, pushing both toward a happy medium.
As we discussed earlier, it is more beneficial for a user to join large networks rather
than small (Metcalfe’s Law). The term that economists use to describe this effect is
usually, network externalities. We have already established the meaning of a
network, but the word externalities still needs some explaining.
64
Shapiro C. & Varian H. 1999:176
60
Externalities arise when one market participant affects others without compensation
being paid.65 Externalities also come as positive and negative (like feedback), where
the classic example of negative feedback would be pollution: “My sewage ruins your
swimming or drinking water”. However, network externalities are usually positive
and when someone joins a network; the network grows to everyone’s benefit. This
would than be seen as a network effect. Network effect is what causes a good or
service to have a value to a potential customer dependent on the number of
customers already owning that good or using that service. 66
Market structures
Before entering a new market, it is necessary to analyze the structure of it to be able
to further realize the possibilities on the market and to form a business strategy.
Here we will discuss 4 basic market structures: Monopoly, Oligopoly, Monopolistic
competition and Perfect Competition.
Each of the above mentioned market-structures describes a particular organization
off a market in which certain key characteristics differ. These characteristics are: 67
1. Number of firms in the market
2. Control over the price of the relevant product
3. Type of the product sold in the market
4. Barriers to new firms entering the market
5. Existence of non-price competition in the market
Perfect competition
This can be considered an idealized version of a market structure that provides a
foundation for understanding how markets work in a capitalist economy. In order to
consider a market as perfectly competitive, there are three conditions necessary.
These are homogeneity of the product sold in the industry, existence of many buyers
and sellers and perfect mobility of resources or factors of production.
Shapiro C. & Varian H. 1999:183
Wikipedia. http://en.wikipedia.org/wiki/Network_effects. Seen 21.03.2006
67
Encyclopedia of Business. http://referenceforbusiness.com/encyclopedia/Clo-Con/Competition.html.
Seen 18.4.2006
65
66
61
The homogeneity of the product has an important implication for the market. If the
products of different sellers are identical, buyers won’t care who they buy it from, as
long as the price is the same. This may seem extreme but can be seen in markets
that deal with commodities, such as wheat and corn.
The second condition is also important, because when the number of buyers and
sellers is high, the power of the buyers and sellers to influence the price on the
market is so small. Therefore, the market price must be accepted by both buyers
and sellers and that price is determined by the market as a whole, but not by
individuals.
The third and final condition requires that all factors of the production can be easily
switched from one use to another. It is also required that all buyers, sellers and
owners of resources have full knowledge of all relevant technological and economic
data.
There isn’t, nor has there ever been, a single industry in the world that satisfies all
three conditions fully, but some industries come quite close, like the market for
commodities as mentioned before. But these markets usually fail to live up to the
condition of mobility.68
Monopolistic competition
As in perfect competition, monopolistic competition is characterized by the existence
of many sellers. But the products are however differentiated, or simply perceived to
be so by the consumers. This is considered the key attribute of monopolistic
competition. In many markets, producers practice product differentiation by altering
the physical composition, for example by using special packaging or simply claiming
to have superior products based on advertising and brand image. A good example of
differentiated products is cleaning supplies.
There should also be relatively small barriers to entry and there should be no
collusion among firms in the industry, like price agreements. Since the market
Encyclopedia of Business. http://referenceforbusiness.com/encyclopedia/Clo-Con/Competition.html.
Seen 18.4.2006
68
62
requires so many firms to be considered monopolistically competitive, this kind of
collusion is difficult, but not impossible.69
Oligopoly
This kind of market structure is actually quite common. The communication industry
is a good example of these market structures. What characterizes an oligopolistic
market structure is the interdependence of firms in the industry. That arises from the
small number of firms in the market. And because of the small number of firms on
the market, changes in price made by a single firm have big effect for the other
companies in the industry.
There are big barriers to entry to enter this kind of market. They can involve large
financial requirements, availability of raw materials, access to relevant technology
etc.
Economies of scale are also a characteristic of this market structure 70.
Monopoly
Monopoly can be seen as the opposite of perfect competition, because there is only
one seller in the market. In the U.S. there are number of factors that can give rise to
a monopoly. An example of that is that when an inventor gets a patent for a product,
he has the sole rights to produce the product for 17 years. Another example of a
monopoly can arise if the company owns the entire supply of necessary materials to
produce a product.
Generally speaking, the price and output decisions of a monopoly are similar to
monopolistic competition, with
the major distinction
that in
a monopolistic
competitive market there are many firms, but in a monopoly there is only one. The
monopolistic firm is however constantly threatened by potential and indirect
competition.
Summary of market structures:
Encyclopedia of Business. http://referenceforbusiness.com/encyclopedia/Clo-Con/Competition.html.
Seen 18.4.2006
70
Economies of scale basically means: as the line of production grows, the price goes down – the more
you make, the cheaper it gets. Computer software is a perfect example of economies of scale, since the
reproduction of the final product has marginal costs near zero.
69
63
Firms
Perfect
Monopoly
Competition
Many
One
Product type Identical
Monopolistic Oligopoly
Competition
Many
Few
Unique
Differentiated Differentiated or not
Easy
Difficult
Downward
sloping
Max Profit
Downward sloping
Zero
Depends (entry, strategic
behaviour)
Entry
barriers
Demand
curve
Objective
None
Max Profit
Difficult
(government)
Downward
sloping
Max Profit
Profit
Zero
Positive
Examples
Agricultural
products
Rail network Restaurants,
Hotels
Horizontal
Max Profit
Cars, medicines, oil
Figure 18 a summary of the 4 market structures and their characteristics. Source: Constantiou, Ioanna
(2005)
Switching costs & lock in
In order for anyone to understand how to make users return to using one’s product
or service, it is necessary to understand the concepts of lock in and switching costs.
Let’s for example consider a car buyer who has previously owned a Ford. Other cars
models are all quite the same and there should be no barrier for this car owner to
make a switch to Toyota instead.
If we then consider a computer user who has only used Windows in the past and is
now thinking about making a switch to the Mac OS. In order to make the switch, the
user needs to buy a new computer from Apple, since the Mac OS cannot be ran from
regular PC’s. The owner has most likely purchased some software with the old
computer and that would also be useless on the Mac, for the same reason that you
cannot run Windows on Mac’s.71 Last but not least, there will definitely be some
hassle for the user to learn how to use the new computer and operating system,
since he/she has become familiar with Windows previously.
With the recent development in Apple computers and the installation of Intel processors, we might see
in the future Mac’s capable of running both Windows and Mac OS.
71
64
For this user, he/she has made significant durable investments in complementary
assets that are specific to that brand of computers (PC’s running windows).72 These
investments all have different economic lifetimes, so there’s no easy way to say
when to start using a new incompatible system.
The result of this conflict is that the user faces switching costs, which can eventually
lock the user into using the particular system or brand. This kind of situation is than
known as a lock-in.
Switching costs measure the extent of a customer’s lock-in to a given supplier. So
far we have mentioned the customer’s switching costs, but the supplier also bears
some costs when it acquires a new customer. These costs can be close to zero, like
for example creating a new entry in a database, or they may be quite large, such as
assembling a team of support personnel.73 Both these switching costs are important,
because they add up to the total switching costs associated with a single customer.
This gives us the following formula:
Total switching costs = cost the customer bears + cost the supplier bears
This measurement is very important when it comes to evaluating the installed base
of customers. The rule of thumb is that the total switching costs for a customer, plus
the value of other competitive advantages the supplier enjoys by virtue of having a
superior product or lower costs than its rivals, gives us the profits a supplier can
expect to earn from a customer.74
Lock in comes in quite a few forms and are here displayed in a table with the
associated switching costs75:
Type of Lock-In
Switching costs
Contractual commitments
Compensatory or liquidated damages
Durable purchases
Replacement of equipment; tends to decline as the durable
72
73
74
75
Shapiro
Shapiro
Shapiro
Shapiro
C.
C.
C.
C.
&
&
&
&
Varian
Varian
Varian
Varian
H.
H.
H.
H.
1999:105
1999:112
1999:113
1999:117
65
ages
Brand-specific training
Learning a new system, both direct costs and lost
productivity; tends to rise over time
Information and databases
Converting data to new format; tends to rise over time as
collection grows
Specialized suppliers
Funding of new supplier; may rise over time if capabilities
are hard to find / maintain
Search costs
Combined buyer and seller search costs; includes learning
about quality of alternatives.
Loyalty programs
Any lost benefits from incumbent supplier, plus possible
need to rebuild cumulative use
Summarizing theories and their purpose
In the table below the previously discussed theories are summarized, together with the
main purpose of using each theory.
Theory
Technology
Mobile devices, network technologies, OS,
mobile browsing
M-commerce in opposition to e-commerce
Business
Business model
Traditional business strategy models
Revolutionary business strategy models
Branding
Economics of information technology
Purpose of theory
Realize the technical possibilities on the
market today and estimate if the technology
has matured enough for advanced mobile
services. This theory will also be used in
the technical design of our system.
Compare the two concepts to see the
differences in where the focus lies.
Will help us in both analyzing the eBay
business model as well as designing our
own.
Review the traditional models in order to
see why a new approach is needed in the
digital economy.
Help us create a new business strategy for
our system.
How to sell our solution to our customers
and create a brand for ourselves.
How we will design our system and
business strategy.
66
Part 3
Analysis
67
3 The maturity of mobile technology
Based on the theory model presented in chapter 1.x, we will now analyze the
technological theory presented in the previous chapter. We will be focusing on the
maturity of mobile technology and bring in the subjects of how the technology today
offers advantages in usability, speed and security.
Mobile phones on the market
In May 2005, W3C launched its Mobile Web Initiative in co-operation with some of
the biggest players76 on the mobile market.77 The goal of the initiative is to make
Web access from a mobile device as simple, easy, and convenient as Web access
from a desktop device. According to W3C, while mobile web access is becoming
increasingly popular, it still suffers from interoperability and usability problems.
W3C’s Mobile Web Initiative (W3C MWI) addresses these issues through a concerted
effort of key players in the mobile production chain, including authoring tool vendors,
content providers, handset manufacturers, browser vendors and mobile operators. 78
W3C have also created a best practice guideline where they, among many other
things, present a default context for mobile web pages.
This default context includes:

Usable Screen Width: 120 Pixels, minimum.

Markup Language Support: XHTML - Basic Profile

Character Encoding: UTF-8

Image Format Support: JPEG, GIF 89a (non-interlaced, non-transparent,
non-animated).

Maximum Total Page Weight: 20 kilobytes.

Colors: Web safe.79

Style Sheet Support: External CSS Level 1

HTTP: HTTP/1.0 or more recent
These companies are as of 31.5.2005: Ericsson, France Telecom, HP, Nokia, NTT DoCoMo, TIM Italia,
Vodafone Group Services Limited, Afilias, Bango.net, Drutt Corporation, Jataayu Software, Mobileaware,
Ltd., Opera Software, Segala, Sevenval AG, Rulespace and Volantis Systems Ltd.
77
W3C. http://www.w3.org/Mobile/. Seen 31.5.2005
78
W3C. http://www.w3.org/2005/MWI/Activity. Seen 31.5.2005
79
A Web safe color is one that has Red/Green/Blue components chosen only from the values 0, 51, 102,
153, 204, and 255
76
68
TDC is the leading telecommunications company in Denmark and has the largest
customer base on the mobile market with 31% of the market share. 80 In a short
investigation performed by the authors on the mobile handsets currently offered by
TDC online (www.tdc.dk) we found out that out of 44 handsets, 34 of them
supported XHTML, 7 handsets did not but supported WAP 1.2.1 and finally 3
handsets had no browser capabilities. 4 of these devices had screens smaller then
proposed in the W3C default context. In order to get an even clearer picture of the
technology on the market we also had a look at the second largest mobile operator
in Denmark, Telia (21% market share).
Telia are currently offering 40 handsets on their website (www.telia.dk) where 38 of
them support XHTML and only 2 do not, but support WAP 1.2.1. All the handsets had
displays bigger than 120 pixels and full color.
Mostly all the handsets available on these two sites were Symbian handsets. Only
one manufacturer had the Windows Mobile operating system, which confirms the fact
that Symbian are still biggest on the OS market. The main reason for this big market
share for Symbian is based on the fact that it is manufactured by the biggest
handset manufacturers on the market. And since the manufacturers have such close
relationships with the mobile operators, it makes more sense for the operators to
choose the Symbian devices. This basically means that the mobile operators and the
handset manufacturers control the OS standards.81
The devices displayed below are just examples of the direction the biggest
companies are taking. Nokia have launched their N-series line of 3G handsets that
have screen resolutions up to 320x280 pixels that can deliver up to 16 million colors.
Sony Ericsson has focused a lot on the Walkman series that have also been a huge
success. Mostly all the newest 3G handsets from these manufacturers have at least
2.0 megapixel camera, great screens and resolution and support XHTML. The N92
even supports live digital TV and is expected to be launched in the summer of 2006.
Many of the handsets are set to compete on the mobile media market, and can have
up to 4GB of memory installed (making it a pretty good competition to the popular
iPod nano music player).
80
81
http://www.itst.dk/static/telestatistik/2005/Orienteringsnotat_2h_2005.doc. Seen 1.6.2006
Mehdi Khosrow-Pour, 2006:730
69
Figure 19 – The Sony Ericsson W850
Figure 20 – The Nokia N92
When dealing with software on mobile phones, it is usually relatively easy to scale
the application according to the dimensions of the screen, since these values are
accessible through the code. But when dealing with mobile web sites, there are no
header values82 sent through by default (unless the mobile operator adds them) that
give up details regarding resolution, image and other media support and so forth.
This means that for developers to be able to scale images and make decisions
regarding the content based on handset is to gather information on the handsets
that are to be supported and (preferably in an XML file) and do a lookup for each
handset with every request. Then if a handset is not no the list, it is possible to
Various values are sent through the HTTP header with every request. The most important one in this
context would be the USER-AGENT header, which contains the name of the handset in use.
82
70
deliver the most basic page with the default delivery context, as specified in the W3C
Mobile Web Best Practices
This of course has some drawbacks, such as if the list is not kept 100% up to date,
many users with new powerful handsets not on the list will become unsatisfied with
the overall user experience of the web site.
There is however an open source project available, called WURFL (Wireless Universal
Resource File). WURFL is an XML configuration file which contains information about
capabilities and features of several wireless devices available on the market today 83.
And because it is open source, everybody can add to this constantly growing XML
file. The idea behind it is, that with every request a lookup into the XML file is made.
If a match is found, then the page is rendered and scaled according to the values
presented in the file. Then if no match is found, it would be recommended to deliver
some basic content based on the W3C default delivery context.
An interesting new browser made by the Norwegian company Opera, called the
Opera Mini browser, offers some very interesting features for mobile browsing. What
this browser does, is not simply render mobile XHTML pages and display them on the
device, but it renders all pages on their own server and convert them to a markup
language that the mini browser understands. Therefore this browser can view all web
pages on the Internet, although some bigger pages tend to look a bit messy due to
the amount of content on those pages.
Security
As mentioned in the theory, devices that support XHTML (WAP 2.0) have eliminated
the protocol switch on the WAP gateway and that means that XHTML on mobile
phones is comparable to the Internet model (TCP/IP). This means that it is possible
to obtain secure transactions all the way to the origin server from the device. XHTML
based browsers support SSL/TLS and should therefore be capable of obtaining the
same or similar degree of security as browsers running on stationary computers
using wireless networks.
83
WURFL. http://wurfl.sourceforge.net/. Seen 24.5.2006
71
Figure 21 - WAP vs. XHTML communications. Source: forums.nokia.com
However it is necessary to realize that the difference between wired networks and
mobile communications is that the airwave is more openly exposed to intruders. The
intruder eavesdrops on signaling and data connections associated with other users
by using a modified mobile phone.84 This makes it extremely important for websites
dealing with sensitive information to use SSL. Google has already taken this step
with their mobile version of GMail, but oddly enough, the new Microsoft Live Mail –
Mobile Edition doesn’t use any encryption, making the mail system vulnerable to
eavesdropping.
If the device is Wi-Fi capable, they will definitely need to support some encryption, most
preferably WPA, since there are many vulnerabilities in the WEP protocol. That is
because it will most likely be a lot easier for lesser skilled hackers to eavesdrop on the
connection since it only takes a simple program to break the encryption key and another
program (such as CommView for Wi-Fi85) to sniff the packets being sent. The reason for
that it may be easier is because all these programs are easily found on the web and take
relatively small skills to set up.
Networks
According to a report by Gartner Group, 20.539.000 3G handsets were sold in all of
Western Europe in 2005. That counts for approx. 12.8% of the total mobile sales of
1.604.338.000. Gartner Group predicts that 3G is taking over the mobile market and
84
85
Mehdi Khosrow-Pour, 2006:731
Tamosoft. http://www.tamos.com/products/commview/. Seen 24.5.2006
72
in by the end of 2006; 3G handsets will count for 36% of the total sales and 74% in
2009, whereas HSDPA (3.5G) will count for nearly 14%. 86
HSDPA87 hasn’t been launched in Europe yet but SK Telecom in Korea (a leader in 3G
mobile networking technology) recently launched the world’s first commercial HSDPA
service. Theoretically, HSDPA can offer a maximum download speed of 14.4 Mbps,
while the current launch supports mobile data connections up to 1.8 Mbps. The
downlink speed however, is expected to be able to reach 3.6 Mbps by early next year
and a full 14.4 Mbps by 2008.88
In Denmark, 3G handsets counted for 11.5% of all mobile sales in 2005 (in
conjunction with the figures for West Europe). Gartner Group then predicts that 3G
handsets will count for 73.8% of the total sales in 2009.
It is clear, based on these numbers, that technologies with less speed, such as
GPRS, are moving out and 3G is finally being accepted in Europe. It has already been
a huge success in Asia, but because of the huge licensing fees in other countries, the
adoption has been rather slow until now.
The 3G networks can offer speeds comparable to many broadband connections but
the bottleneck still lies within the limited processing power of the devices. Even
though it takes a short time to fetch the content to the mobile phone, a considerable
time is used in rendering the content on the device. The same goes for Wi-Fi enabled
devices, where the speed is absolutely the same as using a Wi-Fi enabled computer,
but the processing power is much lower. The Wi-Fi enabled phones are most likely to
be focusing on VoIP calling. (Maybe use in discussion)
86
87
88
Milanesi, Carolina. 2005
High Speed Downlink Packet Access
3g.co.uk. http://www.3g.co.uk/PR/May2006/3092.htm. Seen 29.5.2006
73
Danish m-commerce market
This chapter contains a thorough market analysis presenting market shares, number
of subscriptions, turnovers, and other statistics.
The global sales of mobile phones have topped 224 million in the first quarter of
2006, making it the best first quarter on record and in the last 36 months, the Nordic
market overall has gone from being the most expensive mobile voice and Shot
Message Service/Multimedia Messaging Service (SMS/MMS) market in western
Europe to one of the least expensive. The market is changing rapidly. With a 95
percent penetration rate of mobile phones and 99 percent geographical coverage,
Denmark is among the handful of nations in the world that are very intensive users
of mobile technologies and the penetration rate will top 100 percent by the end of
2006 according to Gartner.89
During the past years the penetration of mobile phones among the Danish population
has grown tremendously which is mostly due to an aggressive marketing strategy
from major telecom providers. Almost every mobile phone is sold with financial
support from the provider that assigns a subscription with the sale and some mobile
phone practically given away for free in order to enroll consumers as customers.
Today – Market overview
Almost all of the major Danish telecom providers offer a variety of mobile services to
the customers. The most common services are person-to-person services such as
SMS and chat; particularly the use of SMS has experienced a high growth rate in the
past few years. SMS is not only a means of communication between people but is
also used between persons and machines to get information on demand and in
interact with corporations. Many companies are using SMS messages in their
marketing campaign to enable the consumer to replay in different ways, to
participate in competitions, to get further information etc. For example during the
2004 Asian Tsunami disaster, mobile operators and the government authorities in
Denmark urged the Danish citizens to send messages to all the Danes they knew of
89
Pittet, Stéphanie. 2006
74
who could possible be traveling in the affected areas. By this means, it was possible
to quickly account for the safety of hundreds of people.
Another reason for this high level of mobile penetration in the last years is related to
the fact that the devices have become more and more accessible to a broader
audience. Today it is possible to download music and games to the mobile phone,
making it a lot more attractive to younger users. And for the adult users, the
smartphones capabilities such as email, news, and sport results make the devices
even more desirable than before. The services providers have also become much
more user friendly and efficient with the advanced technology.
Payment
The use of SMS as a payment method has been used for a while. For example when
paying for parking spaces, wending machines or simply refilling your prepaid mobile
account. One of the biggest player in the online payment market is PayPal which is
owned by eBay. They currently have over 100 million registered accounts 90 and can
be used in many countries including Denmark, where users can both send money
and receive funds to their local bank accounts. One of the reason for their this big
market share is because PayPal is bundled with eBay service in the way, when an
auction ends the winner can choose to pay immediately by using PayPal and to be
able PayPal the user must be a registered PayPal user.
Paypal recently announced their new mobile service, which is based on sending a
simple text message when to purchase goods. The service can also be used to make
payment to other PayPal users. Customers who want to make mobile payment to
other users will simply text the amount and the phone number to PayPal. The system
is password protected so even if the account holder’s phone is lost or stolen, the
PayPal account remains secure. This service however has not yet been established
in Denmark and it is only available in USA, England and Canada. But with high
mobile penetration rate in Denmark and because PayPal is fully available both to
receive and send funds we assume that iit is only a matter of time before PayPal
mobile service will be available in Denmark and other countries.
90
Paypal. http://www.paypal.com. Seen 25.5.2006
75
The use of SMS as a payment method has been hindered, by varying interpretations
of government regulations. These rules currently allow just a maximum of $12 per
SMS message as payment, thereby restricting the creation of higher-priced Valued
Added Services (VAS). Locatability and payment features have been further limited
due to the a priori requirement that users interact with e-commerce sites, establish
accounts and give relevant permissions in order to use m-applications. Privacy
concerns have dictated such requirements.
Market shares at the Danish Market
Figure 22 - Distribution of market shares at the Danish Market
The above figure illustrate that the original monopoly TDC Mobil and its acquired
wireless service provider Telmore dominate the 1G voice market, followed by the
original challenger Sonofon together with its acquired wireless service provide CBB.
3G rollout
In Japan, NTT DoCoMo was the first operator to launch 3G to the public, in the
autumn of 2001. The newly started operator 3 (H3G, owned by Hutchison Whampoa
76
Limited) followed with a launch in its respective countries during 2003. 91 In March
2006, H3G announced that they had reached the 12 million customer mark after only
18 months of operation with full handset availability92. As regards to UMTS
technology, the number of 3G subscribers has at the turn of the year 2005/2006
exceeded 43 million. The rate of growth is estimated to be 3 millino per month and,
in line with 3G being launched in more countries, growth will increase further. 93
The following graph shows the growth of 3G subscribers (UMTS) during the period of
31st of December 2004 to 31st of December 2005.
The strongest growth is obviously in Japan, with over 22 million subscribes and Italy
with over 8.5 million. In Denmark and Sweden, the market seems to be finally
catching up and the number of 3G subscribers tripled during the past year. According
to assessments made by, among others, the Yankee Group, more than half of mobile
subscriptions in Europe will be 3G subscriptions after 2009. 94
By this time, these countries are: Australia, Austria, Denmark, Hong Kong, Ireland, Israel, Italy,
Sweden and the UK.
92
Hutchison Whampoa Limited. http://www.hutchison-whampoa.com/eng/telecom/h3g/faqs.htm. Seen
21.6.2006
93
UMTS development – from an internation perspective. Report from Post og Telestyrelsen Sweden, 2005,
page 11
94
UMTS development – from an internation perspective. Report from Post og Telestyrelsen Sweden, 2005,
page 12
91
77
There are currently 3 operators with a 3G licence in Denmark. There used to be 4,
but since the operator Orange merged with Telia, they returned their licence to the
National IT & Telecom Agency. These operators are TDC, Telia and H3G. H3G were
quickest on the market and they have had a big effect on the number of uploaded
and downloaded Mbits in Denmark. From the end of June 2004 and to the end of
June 2005, total uploading and downloading among all mobile customers increased
from 2.6 million Mbits to almost 7 million Mbits, making it almost tripled. The
following graph shows this growth over this period where H3G is shown in
comparison with all other operators.
Figure 23 Mobile data traffic in Denmark. Source: National IT & Telecom Agency, Denmark
As we can see from the figures we can assume that the market is finally getting
ready in Denmark. There is a linear growth in data traffic, as well in 3G
subscriptions. Even though the technology has been available for a few years, there
adoption has been slow based on high licensing fees for the operators, which
resulted in slow pushing of the technology. But as we can see now, both the market
and the technology should be mature enough for advanced mobile services.
78
Drivers for adoption
The drivers for adoption of m-commerce services within the enterprise and with
consumers are numerous. They include the following:

The increasing mobility of today’s workforce

The convergence of telecommunications and software industries

The increasing need for information and transactions anytime and anywhere

The new breed of wireless handsets coming on the market

The improvement in bandwidth brought about the migration from 2.5G to 3G
Sub-conclusion
After analyzing the market for mobile commerce and the technology available, we
believe that both the market and the technology have matured enough to accept advanced
mobile services.
Regarding the status of the market, the numbers of users are constantly growing and the
youngest generation that is starting to use mobile devices today have grown up using the
Internet and computers so making the step towards mobile browsing should be a walk in
the park for these kids. The number of services is also constantly growing, where many
are focused at the younger audience in the form of ringtone and music downloading,
chatting and more content specific news services than before (music, entertainment,
competitions etc.). The increasing popularity of these services is also because of the
improvement in the mobile technology and devices.
The devices have become more like mini computers, instead of pure communication
devices and many of them include music and media players, digital camera and the
ability to run user installed programs and surf the mobile web.
Browsing has come a long way since WAP was first introduced and the experience of
mobile browsing is now more similar to the regular Internet browsing the users already
know. The new browser from Opera also makes it possible to view even more web pages
since they don’t have to be written specifically for mobile devices. In our view all this
79
shows us that the technology has come a long way since the initial WAP launch and the
first 3G networks.
Based on figures from previous years regarding usage of 3G and mobile services, and
forecasts for the coming years we conclude that both the market and the technology has
matured enough to accept m-commerce services. Also based on the hype cycle we
presented in the beginning of the thesis, we are confident in that after a huge hype and
disappointment regarding WAP, the market is now beginning to realize the possibilities
as the technology matures and the market grows. The disappointment after the hype has
now turned to realism and based on the figures presented in the analysis, m-commerce
has become a reality.
80
Part 4
Design
81
In the past chapter we found that the mobile technology and the market is matured
enough to accept m-commerce services. In this chapter, we will present our idea of a
mobile auction service that we choose to call Instant Auctions. Since we are focusing
on mobile auctions, it seems logical to first analyze the biggest player on the online
auctions market, by conducting a case study of eBay.
After that we will discuss the strategic approach to penetrate the market with the
blue ocean strategy. Finally we will present our idea by creating a business model
and discussing the design of the system. We will also discuss the economics of such
a system.
EBay
In order for us to get a clear picture of the market for online auctions, we will now go
through an analysis of what can be seen as the biggest player on that market, eBay.
We will start by analyzing the economics of eBay and then look at the eBay business
model. Finally we will be discussion the two mobile solutions eBay has launched for
their services.
The economics of eBay
EBay was founded in 1995 by a computer programmer called Pierre Omidyar. He
initially started the project as a hobby, since his wife was an avid PEZ-dispenser
collector and had gotten frustrated in how hard it was to obtain rare items and
contact other collectors around the globe. From this hobby grew one of the largest
online companies in the world with a global presence in 33 international markets,
157 million registered users worldwide and has been profitable since its initial launch
with a total of $1.086 billion in net revenues for the second quarter of 2005. 95
EBay works as an intermediary between sellers and buyers and allows sellers to put
up their items for sale via an English auction or via fixed price (the “Buy Now”
option). The buyers can then search or browse for items of interest and either make
a bid on the particular item or buy it instantly with the Buy Now option. EBay has
never offered to take care of payments for the users, but they have however made
the process easier for the user by acquiring PayPal, a company that serves as an
intermediary by allowing users to send payments with their credit cards to other
95
eBay. http://pages.ebay.com/aboutebay.html. Seen 21.6.2006
82
users in a few simple steps. This means that when an auction/sale closes, the seller
has the option to allow the buyer to pay for the item instantly with a click of a
button. Then the buyer is transferred to PayPal and can finish the transaction.
The problem of asymmetric information
Since eBay is not an online reseller, but an intermediary between sellers and buyers,
they had to come up with a solution to deal with the problem of asymmetric
information. When a buyer bids on a particular item, the chances for the bidder to
see the item beforehand are slim to none. This is not always the case when shopping
online from resellers, because users often have the change to look at those items
beforehand in the shops and then choose to purchase it for a cheaper price online.
However when users shop through eBay, they have no clue who the seller really is
and therefore the users needed a way to build up trust with other users. To deal with
this asymmetry of information eBay introduced the feedback forms. When a
transaction is completed successfully, eBay encourages their users to leave
feedbacks for each other (buyer and seller) to let others know how the transaction
went. Users can choose to leave a negative or a positive feedback for each other,
and based on the feedback given, the user’s feedback score is either raised by 1 or
lowered by 1.The final feedback score is then the sum of all feedbacks given. As well
as stating the level of the feedback left, users also need to leave comments to tell
others what they liked / disliked about the other user.
It is clear that the more positive feedbacks users have, the easier it is for both
sellers and buyers to screen for trustworthy individuals to deal with. That being said,
buyers are likely to buy from sellers with a high number of positive feedbacks and
sellers are more likely to refuse sales to buyers with a bad feedback history,
therefore helping both parties screening for trustworthy people to make business
with. This also helps reducing the information asymmetry problem since buyers can
more easily trust sellers with a good feedback history and therefore it is more likely
that the item description is accurate and less likely that fraud will occur. Although
this mechanism is a good effort to deal with these problems, it is not a complete
solution when it comes to risk aversive buyers.
83
The risk aversive might only want to deal with sellers with a relatively high number
of positive feedbacks and skipping those with lower feedback numbers, thereby
making it harder for the sellers with lower score to reach their full potential and get
the price they want for their products. This would in the end affect the indication of
pricing for those sellers, since they wouldn’t be able to reach the full market since
the risk aversive buyers would rather buy from “experienced” sellers. And with fewer
people to sell to, the harder it gets to build a respectable feedback score, so in the
end this could be considered “the feedback paradox” – where users want higher
feedback ratings but might have difficulties getting there without having any to begin
with.
The Lock In of eBay
EBay is without a doubt the biggest online auction site in the US. It’s difficult to find
numbers for rest of the world, but eBay has over 90% market share in the US,
making it almost monopolistic in the US market.96
The size of the eBay user community is a huge factor in its popularity. Sellers want
to have as big a market as possible and buyers want to have the best range of
products available. Users who have collected a good feedback score are eventually
locked in to eBay, since it wouldn’t pay off to switch to another service, where they
have no feedback history and smaller user base (at least in the US). The switchingcost are simply too high for users with good feedback history, but not as relevant for
users with low or none feedback score. But as mentioned, the biggest selling point
for eBay is the huge market both sellers and buyers can reach.
Market Structure
As previously mentioned, eBay have over 90% of the online auctions market share in
the United States. It is however difficult to assess their market share in Denmark,
since other similar, local services are quite popular (for example Lauritz.com and
qxl.dk). EBay have no particular Danish branch, like in the UK, France, Germany etc,
but users can register to the service on any of these branches (ebay.com, ebay.de
etc) and use it for buying and selling.
96
Computer Times. http://www.computertimes.com/Aug05edchoiceeBaytheSmartWay.htm (24.
November 2005). Seen 12.6.2006
84
If we only focus on the US market, where eBay is the biggest, it can be argued for
that eBay has a monopoly in the USA. This is based on the same arguments that are
often used when referring to Microsoft having a monopoly with their Windows
operating system versus Linux and Mac OS, based purely on their huge market share
and profits. Ebay have been profitable from the start and their financial results for
2005 are as follows:
3 months ended 31. Sept
2004
2005
805.876.000
1.105.515.000
157.121.000
200.375.000
648.755.000
905.140.000
Net revenues
Cost of net revenues
Gross profit
Figure 24 eBay’s financial results 2005. Source www.ebay.com/aboutebay.html
This makes for 37.1% increase in revenues and 39.5% increase in profit between
these two years, and that is similar to the growth eBay has experienced every year
since the initial launch.
In Denmark however, eBay are closer to an oligopoly. We base this estimate on the
facts that there are relatively few firms in the same industry and there is some
uncertainty due to asymmetric information. There is also no player on the Danish
market notably larger then the other. Monopolistic competition and perfect
competition can also be ruled out based on the fact that that kind of market requires
many firms to function.
The high barriers of entry for oligopolistic markets can be debated though. The initial
start-up costs of online auction site don’t necessarily need to be very high, but there
needs to be put a considerable time and money in advertising the service in order to
gain a critical mass of users. But it shall also me noted that these market structures
presented in the theory should be seen more as guidelines and not pure facts that
apply
to
every
market,
since
each
market
is
different
and
has
it’s
own
characteristics.
85
EBay Auction types
Besides for the sellers to be able to list their items via a traditional English auction 97,
the following auction models and variations are offered by eBay:
1. Reserve Price Auctions
A reserve price is set by a seller who will not sell below a certain price. The
bidders will not be informed the reserve price and if the reserve price is not
met, the seller is not obliged to sell.
2. Buy It Now
Sellers name a price at which they would be willing to sell their item to any
buyer who is willing to pay that price. The listing will be run as a normal
auction, but will also feature a Buy It Now price where the buyers will have
the option to buy the item instantly without waiting for the listing to end. This
feature is however removed from the auction once the first bid has been
made and the normal auction process will then apply.
3. Fixed Price
The new Fixed Price format will allow you to buy or sell items instantly at a
set price, similar to the current Buy It Now option available with auction-style
listings.
4. eBay Store Buy It Now
Fixed Price listings presented in collections of stores designed to showcase
merchandise from eBay Storefront sellers. Many of these fixed price items can
only be purchased in these stores! EBay Store sellers create Store Buy It Now
listings to display in their store.
5. Private Auctions
Bidders' email addresses won't show up on the item or bidding-history
screens. When the auction is over, only the seller will know who bought the
item.
6. Dutch Auctions
This is a variation of the typical Dutch auction models as described in the
theory. Sellers start by listing a minimum price, or starting bid, and the
number of items for sale. Bidders specify both a bid price and the quantity
they want to buy. All winning bidders pay the same price—which is the lowest
The auction process for English eBay auctions is as follows: The seller puts the item up for auction and
the auction is usually set to run for a few days. Bidder make a bid by entering the highest bid they are
willing to pay for the item and when the time runs out, the winner is the bidder with the highest successful
bid.
97
86
successful bid. If there are more buyers than items, the earliest successful
bids get the goods.
Example: Let's say that 5 people bid $1.25 for one pen each and 10 others
bid $1. The minimum bid for the pen will be raised to $1.25 because demand
exceeds supply. Because the $1.25 bidders bid higher than the $1 bidders,
they will be guaranteed a pen. The other 5 pens will go to the earliest $1
bidders. The final price for each pen will be $1 (even though someone placed
a high bid of $1.25) since all winning bidders pay the same price — which is
the lowest successful bid.
98
Network effect
As we have already established in our theory regarding network effects, the value of
the marketplace is proportional to the number of other users on the market. Since
auctions are a competitive process, more auctions equal more competition which
then results in the prices rising.
This makes it more worthwhile to sell on eBay, since more sellers are using eBay
which drives the prices down again as supply increases. This then again brings more
people to eBay since there are more things being sold.
Essentially, as the number of users grows, prices fall and supply increases and more
and more people find the site to be useful. EBay is therefore a network with high
network externalities.
98
eBay. http://pages.ebay.com/help/buyerguide/bidding-type.html. Seen 22.6.2006
87
EBay Mobile
EBay is currently offered in a mobile version, both through the ebay.com main site,
as well as the ebay.co.uk sub-branch, which only customers from the UK can use.
The mobile version of the main site can be used by anyone with an eBay account and
a WAP 2.0 enabled mobile phone.
Figure 25 eBay Mobile. Source: Screenshots taken by the authors
What eBay have done with this mobile version is to simply take the basic
functionality and the existing business model of the already established “wired”
solution, and made it more compact. It doesn’t bring anything to new to the table
since all the functionalities here are available through the web-based version. Users
can sign in with their username and password (no encryption is used though) and
search for items from the eBay database. User’s can then select an auction from the
list and view the details, such as time left of auction, current price, pictures and
shipping charges.
Users can not view seller’s feedback, but are presented with the number of positive
feedbacks given to the seller. No information regarding the number of negative
88
feedbacks is given. Users can however, bid on the item selected or use the “Buy It
Now” option directly on the mobile phone.
By the looks of it, eBay are merely offering this as a service to its already registered
customers where they can easily bid on items through their mobile phone. The
business model of eBay has simply been transferred to the mobile version and
doesn’t include anything new that the users can’t do on the web-based version.
The fact that the mobile versions of eBay don’t use any form of encryption is quite
disturbing, since if a username and password could be intercepted by a hacker, than
they can be used to access the standard eBay site as well. Many users use the same
password for everything and it could be a serious problem if these passwords were
captured by someone else and used for logging on to PayPal for example.
EBay business model
Like most online auction companies, eBay is an e-commerce brokerage model. EBay
does not actually sell goods that it owns itself, but merely facilitates the process of
listing and displaying goods, bidding on items, and paying for them. It acts as a
marketplace for individuals and business that use the site to auction off goods and
services.
The strengths and the strategic advantages of the eBay business model include:
No time constraints:
Bids can be placed at any time and the items are listed for a number of days (usually
between 1 and 10, at the discretion of the seller), giving purchasers time to search,
decide, and bid. This convenience increases the number of bidders.
No geographical constraints:
Sellers and bidders can participate from anywhere that has Internet access. This
makes them more accessible and reduces the cost of “attending” an auction. This
increases the number of listed item (number of sellers) and the number of bids for
each item (number of bidders). The items do not need to be shipped to a central
location, reducing costs, and reducing the seller’s minimum acceptable price.
Intensity of social interactions:
The social interactions involved in the bidding process are very similar to gambling.
The bidders wait in anticipation hoping they will “win”. EBay calls the successful
bidder the winner. Much like gambling addiction, many bidders bid primarily to “play
89
the game” rather than to obtain products or services. This creates a highly loyal
customer segment for eBay.
Large number of bidders:
Because of the potential for a relatively low price, the broad scope of products and
services available, the ease of access, and the social benefits of the auction process,
there are a large numbers of bidders.
Large number of sellers:
Because of the large number of bidders, the potential for a relatively high price,
reduced selling costs, and ease of access, there a large number of sellers.
Network economies:
The large number of bidders will encourage more sellers, which, in turn, will
encourage more bidders, which will encourage more sellers, etc., in a virtual spiral.
The more the spiral operates, the larger the system becomes, and the more valuable
the business model becomes for all participants.
Fees:
EBay has pioneered and internationalized automated online person-to-person
auctions.
collectibles
Previously,
shows,
such
flea
commerce
markets,
and
was
conducted
classified
through
garage
advertisements.
An
sales,
online
marketplace facilitates easy perusing for buyers and enables sellers to list an item
for sale within minutes of registering.
Browsing and bidding on auctions is free, but sellers are charged transactions fees
for the right to sell their goods on eBay. Sellers are charged as follows:
Insertion fees:
When an item is listed on eBay, a nonrefundable insertion fee is charged based on
the seller’s opening bid on the item.
Final value fee:
A final value fee is also charged once the auction is completed. This fee generally
ranges from 1.7 percent to 5.25 percent of the final sale price.
Promotional fees:
90
EBay also offer seller to upgrade their auctions with enhanced features for a set
price, including highlighted or bold listings, featured status, and other ways for
sellers to increase to visibility of their items.
Once the auction is finished, eBay notifies the buyer and seller via email. For
example, at the end of an auction, eBay notifies the buyer via e-mail that he or she
has won. EBay also e-mails the seller to report who won and at what price the
auction finished. At that point it is up to the seller and buyer finish the transaction
independently of eBay.
Over the years, eBay has quickly branched out from primarily auctioning collectibles.
It gradually moved into an array of upscale markets where the average sale price is
higher. The average sale price is a key metric in determining eBay’s transaction fees,
so increasing the average sale price has become an important way for the company
to be profitable. By forging partnerships with name brands such as GM, Disney, and
Sun, eBay has managed to do exactly that. Sun has sold $10 million worth of
equipment on eBay and now lists between 20 and 150 items per day. 99
The eBay affiliate program
Affiliate programs are among the most popular ways to make money on the Web. In
an affiliate program individuals or businesses earn money by directing visitors from
their Web sites to the company offering the program. In other words, if you place an
ad or link for eBay on your Web site and someone clicks on it, and then either place
a bid on an eBay auction or becomes a registered user, eBay pays you a small fee.
The eBay affiliate program pays Internet publishers, Webmasters, and other online
partners to drive new users to eBay. Affiliates promote eBay with banners, text links
and other innovative tools. In return, they receive commissions for driving new users
as well as bids and “Buy It Now” purchases. EBay pays an affiliate between 5 to 13
dollars for each new active user and from 5 to 9 cent for each bid or “Buy It Now”
transaction.100
99
Timeline Index. http://www.timelineindex.com/content/view/1086. Seen 2.6.2006
100
eBay. http://pages.ebay.com/help/sell/affiliate-program.html. Seen 5.6.2006
91
EBay’s success
What is it about eBay that attracts millions of registered users from all over the
world, many of whom keep buying and selling for years at a time, and who build a
good part of their daily lives around the site? A lot people go to eBay looking to
make some extra money or save a few dollars. But the main reason eBay is so
successful is because the site gives buyers and sellers plenty of reason to stay for
long periods of time and revisit on a regular basis. The longer they on eBay, the
more likely they are to actually complete a transaction, and thus generate some
revenue for eBay. It goes back to the vision that eBay’s founder had in the
beginning: eBay would create the environment and give users ways to interact. By
focusing on creating a community of users rather than simply on finding ways to
make money, eBay ended up making lots of money.
M-commerce levier to change strategy
For the past 25 years academics and consultants have developed an impressive
array of tools and frameworks to compete in red oceans, such as the Porter’s five
forces to analyze existing industry conditions and SWOT analysis, which we
described in the last chapter of this thesis.
The “blue ocean” strategy has been gaining more acceptances recently, since many
agree that the traditional strategies no longer apply in the information society. Blue
Ocean has therefore become a strategy that many industries now use in order to
avoid harsh competition and thus pioneer new business ventures.
Adopters of Blue Ocean Strategy believe that it’s no longer valid for companies to
engage in head-to-head competition in search of sustained, profitable growth. If
Michael Porter’s disciples have fought for competitive advantage, battled over market
share, and struggled for differentiation, Blue Ocean strategists argue that cut-throat
competition results in nothing but a bloody red ocean of rivals fighting over a
shrinking profit pool. In contrast to Porter’s work, W. Chan Kim and Renee
Mauborgne advocate a different approach to strategy: try to create new industries
that change the competitive landscape completely. By focusing the resources on
creating uncontested market space (a “Blue Ocean”), you’re working to make your
firm the industry leader while simultaneously making your current competition
92
irrelevant. There’s no sense in operating in competitive war-zones (“Red Oceans”) if
you have a choice to do without.
Create a blue ocean for Instant Auctions
What operators and m-commerce service provider think competition is about and what
consumers actually value often don’t match. What usually does match is the way
operators and m-commerce service providers approach strategy. Generally, they view it
as a battle to increase market share by outperforming everyone else on the same
factors. But that is not what customers want them to do in our opinion. We think
operators or m-commerce service providers who adopt a different strategy tend to have
better margins than their competitors. In other words, following the logic of value
innovation.
Value innovation defies one of the most commonly accepted dogmas of competitionbased strategy: the value-cost trade-off. It is conventionally believed that companies
can either create greater value to costumers at a higher cost or create reasonable value
at a lower cost. Here strategy is seen as making a choice between differentiation and
low cost. In contrast, those who create blue oceans seek differentiation and low cost
simultaneously.
It has expanded into a way to communicate and interact with computerized services
such as TV-show voting and information alerts.
In the following chapter we will attempt to reconstruct market boundaries and create a
“blue ocean”—that is to say, a new, uncontested market, by providing an instant auction
service via mobile phone, with a brand new business model.
We agree that the traditional strategies no longer apply in the context of m-commerce and
will therefore follow the blue ocean strategy to create a new market for mobile auctions.
According to the theory, our blue ocean will be created within a red ocean since our
concept expands the boundaries of an existing online auctions industry.
Based on the Blue Ocean theory, we have decided to use the Four Actions Framework to
create a new value curve for Instant Auctions. We will now answer the four questions
93
from the framework and then create a strategy canvas for Instant Auctions vs. eBay. A
more detailed description of the system will follow in the next chapter.
Question 1: Which of the factors that the industry takes for granted should be
eliminated?
The system will be designed in such a way that buyers can not browse nor search for
items directly, but can register search criteria through their profile and have the
auctions sent to them directly when the requested product become available.
The auctions will be made free of charge for both sellers and buyers.
Question 2: Which factors should be reduced well below the industry’s standard?
The actions to perform on the auction home page will be reduced since this is mainly
a mobile system. The description of the items will also be made limited since the
devices may have trouble with displaying an overflow of information due to the
device limitations. The payment methods between buyers and sellers will also be
reduced, since PayPal mobile only works in a handful of countries yet.
Question 3: Which factors should be raised well above the industry’s standard?
The mobility of the system is very important since this gives both the buyers and
sellers the biggest advantage. An example is that a seller can start an auction
directly from his/hers mobile device, by taking a picture on the phone and uploading
it to the service with description and other information necessary through the
handset. Buyers can participate in the auction anywhere as long as they have a
mobile signal.
Mobile security of the system is also raised above the industry standard since users
always have to log in to the system and all information will be encoded using SSL.
Question 4: Which factors should be created that the industry has never offered?
The buyers receive an instant auction invitation as soon as the desired item becomes
available. This means that the auction is in fact pushed to the buyer as soon as it
matches the buyers search criteria and the buyer doesn’t have to search for
auctions. Only search once, and have the matching auctions sent directly to your
mobile device.
94
The auctions are much shorter than previously known, which means that the sellers
get rid of their items quicker (assuming that a match is found with any buyers) and
should get more money for it since the buyers are forced to act quickly. The buyers
can also get the items quicker as soon as they become available. The auctions are
“pure” mobile in the sense that it is impossible to participate in them unless through
a mobile device.
Based on this framework, we have assembled a strategy canvas for our system and
eBay, which shows where we will differentiate ourselves from eBay and their services
in order to create our Blue Ocean.
eBay
se
ar
ch
in
g
pr
&
pa
b r ice
ym ow
en sin
to g
au ptio
ite ctio ns
m
n
tim
in
ea
f
o
se mo r m e
bi
a
of
fil le s tion
te
rin e cu
r
g
au ity
ct
io
ns
au
m
ct
ob
io
ili
n
pu ty
sh
in
g
Instant Auctions
Figure 26 – Strategy canvas for eBay and Instant Auctions
Instant Auctions – Introduction
If there is one thing that the initial failure of WAP thought us, is that the key to a
successful mobile solution is a well thought out business model. Efforts to transfer
existing business models to the mobile world mostly failed because there was so
much pressure on companies to go mobile, but the concept of mobility somehow got
lost along the way.
We recently attended The International Conference on Mobile Business 2006, which
was luckily held in Copenhagen this year. The conference has now become a yearly
event and brings in people from all over the world. There it was made very clear that
the key to the success of any mobile business solution is a good business model. It is
95
also extremely important to make sure that the mobile solution offers advantage to
the user with the mobility of the system.
After a careful consideration on how we can take the auction market mobile, we have
come up with a brand new way of thinking online auctions. This we like to call
Instant Auctions, and we will use the next chapters to describe the concept and its
business model, as well as discuss the economical challenges and possibilities.
The concept of Instant Auctions
The idea behind the system is to have it serve as a mobile marketplace, where seller
inserts his/hers items on either a website or through a mobile device. Both sellers
and buyers need to have a stored profile in the system to be able to use it. The
profile contains contact information, bank information (if needed), address etc. When
sellers wish to sell an item, they insert information such as category, and then based
on the selected category - additional information can be added (for example if the
category is Music, then the seller can choose CD, LP, DVD, Cassette etc). Then the
seller adds a short description of the item and has the option of adding pictures.
Then the seller sets the minimum price he/she would like to get for the item and
confirms.
Sell item
Subcatergories
?
Enter the category
No
User enters a title
of the item and a
short description
Add a picture?
Yes
Yes
User furhter
defines the
specific category
for the item
If more than 1 subcategories
Picture added
No
Enter minimum
price / startprice
for the auction
Review
information
No
OK?
Yes
Item registered for
sale
Figure 27 - The process of putting an item up for auction / sale
Buyers on the other hand, log in to the system via the website or his/hers mobile
96
device and add a description of the item they wish to purchase. The buyer can add
the category to search in (as well as further options based on the selected category);
free text search criteria, maximum price and can choose to search only for items
with a picture if desired.
No
Register search
criteria
Enter
category?
Yes
Subcatergories
?
Enter the category
/es
User furhter
defines the
specific category
for the item
Enter search
text?
If more than 1 subcategories
No
Yes
No
User enters
keyword(s) for
searching
User enters the
maximum price
he/she is willing to
pay for the item
User reviews the
information
entered
OK?
Yes
Search criteria
registered
Figure 28 – Buyer registers search criteria
All these information will be stored in a database on a server that runs a program
that continuously checks (with a given time interval) if an item matches buyer’s
criteria. If a match is found, a message is sent to the buyer / buyers giving them the
option of participating in an instant auction for the item. Here is where the mobility
factor plays a big part since the buyers don't have to be sitting in front of a computer
to finish the transaction. In terms of delivering the messages there are at least two
options. The first is to have a small program running on the mobile device with an
Internet connection.
The program would check with a certain time interval if a
match is found and when it is found it would show the buyer a message that contains
information about the item for sale and allows the buyer to bid on the item. The
other option would be to deliver a SMS to the mobile device, with a short text and a
link to an XHTML webpage where users can see the full description with pictures and
the option to bid on the item.
Both options have their pros and cons. In the case of the first one, the problem is
that the messages would never be entirely instant, since there would always be
some interval on the polling. In addition to that, the user would need to be
connected to the Internet for the poller to work. This would however allow more
usability and nicer graphics. In the second case the disadvantage is that no operator
in the world can guarantee that SMS messages will be delivered within 12 hours, but
as the technology runs today - the chances of delays are usually minimal. The
97
advantage is though that there would be no need for an Internet connection, but this
would exclude devices such as Pocket PC's that don’t have telephones built in. We
would most likely select the second option (SMS & XHTML) since that would be much
easier for most users and give us the opportunity to reach a bigger market.
A automatic
process matches
buyers wishes
with sellers items
Start auction
Match?
Yes
System sends SMS to
buyers – inviting them
to participate in the
auction
Auction started
No
Fig
ure 29 – The automated “matching” process.
The auction model is similar to the one found on eBay, although the time span is
much shorter. The auction would basically start as soon as the messages are sent
out and would only run for 10 minutes for example. If no buyer is willing to
participate in the auction, the buyers will be marked as uninterested in this item and
will not be sent an invitation again. However, there is always the change that a
buyer is interested but didn't read the message in time, and therefore if no one bids,
a final message could be sent out allowing the buyers to buy at a minimum price
where they have 1-2 days to respond to. The first buyer to respond the message is
the winner.
Auction invitation received
by buyer (An SMS with a
http link + item name and
start price)
Participate?
Yes
Buyer clicks on
the link and the
auction page is
displayed
View detailed
information
regarding the item
Bid?
Yes
Enter PIN /
password
Correct PIN/
password?
No
Yes
User enters his/
hers maximum bid
Buyer outbid?
No
The buyer is now
the highest bidder
Yes
Figure 30 – The auction process
While the auction is running, the first buyer to respond to the message is the current
high bidder for the item. If another bidder bids the same amount within the auction
period, he will get a message that says that he's been outbid and given the chance
to raise his bid. If the second buyer outbids the first one, the first is given the chance
to raise his bid and so on and so forth until the auction ends. There is also the
possibility that only one buyer is interested, and then he should be able to buy the
item at the lowest price offered by the seller or submit a best offer.
98
The whole idea behind this approach is based on the fact that most bids on an online
auction are made on the last few minutes of the auction. And because of the
competitive nature of auctions, sellers should be able to get a good price for their
products if a critical mass of users is obtained. And giving users the change to sit
back and wait for the item of interest to pop up instead of searching in front of their
computer and waiting for the auction to run out should give great advantages to the
users.
4
System Architecture
Following is a short and simple description of how the system will be built up and
coded. All code will be written in C# using the .NET platform from Microsoft.
The system will be based on 2 seperate back-end programs that each have their
seperate purpose and run on the application server. The first one will be a scheduler,
most likely in the form of a Windows service, that runs with a short time interval and
matches seller items with buyer wishes.
99
This same program will then have an SMS send function that will send out an auction
invitation to buyers whenever a match is found. The matching process will use the
keywords entered by the buyers to search for items made available by sellers. If a
match is found, the buyer’s search will be marked as “in process” and will not be
included in the matching process again unless the auction ends without him/her
winning.
When a buyer receives the SMS with the invitation, he/she will have to click a link in
the message that takes the user to a mobile web page. The mobile back-end will be
completely dynamic, using XML for the data and XSL transformations to display the
content. This is done because it will allow great flexibility in the rendering of the
pages, where we can offer different layouts for different countries for example.
Serving multiple versions of markup languages can also easily be achieved with this
method. This is particularly important if the application will be added to the portals of
any mobile operators in exchange for a share of the revenues, since some operators
have their own markup language that is then transformed by them to the devices
(for example Vodafone uses a markup language called PartnerML101).
In order to insure the optimal tweakability of the pages, all configuration and texts
should be kept in XML format.
When a request is made to the server by a mobile device, we will start by checking
the header variables for the user-agent variable and try matching the device with a
device from the WURFL file. The WURFL file contains a lot of information irrelevant to
our project, so we will most likely strip it down using XSL to only contain the content
we need. This will both make the file smaller and the XML parsing quicker.
101
Vodafone. http://www.via.vodafone.com/schema/samples/index.html. Seen on 9.8.2006
100
HTTP Request
from mobile
device
Supported
device?
No
Basic WAP
page – “This
device is not
supported by
this service
Yes
Locate correct
sized banners &
images using the
screen dimension
values
Read XML
configuration and
texts
Fetch content from
database as XML
Rendered
page
displayed on
the device
Find correct XSL
Transform XML
using the correct
XSL file
Figure 31 – The HTTP Request flow
When we have a match for a device, we can fetch the auction information from the
database and have it returned as an XML text. The XML will then be transformed
using the appropreate XSL stylesheet, with correct image and text sizes for this
particular handset. After the transformation is done, the content is rendered and
displayed on the mobile handset as a mobile web page.
Further design details, such as class diagrams and database diagrams are out of the
scope of this thesis but will be neccesary to create before the actual coding of the
project begins.
101
Payment
Regarding payments between customers after auction ends, we will not offer to
handle any payment transactions for the customers. We will give the buyer and the
seller the opportunity to contant each other and work that out themselves, or add a
link to PayPal mobile, in the countires where it has been made available. Other
mobile payment systems will not be integrated.
Further information regarding our revenue model can be seen in our business model.
Instant Auctions vs. eBay
The following is a summarization of where our concept differs from eBay.

Buyers don’t have to monitor auctions and search
o
Buyers only need to enter their wishes once, and the system
automatically monitors matches to these wishes and sends out the
auction to the buyer.
o

This serves both as an invitaition and a reminder.
Buyers get sent out information about the auction and they deceide when and
if the auction starts.
o
The auction only starts if two or more buyers begin bidding.
o
The auction starts once the first bid has been made and runs only for a
short period.

The bidding can only be done through a mobile device.

By using mobile device, buyers participation in auctions are no longer bound
to location or internet connection.
o

The only demand is to have a mobile signal
By keeping the auctions short, we push buyers to bid as well as taking
advantage of the fact that most bids happen in the last few minutes of
auctions.
o
This also makes the auction more fun and exiting, which should lead to
more bids.

Buyers can finish the auction quickly and immediately contact the seller (or
vice-versa) through their mobile phone or email, depending on their
preferences.
102

Sellers can take pictures of the items on their mobile phone, and use the
image when adding new items for auction through the mobile version of the
system.
Technical considerations
There are many issues and challenges to consider when designing and implementing
such a solution. We will not be doing a full design here, but focus more on the big
picture and what needs to be clear regarding security and usability.
Security
Security is a big factor in a system such as ours, and there must be a clear security
policy from the start. As technology has progress, support for security has grown
substantially and there information sent through the mobile web should be just as
secure as the Internet. We have already established that un-encrypted mobile
content can be easily intercepted and since the information sent through the system
can be everything from bank accounts and PIN codes to other personal information,
it is clear that HTTP requests made from the mobile XHTML pages must be
encrypted. Even though this might exclude some older handsets, we feel that this is
to important feature to let go. Google have already taken this same step with their
mobile version of Gmail, which is only able for browsing with a device that supports
SSL.
Usability
In order to offer an enjoyable user experience, all XHTML pages would have to be
rendered according to the device specifications. There the WURFL XML file would be
extremely usable since it is continuously held up to date by the submitters. We
would like to store the file locally on our servers to save time with each lookup and
there would have to be some kind of a program on our servers to check the WURFL
file on a regular basis and see if it is up to date with the local file.
Once a HTTP request is made, there is a HTTP-header value for the browser or
device being used (user-agent). All devices send these values in the request and
these user-agents can be used to look up the handset specifications in the WURFL
103
file. By doing this lookup with every request it is possible to return an XHTML page
that matches perfectly the dimensions, image support etc for each an every handset.
A good way to do this programmatically is to use XSL 102 transformations to deliver
the web pages to the devices. All the XHTML pages sent to the devices should be
according to the W3C Mobile Web Initiative.
The following picture is an example of what an auction page could look like. The
attemt is to minimize the content on each page and divede it up into multiple pages
(such as item description, shipping and payment information etc).
The economics of Instant Auctions
There are quite a few similarities in the economics of both eBay and our Instant
Auction solution. The information assymetry problem is still the same so we would
have to implement a similar feedback system as eBay have done in order to limit
that problem.
102
W3C. http://www.w3.org/Style/XSL/. Seen 21.7.2006
104
Switching costs
In order to keep the switching costs (from eBay) as low as possible, the feedback
mechanism will be very similar to eBay with the possibility to give positive, neutral or
negative feedback with comments. The number of feedbacks will then be shown next
to the seller and buyer usernames with a possibility to view the comments given.
eBay have made an API available, which for example makes it possible to retrive
user information through code.
This opens up a great possibility to even decrease the switching costs, since a big
part of the eBay lock-in is of the Information and Databases type (feedback rating).
We would simply allow our users to enter their eBay username when they sign up for
an Instant Auction account, and then access their eBay profile and retreive the
feedback rating. This can then be stored in our system, giving the users a great
advantage in their feedback building. In order to make this secure for our users, the
eBay API is designed in a way that users never have to give their eBay passwords to
3rd parties. Instead they are transfered to the eBay log-in page, which returns an
authorization token to the 3rd party upon successful login.103 This means that we can
safely verify that the username is legit and belongs to this particular user and
therefore it is safe to transfer the feedback score.
According to a recent study by the University of Michigan, sellers with established
reputations can expect about 8 percent more revenue than new sellers marketing
the same goods. This clearly shows the importance of the feedback system and
being able to transfer this to our system should be highly desirable for both sellers
and buyers.
The fact that the system will be free of charge for both buyers and sellers should
help us gaining the critical mass of users more quickly than other systems that rely
on fee from their users.
Market structure
Since we will be using the blue ocean strategy to create a brand new market, we can
safely say that we will have a monopoly on that particular market in the start. But as
eBay.
http://developer.ebay.com/DevZone/SOAP/docs/WebHelp/wwhelp/wwhimpl/common/html/wwhelp.htm?c
ontext=eBay_SOAP_API&file=AuthAndAuth-.html. Seen on 4.8.2006
103
105
the concept gets more recognition, other players will most likely move in to the same
market. Therefore it is very important to constantly monitor the market for new
competition and always stay ahead with the use of latest trends and technologies. A
likely market structure in the later run would be an oligopoly.
Regarding network effects and positive feedback, all the same principles of eBay
apply.
Why auctions?
One extremely important issue to analyze is what makes auctions, and instant
auctions in particular, attractive to both sellers and buyers.
Auctions are a competitve process and are in essence a game where the highest
bidder at the end of the auction is the winner. This might make some users take
irrational decisions regarding the bidding which can affect the usual reservation price
set by the buyer.104 This game element is therefore a huge factor in helping sellers
receive a good price for their products and giving the buyers a good thrill as well a
good deal (or the thought of getting a good deal).
And the fact that most of the bidding on eBay is made during the last few minutes of
the auction, is something that makes the basis of instant auctions. By making the
auctions as short as we do, we are putting more pressure on the bidders, since they
know that there is only short time to act. Sending out the auctions as a text message
also works as a reminder for the buyers, so they don’t really have to think of
anything themselves, such as monitoring the item or keeping track of time in front of
the computer. By our model, all buyers are on the same level and much more
independent on location then before.
Business model
Much like eBay, our idea is an e-commerce brogerage model. We won’t sell any product
ourselves, but serve as an intermediary between sellers and buyers. The main difference
however between our system and eBay, is that our system is purely designed for mobile
devices and instead of buyers browsing a web page searching for items of interest, they
104
A reference price is the maximum price a buyer is willing to pay for a good or a service.
106
register a search criteria in our system and have the auctions that match their wishes sent
to their devices as an SMS message whenever a match is found.
The strengths and the strategic advantages of our business model include:
Search only once:
No need to search and browse for the desired items. Enter your search criteria once and
have the auctions sent directly to your mobile when they become available. There is no
obligation for the buyers to participate in the auctions that are sent out.
No geographical constraints:
Sellers and bidders can participate from anywhere that has a mobile signal. The fact that
mobile signals are much more widespread than Wi-Fi hotspots for example makes our
system highly accessible since there is no need for an Internet connection to use the
system. There is no need to sit in front of a computer to monitor the auctions and wait for
it to run out. Buyers simply participate whenever and wherever they want to.
The items do not need to be shipped to a central location, reducing costs, and reducing
the seller’s minimum acceptable price.
Intensity of social interactions:
The same “gambling” principle presented in the eBay business model are also at place
here, although we believe that the fact that the auctions are pushed out to all the
interested parties at once and with the short auction time, it will only enhance this factor
greatly.
Network economies:
The large number of bidders will encourage more sellers, which, in turn, will encourage
more bidders, which will encourage more sellers, etc., in a virtual spiral. The more the
spiral operates, the larger the system becomes, and the more valuable the business model
becomes for all participants.
107
Fees:
Unlike eBay, we will not charge any fees from our customers. However we will rely on
income from advertisements. In order to break even, these revenues need to cover the
costs of the equipment (servers, programs etc.), SMS fees, web hosting, advertising and
other costs associated with running a company.
In the start, while we are building the customer base, we will most likely use some form
of advertisement exchange program and rely on word of mouth marketing. Google
Adwords are also a great way to get more hits to our site, since it only costs money when
a user clicks on our advertisement from Google, but not to have it displayed on the
Google search page.
The advertisements we will use in our system will be in 3 forms. They are as follows:

Short texts with links sent out with the auction SMS’s. An optimal solution for us
and both the advertisers would be to match the advertisements with the keywords
registered by the buyer (the Google approach). Advertisers would be charged for
each SMS sent out.

Simple links on the auction web pages. These advertisements will have to be very
small so they won’t irritate the users, but still located in places that they will be
effective. These advertisements won’t necessarily have to match content of the
auctions.

Banner ads on the Internet web page. Displayed both on the top of the page (most
expensive) and on the sidebar of each page. Sellers will be charged a fixed fee on
a monthly basis.
108
5 Findings and Conclusion
In this chapter of the thesis we will make a short summary of our study. The aim of the
thesis was to analyze how to penetrate the competitive market of online auctions, by
analyzing the existing business models and creating a new one for m-commerce in order
to gain a competitive advantage. We also had to analyze whether the technology and the
market was mature enough to allow adoption of advanced mobile services.
As we saw in the analysis chapter, both the market and the technology has, in our opinion
based on reliable statistics and observations, matured enough to the extent that the market
is now ready to adopt advanced mobile services.
In order to penetrate such a market, we have looked at different types of strategies but
decided that it was time to move away from the traditional strategies, since they no longer
apply in today’s information society. We still see parts of the traditional strategies in the
new revolutionary strategies but we think that the overall idea behind the Blue Ocean
strategy as the most rewarding for our system in today’s competitive environment since it
allows us to eliminate the competitors by offering services which are not offered by them
and cut down those irrelevant to our system.
Creating this new blue ocean would give us the first mover advantage and therefore
helping us gaining a competitive advantage over other new competitors that will move on
to this new market and transform the blue ocean to a red ocean.
Based on the fact that both the market and technology are mature enough for advanced
mobile services, we feel that our mobile auction system will set it self apart from the
already existing auction services and offer great value to our customers since the system
is designed purely for mobile devices. Since we have designed our system and business
model with the concept of mobility in mind from the start, we believe that our customers
will realize the value that they get from the system and the mobility of it. Basing our
strategy on the Blue Ocean strategy, we have designed our business model in a way that
109
it differs greatly from the eBay business model and therefore our customers should not
see this as a competitor to eBay, but a whole new way of doing auctions on the move.
110
6 Future work
In our design for the business model, we suggested that the system would be run
independently of mobile operators. There is however another way that would help us
gaining the critical mass of user.
That method is normally known as revenue sharing with the operators, which is a
method and system for revenue sharing between mobile operators and content
providers. The content providers, through a data network, provide data services to
the end users of the mobile operators. For the data services, the content providers
are paid by the mobile operators based on the revenue collected by the mobile
operators from the end users using the services. This might however bring changes
to the business models, since the operators might decide to charge the customers for
parts of the service not initially planned for charging by us.
If we however choose to work independently of the operators like planned, issues
regarding branding of the product needs to be added to the business strategy. …not
done!!
111
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