Competition and the_evolution_of_mobile_markets

2011

COMPETITION AND THE EVOLUTION OF MOBILE MARKETS

A STUDY OF COMPETITION IN GLOBAL MOBILE MARKETS

WORKING PAPER

CHETAN SHARMA

COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011

2 Table of Contents | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Table of Contents Table of Contents ............................................................................................................................ 2 Introduction .................................................................................................................................... 3 Competition – the lifeblood of the industry ................................................................................... 4 The Rule of Three ............................................................................................................................ 6

The Rule of Three in Mobile .........................................................................................................7 The HHI3 Index .............................................................................................................................. 8 Completing the big picture ............................................................................................................10 Analyzing global telecom markets ................................................................................................. 12

Market power and HHI3 ............................................................................................................ 14 Impact of competition ................................................................................................................... 15

Does competition equate to consumer value? ........................................................................... 18 Operator competitive market equilibrium ................................................................................... 20

Regulatorly model – Japan ....................................................................................................... 22 Regulatory model – US ............................................................................................................. 23

The national competitiveness dimension ..................................................................................... 23 Comparing mobile markets .......................................................................................................... 24

Developed postpaid markets ..................................................................................................... 26 Developed prepaid markets ...................................................................................................... 27 Developing nations - BRIC ........................................................................................................ 28

Analyzing the US market ............................................................................................................... 31 Engineering perfectly competitive mobile markets ...................................................................... 33 Regulations and the role of regulators .......................................................................................... 34 Globalization and competition ..................................................................................................... 35 Competition from outside, Changing ecosystems ........................................................................ 36 Possibilities of new market structures .......................................................................................... 37 Implications for players in the ecosystem .................................................................................... 37 The next 25 years .......................................................................................................................... 39 Summary and Conclusions ........................................................................................................... 40 Acknowledgements ....................................................................................................................... 43 About Chetan Sharma Consulting ................................................................................................ 44 About the Author .......................................................................................................................... 45


3 Introduction | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Introduction Over the course of the last decade, mobile communications has become an essential part of the global fabric of evolution. With almost 70% global subscription penetration as of 2010, mobility is being embedded into almost every facet of our lives. Mobility is also spreading across verticals whether it is m-pesa in Kenya or SMS based counterfeit medicine detection in Ghana or paying for your coffee using your NFC enabled mobile phone in a Tokyo café or watching the cricket world cup broadcast while hiking the Yangtze river near Tibet. Consumers expect access to information everywhere they are and the ecosystem is responding with continued innovation, which has become extremely critical in managing the competitiveness of nations. It is also apparent that some of the innovation and market dynamics has been evidenced by the competitiveness of these markets at different levels – network, devices, and services. While the market entry conditions into the devices and software services markets have gone through significant overhaul this last decade, the competitiveness framework of the mobile networks has been more structured and controlled in many instances. Given the importance of the mobile network infrastructure to every nation’s competitiveness, security, and productivity, it is useful to understand how the “competitive mobile markets” are formed. In theory, the perfectly competitive markets are in the best interest of the consumers as they provide the best value given the competitive dynamics and the equilibrium provides good checks and balances for the ecosystem. The global mobile networks have shown a remarkable adherence to the “Rule of Three” which states that in any mature industry, 3 top players dominate the market. Sometimes it has been dictated by the regulators and in other instances by the markets. Some markets like in Europe have settled into a state of equilibrium while other hyper growth markets like India are shuffling to find the right balance. The elements of globalization are also shaping how mobile network operators grow. The regulators and the political class are increasingly looking at mobile networks as national assets and any foreign ownership generally goes through tremendous scrutiny. Having worked in major mobile markets around the world, we have been intrigued by the framework for a competitive market and this is the theme we explore in this working paper. Having the front row seat in an industry that is growing stupendously has given us some unique perspective on the competitive forces at work in the mobile space. We studied the competitive landscape in 40 top mobile markets around the globe. This paper presents the analysis and an in-depth analytical framework to study the competitive landscape in the global mobile markets.


4 Competition – the lifeblood of the industry | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Competition – the lifeblood of the industry Since time immemorial, competition has been the lifeblood of industries and markets. In the early Roman era, legislators controlled price fluctuations and unfair trade practices. In Julius Caesar’s time around 50 BC, these principles were codified in Lex Julia de Annona to protect the corn trade and heavy fines were imposed on anyone directly, deliberately and insidiously stopping supply ships.1 Through the middle ages into the modern global economy, industries and nations have been governed by written and unsaid rules of competition. Competition is the central tenant of economics and in turn fairness to everyday consumers. Competition also drives innovation and accelerates the advent of new and nimble players to disrupt the waters and moves the ecosystem forward. In theory, there are two extremes of a competitive environment - perfect competition where several players compete and have similar market shares and a monopolistic environment wherein a single player dictates the terms of the market. In a perfectly competitive environment, price is equal to the marginal cost and the average cost and profits of the companies involved tends to zero. Perfect competition delivers both productive efficiency and allocative efficiency.2 In a perfectly competitive environment, economic profits for efficient firms tends towards zero and so inefficient firms must lose money and gradually exit the market.

Price

Pc

Quantity

Average Cost Curve

Marginal Cost Curve

Qc

Quantity

Marginal Cost Curve

Qc

Price

Qm

a

b

c

dPc

Pm

Figure 1. Price demand curve for a) Perfect Competition b) Monopoly On the other hand, in a perfectly monopolistic environment, the monopolist will sell less than would be sold under perfect competition, and the price will be higher. This means that the pricing and output decisions of a monopolist fail to maximize consumer value and social welfare and thus allow scope for a regulator to improve matters.

1 http://en.wikipedia.org/wiki/History_of_competition_law

2 Competition Law Toolkit, Asian Development Bank, http://www.adb.org/Documents/Others/OGC-

Toolkits/Competition-Law/complaw010000.asp

http://en.wikipedia.org/wiki/History_of_competition_law

http://www.adb.org/Documents/Others/OGC-Toolkits/Competition-Law/complaw010000.asp

http://www.adb.org/Documents/Others/OGC-Toolkits/Competition-Law/complaw010000.asp


5 Competition – the lifeblood of the industry | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Figure 1 shows the price-demand curves for the two extremes. The demand curve shows the quantity demanded of a good at various prices, assuming that the non-price determinants of demand, such as consumer’s income, don’t change.3

Figure 2. Price-demand curves for a) voice - US b) voice - UK c) voice - India wireless market d) voice - China e) data - Sweden and f) data - US4 In reality, the markets lie somewhere in between and it is the degree of competitiveness that varies from industry to industry and from nation to nation. In the mobile markets, competition in the markets can be quite intense like in India, US, or UK and the market forces have an impact on the price-demand curves for services. Figure 2 shows the price-demand curves for

3 For a more detailed treatment of the subject, any basic economics book will suffice. E.g. Economics, Walter

Wessels, Barron’s, 2006 4 US has the highest Minutes of Use (MOU) of all nations. Sweden and US were the top two nations in data

consumption at the end of 2010


6 The Rule of Three | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

mobile markets (voice and data) in the US, UK, India, China, and Sweden. In the US, over a period of the last 18 years, voice revenue per minute dropped as usage grew. Similarly, as the data usage has grown to over 350 MB/mo in 2010, the revenue/MB has gone down.5 Competition is a central idea in economics; its idealization as perfect competition underlies much of the traditional analysis.6 In an ideal world, “perfect competition” will have enough participants in the ecosystem so that no player is large enough to exert its market power to set the price of a homogeneous product. However, in reality, markets are imperfect and there are hardly any perfectly competitive industries or market places. However, the regulators and the market forces seek a perfect equilibrium that lets the buyers and sellers engage in fruitful transactions. Sometimes regulators forget that the most important job they have is to keep the markets they regulate – competitive. Competition protects consumers, works towards the general welfare of the mass markets, keeps the big boys from behaving badly, and in general is important to keep the equilibrium for innovation and progress of the industry. In some instances, the regulators haven’t done a good job and left the markets drift away. Adding competition at a later date generally doesn’t change the industry structure by very much. As the mobile device has gone from being a luxury item to everyday necessity, the supply-demand curves of mobile voice and data usage have undergone significant transition in markets around the world. The devices continue to be shaped by consumer behavior that continues to change with the introduction of new devices, networks, and services.

The Rule of Three In his 1976 paper, Bruce Henderson, the founder of Boston Consulting Group surmised, “A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest.”7 Picking up on the theme, in their influential book, “The Rule of Three: Surviving and Thriving in Competitive Markets,”8 the two co-authors – Jagdish Sheth and Rajendra Sisodia further observed that in most of the industries, the top 3 players control 70-90% of the market. While many markets start from zero or a single player dominating, any mature market generally trends towards the top 3 players eventually controlling the market. The remaining players generally focus on the niches and can create a healthy margin business but the top 3 serve the majority of the market. Take any industry and we see the Rule of 3 at work.

5 Managing growth and profits in the Yottabyte era, Chetan Sharma Consulting, 2010-11; US Wireless Data Market

Update 2010, Chetan Sharma Consulting, 2011 6 Perfect Competition and the Creativity of the Market, Louis Makowski and Joseph Ostroy, Journal of Economic

Literature, 2011 7 The Rule of Three or Four, Bruce Henderson, 1976

8 The Rule of Three, Surviving and Thriving In Competitive Markets, Jagdish Sheth and Rajendra Sisodia, Free Press,

2002


7 The Rule of Three | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

The Rule of Three in Mobile In the case of mobile operators in a given country, the Rule of 3 is followed with remarkable consistency. Of the 40 major markets we studied, on average the top 3 mobile operators controlled 93% of their respective markets. In fact, 36 of the 40 markets had the top 3 players control 85% or more of the market. Other hyper-competitive markets like the UK and the US, which had more than 4-5 large players are moving towards the consolidation phase wherein the top 3 control more than 80% of the market. Of all the large major markets, only India proves to be an exception and it is due to the hyper-growth phase of the market and due to somewhat unique nature of the market. We will discuss India’s market in more detail a bit later. Figure 3 shows the market share of the top 3 operators in the 12 major mobile markets in the world. Except for India, the top 3 operators have generally controlled more than approximately 80% of the market during the last 11 years. The US market has also gradually consolidated over the period of 18 years. We will discuss the evolution of the US market in more detail later in the paper.

Figure 3. Market share of Top 3 Operators in leading global markets The Rule of Three phenomenon is evident in other parts of the mobile ecosystem like in mobile devices where top 3 control 53% of the unit share; Mobile OS, where top 3 control 90% of the market share; Smartphones where 55% of the market share, and areas such as mobile search where top 3 account for almost 100% of the market.9

9 As of Q4 2010, Source: US Wireless Market Updates, 2010, Chetan Sharma Consulting


8 The HHI3 Index | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

For the purposes of this paper, we will primarily focus on the mobile operators in various markets. It should be noted that the Rule of Three is applicable to mature and open markets where competitive forces are at play. In the upcoming, fast-paced, or controlled market, the structure might look different. However, in emerging markets which are open, the market structure will tend to settle towards the top 3 players. The perfect examples are China and India. Both markets are in hyper-growth mode right now. While India is more open, the competitive concentration is limited (relative to other mature markets) but within the next 12-24 months, we can expect the Rule of Three to take effect. China, on the contrary, hasn’t been deregulated enough to be shaped by the market forces and the three mobile operators are a byproduct of the regulatory design.

The HHI3 Index The Herfindahl-Hirschman Index or HHI is a commonly used index referenced by the economists and the regulators to gauge the competitiveness and concentration of any given industry.10 It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. Mathematically, the scale goes from 0 to 10,000. The higher the number, the less competitive the markets are. Normalizing to 1, on the scale of 0 to 1, 1 represents a perfect monopoly and 0 a perfectly fragmented oligopolistic market. The Department of Justice considers a value of .18 to be a balanced market and it studies how the HHI index will change if any major M&A is to be approved.11 As we illustrated in the previous section, the mobile network space follows the Rule of 3 with remarkable consistency. We combined the two concepts to study the competitiveness and market share of the top 3 mobile operators in the major mobile markets. Hence, we will be focusing on analyzing just HHI3 or the Herfindahl-Hirschman Index for top 3 operators in a given country. Mathematically,

HHI3 = (Mobile Operator Market Share)i2 where I = 1..312

To study the market concentration, we look at both the subscription concentration and the revenue concentration. Generally, the market share and revenue share are strongly correlated but in some segments of the mobile markets, there are some exceptions for example, in 2010, in the device market, Apple and Nokia have widely varying market share and revenue share figures. While Apple controls a relatively small percentage of the units shipped, its share of the industry profits is disproportionally higher. On the other hand, Nokia’s unit market though eroding over the last few years is still quite high, but, its profit share is disproportionally lower due to much lower margins. However, the mobile services business is less dependent on innovation and IP and more on market share. Hence, the more customers you have, the more likely you are going to have higher a revenue share. As we will show later, in some of the

10

FCC’s Commercial Mobile Radio Services Competition Reports provide a good discussion of HHI trends in the US market. http://wireless.fcc.gov/index.htm?job=cmrs_reports 11

http://www.justice.gov/atr/public/testimony/hhi.htm 12

For most nations, the ratio of HHI3/HHI will be close to 1 as the top 3 control bulk of the market. In markets like India, however, the ratio will be much lower due to the fragmentation in market share

http://wireless.fcc.gov/index.htm?job=cmrs_reports

http://www.justice.gov/atr/public/testimony/hhi.htm


9 Completing the big picture | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

markets, the dominant operators have higher proportion of the profits because of their market dominance.

Figure 4. HHI3 Competitive Index of various industries and segments in the US13 Generally, higher revenue share also translates into higher margins but not always. In saturated markets, the additional cost of securing a new customer is high which impacts the margins. Higher competition also has a dilutive impact on the ARPU (average revenue per user) and the margins. This may not be good for the player and its shareholders but is good for the consumers and the ecosystem. If we look at the concentration in different industries (Figure 4), it can vary significantly, depending on a number of factors such as its evolution cycle, barriers to entry, etc. For example, in the case of commercial jets, only Boeing and Airbus control the global market whereas the airline industry is more competitive due to regional, national, and international players though the industry has gone through several consolidation phases in the last three decades. In the mobile space, except for some of the new emerging areas, the established segments generally settle down with top 3 taking the lion share of both the revenues as well as the profits.

13

Sources: Chetan Sharma Consulting, StatCounter, Bureau of Transportation Statistics, US Business Reporter



Completing the big picture Looking at just the HHI values doesn’t provide a complete picture of the competitive landscape in a given country or in relation to other nations. It has to be understood holistically. For example, factors such as the Size of the Market, Mobile Spending as a percentage of the GDP, Subscriber Penetration, % Postpaid, ARPU (Average Revenue Per User), Mobile Data availability and penetration, Decline in Revenue Per Minute, Service Maturity, and Total Revenues in the market are important dimensions that should be studied while looking at the competitiveness and concentration of the mobile markets. We will do a detailed comparison of the 12 major mobile markets using these metrics a bit later in the paper.

Investment

Regulators

Operators Competition

Price to

Consumers

Barriers to Entry/Exit

Create Competitive Env

Direct Competition

Indirect Competition

Infrastructure

New Devices

New Services

New Ecosystems

Spectrum

Regulatory Measures

Competition

Prepaid/Postpaid

Size of the Market

Subscriber Penetration

Mobile Data Spend

Market/Rev Share

ARPU/AMPU

Lifetime Value

Drives Lower Prices

% GDP Spend

Rev/Min

New Services

New Devices

Consumer Feedback

Market Concentration

Figure 5. Mobile Industry Structural Framework As shown in the figure 5, the investment and the regulators drive the mobile markets in any given country. To enable the services and the applications that have become common place, the markets won’t evolve without the underlying infrastructure and the allocation of the valuable spectrum. The significant investment required to build a nationwide network raises the barriers to entry (and exit for that matter). Given the spectrum constraints, regulators also shape the market by granting the spectrum in a more deliberate manner. In some countries like Japan, Korea, China, Mexico, Italy, and the like, regulators have controlled the access to spectrum by providing it to a limited number of players while the markets like the US, UK, and India have had a more open approach. In some instances, the regulators control the number of operators as well as the market share of the operators while in others the market forces define how the market gets structured over time. In a market force driven market, more variables are at play compared to a regulator driven market. An open market can take unexpected turns depending on how efficiently the market and its participants are performing. The competition further defines the market concentration of the operators and as such the pricing for the consumers for their mobile voice and data services. Consumers speak by opening up their purses and in some instances their voice which goes back into the feedback loop of the mobile industry structural framework.



Markets are inherently different. They are influenced by several forces, and hence evolve differently over time. While some markets might display affinity across 2-3 variables, only by studying the complete multi-dimensional picture can one assess the overall competitive landscape of one country in relation to others. We will be evaluating these factors for some of the major markets in more details later in the paper.


12 Analyzing global telecom markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Analyzing global telecom markets To understand the competitive landscape in the mobile markets around the world, we looked at the top 40 markets by size and importance. Figure 6 shows the HHI3 by revenue share and subscription market share . One of the things that jumps out right away is that the two hyper-growth markets of China and India are at the opposite spectrum of the Competitive Index. How can that be? A closer observation of the market shows that while China Mobile controlled 68% of the Chinese Mobile Market in 2010, in India, the top 5 operators controlled less than 50% of the market. While the market power is highly concentrated in China, it is very evenly distributed in India putting them on the opposite ends of the Competitive Index (CI) scale. The regulatory history of the two markets shows us how global mobile markets generally tend to evolve. In some markets notably European, Japanese, Chinese, Korean, the regulators take an active role in shaping the market by granting the spectrum to a limited number of players. They generally start with 1 or 2 top wireline operators having the licenses to operate and gradually the 3rd and 4th operators get into the market. However, depending on the timing, it might take years before the introduction of the additional players makes any difference to the competitive index of the given market due to high concentration of the market share in the top 1 or 2 players. Figure 7 shows the HHI3 distribution and the groupings of similar nations by HHI3 value. One extreme is India with the HHI3 value of 0.10 with hyper-competition and on the other extreme are China and Mexico with > 0.50 HHI3 value. The average HHI3 value of the sample group is 0.33. In China, China Mobile had 75% of the market in 2005, China Unicom played second fiddle to China Mobile for a long time and in 2008, the government empowered China Telecom to become the third player but as of 2010, the overall market structure hasn’t changed much. In the early days, the regulators focused on price regulation rather than competition to keep the prices down but it wasn’t very effective.14 In India, the market structure has been more open. While the mobile market started late, the regulators granted licenses to too many operators at the same time. Also, the licenses were granted regionally (known as circles) and nationally. This resulted in intense competition. ARPU has dropped from $45 to merely $5 in a matter of 5 years. Operators compete more on the ability to lower cost vs. ability to generate revenues to keep healthy margins that keeps them in the game. UK provides a perfect case study of changing competitive landscape. The market has been hypercompetitive from the start. High competition drove the prices lower for the consumers as well as the margins for the number 3 and 4 players which as expected merged to form the top player in the market (Everything Everywhere ). The HHI3 inched up from 0.19 to 0.20 and the top 3 market share went from 70% to 80%.

14

Telecom Price Regulation in China, Sun Yu, Zhang Shasha, 2007

Figure 6. Competitive Index of Global Wireless Markets (Subscriber and Revenue Concentration)

Figure 7. Distribution by HHI3 value The US is another interesting competitive market. If you notice the HHI3 groupings, US is shown in an unlikely pairing with the three emerging markets of Pakistan, Russia, and Brazil. The primary reason is that the top 2 (Verizon Wireless and AT&T) control 60% and the top 3 about 78% of the market and they are approaching the 80-100% band like other major markets. While we were researching the paper, the inevitable T-Mobile USA acquisition news broke. How will that transaction shape the US mobile market? We will deal with this question later in the paper.

Market power and HHI3 HHI gives an indication of the market concentration. Given the dominance of China Mobile and Telcel in China and Mexico respectively, the HHI3 values are the highest in the world. To further understand the structure of the market, one can calculate the Dominance Index15 of the top two operators, which can indicate if the market is a monopoly, duopoly or if it is more evenly distributed amongst the top players. In the economic literature, 40% market share is a generally accepted threshold for what is termed a “dominant firm”.16 It should be noted that being a monopoly or a duopoly because of better products and prices is not against the law. As shown in figure 4, there are a number of industry segments companies have been able to chalk out a

15

We calculated the Kwoka’s dominance index for the top 2 operators which is calculated bas the sum of the squared differences between each firm’s share and the next largest share in a market. D = ∑ (s i - si+1)

2 where i = 1..3

16 An Empirical Examination of the “Rule of Three”: Strategy Implications for Top Management, Marketers, and

Investors, Can Uslay, Z. Ayca Altintig, & Robert D. Winsor, American Marketing Association, 2010


15 Impact of competition | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

substantial portion of the market for themselves. It is when these players create their market power by unreasonably excluding other companies or by impairing other companies’ ability to compete against them, is when they get into trouble.17

Figure 8. Monopoly and Duopoly in global mobile markets Figure 8 shows how the various markets score on the monopoly/duopoly scale. Most markets are near the competitive equilibrium point, however the outliers like China, Mexico, Switzerland, and New Zealand show a clear monopoly or duopoly market structures.

Impact of competition The underlying assumption of all regulatory frameworks is that the competition is better for the consumers. More competition leads to innovation which in combination of the desire to win the market share, leads to lower pricing and more choice for the consumer. If a market has “perfect competition” the profits of the player will go to zero and the value to the consumer will increase to maximum.

17

Competition Counts, FTC, http://www.ftc.gov/bc/edu/pubs/consumer/general/zgen01.pdf. Not all nations have good anticompetitive laws on the books or they are not applied in the same manner so the how “competition” is viewed by the regulators will vary from region to region and country to country.

http://www.ftc.gov/bc/edu/pubs/consumer/general/zgen01.pdf



To study the impact of competition on consumer pricing we looked at the HHI3 Mobile Operator Index of various nations and the revenue per minute (RPM) decline over the last 5 years. The RPM can decline for many reasons such as from the use of better technology that helps deliver the same performance at a better cost structure and the savings are passed on to the customer. Price can also be driven down due to the operational efficiencies such that an operator is able to run its network and operations more cost-effectively. This is proven from the fact that many of the operators in the developing world have similar or better margins than their western counterparts. One of the main influencers of driving the cost down is competition. Given that the products look and feel similar to the consumers, operators routinely engage in price wars and in repackaging of the value proposition to win the customer pocket share. For the purposes of this exercise we focus primarily on Revenue Per Minute (RPM) decline in relation to the Operator Concentration in a given country. Figure 9 plots the Index depicting the impact of competition on consumer pricing (the bars in red indicate the predominately postpaid markets).

Figure 9. The impact of Competition on Consumer Pricing It comes as no surprise that India tops the rankings. The market is in hyper-growth mode adding approximately 20M new subscriptions every month in 2010. The HHI3 is the lowest amongst all nations at 0.10 and the price war has been going on for the last 5 years to capture the market share. It is also a prepaid market are more prone to price war attrition. It is worth noting that the next 6 markets are also prepaid markets. In fact, only two predominantly postpaid markets appear in top 20. Austria and US are the top two predominantly postpaid markets and have seen the RPM decline by 63% and 43% respectively. However, the markets



differ significantly as US is several times the size of Austria and its HHI3 value is significantly lower. Other markets where postpaid is dominant like Finland, Japan, Korea, and Canada have seen less price decline over the last 5 years. The prepaid nations with higher operator concentration have also seen less price decline. There are a few exceptions such as Mexico and China the top two least competitive nations as measured by HHI3 where RPM declined by 75% and 67% respectively indicating the pricing is not always influenced by competition.18 The technology evolution in these markets is also quite different than others as Mexico and China are predominantly 2G markets vs. the western markets which have much higher 3G penetration and as such the traffic and cost structures are quite different.

Figure 10. Correlation of Market share and operating margins for top mobile operators Several economic studies have shown the relationship between market share and profitability/operating margins.19 Figure 10 shows the relationship of market share with margins for the top 65 global operators. In most cases, the more market share the operator has, the economies of scale get better, and the cost of adding new subscribers or offering the service declines thus maximizing the margins.

18

In China, the government instituted price regulations in the early phase of the industry development which didn’t work well as prices stayed high and the quality of service suffered. 19

The relation between market share and profitability, Birger Wernerfelt, The Journal of Business Strategy



However, the margin difference between the two is not entirely consistent across markets. There is a stronger correlation of the market share and margins for the developing markets vs. the developed markets. In the developed markets, the average margin difference between the top two players was 6% while as in the developing markets over 14%. In mobile markets such as Mexico and China which are monopolistic, the margin difference was over 50%. This indicates, in mature markets, the top two operators operate at similar operational efficiencies and as such the cost and revenue structure per new customer look the same, that is, they are not spending inordinate amounts on acquiring a new customer relative to their competitors and their ARPU levels are similar. In developing nations, which are still going through the growth phase, the bigger players are able to exert pricing pressure and the cost of acquisition for smaller player becomes relatively higher. While market share is a good indicator of an operator’s market power, without doing a more granular analysis, it might yield misleading results. For example, if one does market-by-market analysis in the US, in some of the markets, the tier-2/3 operators like MetroPCS, Leap Wireless, and US Cellular have higher market share than some of their tier-1 compatriots. However, market share in specific markets is not directly proportional to market power. One has to also look at the other financial metrics such as revenue share and profit share in those markets as well holistically understand the competitive dynamics. MetroPCS or Leap Wireless don’t have the same buying power as Verizon Wireless and while it might be behind in market share in big markets such as New York, Los Angeles, and Miami,20 the revenue share and the profit share for Verizon in those markets is relatively higher. As such, while doing a market-by-market or circle-by-circle (e.g. in India), one has to look at multiple variables to assess the competitive forces at work.

Does competition equate to consumer value? Intuitively, competition in a free and fair market should increase consumer value. But how do you go about measuring it? The price equation only gives a partial answer. Mexico and China are the two least competitive markets yet their revenue per minute decline in the last 5 years is amongst the highest. Consumer value depends on a number of factors in any given market:

a) Price - how are the prices to the consumers changing over time (for the same set of services)?

b) Affordability - how affordable are the mobile services in relation to other goods? c) Innovation - are new technology, services, and applications being introduced in the

market? d) Investment - how much is being reinvested back into the ecosystem? e) Growth Trajectory - where is the market in its evolution cycle?

The cost structures are quite different for the growth phase of the market vs. the maturation phase. Both developed and the developing nations see this effect albeit on different scales.

20

FCC 10-81 14th CMRS Competition Report, 2010



Figure 11. Affordability and investment index of various mobile markets Figure 11 plots the Affordability and Investment Index of various mobile markets. The x-axis shows the consumer mobile spend as a percentage of GDP which indicates the affordability of the mobile services in the market.21 The y-axis plots investment by the operators as a percentage of the service revenues. Both are impacted by the growth trajectory of the market and they might also vary on the type of growth, for example, India is growing rapidly on pure subscription front -- most of the new users are voice-only users and while the overall revenue is growing, the data segment is relatively slow in breaking out. The next 12-24 months will see the consolidation phase in the market. The US and some of the western European nations exhibit a different growth curve wherein the voice component of the network is saturated relative to the explosive growth on the mobile data side. The data usage growth in the US is somewhat similar to the voice growth in the Indian market. Innovation is a key component of “consumer value.” The Japanese and Korean markets scored much higher on the innovation front over the last 11-12 years because they were executing several new service concepts that were many years ahead of other markets. Such innovation directly impacted consumers in their everyday lives in profound ways. The areas of commerce, instant access, telematics, advertising are still much better developed in these two markets and thus greatly enhanced “consumer value.”

21

However, the level of mobile services available in a given market can vary.


20 Operator competitive market equilibrium | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Higher degree of competition forces players to innovate and bring new ideas to the market place at a faster pace with affordable rates. However, as some markets have shown, in absence of significant competition, industry and government collaboration can also infuse appropriate capital and incentives to keep the innovation levels high.

Operator competitive market equilibrium While the perfectly competitive markets are hard to engineer, can market or regulatory forces drive a mobile market towards an equilibrium point? We analyzed the market shares of the top three operators in 40 top markets over the past decade. The average ratio of the share between the number one and two operator was 1.6 and remarkably, the same held true for the ratio of the share between number two and three. This translates into a 50%:30%:20% market share amongst the top three operators. If we leave room for the niche operators, the average collective market share of such operators is around 7% which translates to the top three market share as 46%:29%:18% respectively. If we assume this is the equilibrium point, the variance from this equilibrium point is plotted in figure 12. The closest to this equilibrium point are Japan and Korea and the furthest is Mexico followed by China, Switzerland, and New Zealand. The darker oval represents the first equilibrium sphere and both developed and developing markets are in this sphere. Same is true for the outer sphere which represents more variance from the equilibrium. While the absolute market shares are difficult to engineer, the above shows that to achieve some semblance of equilibrium in the market the top operator shouldn’t have more than 50% of the market share and the number three player shouldn’t have less than 20%. This helps create enough balance in the market to derive maximum value for the consumer.

Figure 12. Top three Operator Competitive Equilibrium in Various Mobile Markets

Regulatorly model – Japan The success of the Japanese mobile market in the 2000s seems to indicate that the regulatory model that Japan pursued yielded the maximum benefit to its citizens. Since the advent of i-Mode in February 1999, for almost 10 years, Japan has been ahead of the rest of the world in mobile broadband deployment (figure 13), high-end handsets (though these were primarily featurephones), new services, technology breakthroughs and implementations, and in the pace of innovation in general.22 Korea followed a similar path and the market structure was quite similar. The governments in both countries collaborated closely with the mobile industry. The Japanese industrial policy, formulated by the Ministry of International Trade and Industry (MITI), has had much the upper hand over the Fair Trade Commission (FTC) - the US competition watchdog. One of MITI’s main objectives was to ensure a high rate of profitability and investment in Japanese industry. MITI was therefore always concerned with questions of “ruinous competition” leading to reduced profits and a lower propensity to invest. The Ministry thus officially sponsored a wide variety of cartels, sequenced investment by firms and intervened in the exit and entry decisions of firms, all of which contributed to the high concentration ratios observed in the Japanese economy.23

Figure 13. 3G subscriber growth during the last decade

22

For a historical reference, see Wireless Data Services, Technology, Business Models, and Global Markets, Chetan Sharma and Yasuhisa Nakamura, Cambridge University Press, 2002 23

Competition and Competition Policy in Emerging Markets: International and Developmental Dimensions, Ajit Singh, G-24 Discussion Paper No. 18


23 The national competitiveness dimension | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

This policy of both competition and cooperation permitted the Japanese mobile industry to stay ahead of its rival nation for almost the entire decade. NTT DoCoMo took a lead role investing and creating new markets in mobile commerce, entertainment, payments, and much more. In Korea, SK Telecom took the lead in investing in cutting-edge technology and the consumers benefited immensely from R&D focused operators. The Korean OEMs benefited from focusing on CDMA and that helped open the global markets for them over the last 15 years. Now Samsung is poised to become the number one device provider in the future.

Regulatory model – US The regulatory environment in the US has been more contentious with the industry players marked by frequent legal skirmishes. While national competitiveness is a stated objective of the National Broadband Plan that was unveiled in 2010,24 there has been little substantive progress on the policy front. The market took the path of a free market natural evolution and is coming full circle since the 1G days of the eighties. Over the period of 18 years, the market structure has consolidated and starting to resemble that of other major global markets. While the US was behind in mobile innovation compared to Japan and Korea for the better part of 2000s, by 2010, it started catching up and even overtaking its Asian counterparts across a number of competitive dimensions. By the sheer force of its market size, US overtook Japan in data revenues in 2007, Verizon overtook NTT DoCoMo in terms of data revenue in 2010.25 In the 4G broadband deployment and usage, US has again taken the lead. On the handset side, Apple and Google are dictating the terms of innovation, growth and profits and the Japanese players are duly following them. However, Japan has still the lead in service innovation.

The national competitiveness dimension Telecommunications has become the core infrastructure of a nation’s competitive and security apparatus. As such regulators have been eager to play a role in shepherding its future for their country. In free and open markets, the power of regulators is generally limited to spectrum allocation. Typically, in such markets the regulators are not able to act until a “true” monopoly or a duopoly is formed. Other times, regulators are just behind the curve and by the time they get caught up, it is too late. In more controlled markets like Japan or China, regulators work closely with the specific industries for their national advantage. That the Japanese regulatory model worked so well for its mobile industry is no accident. The Japanese government has a more competitive attitude and is eager to protect the interests of its players and maximize the benefits for its citizen. After years of economic stagnation, Korean government too adopted the Japanese model of industry collaboration and actively protected and enhanced the competitiveness of Korean players. The Chinese regulatory bodies have taken the same approach a step further and one could see the national competitiveness battles being fought at the geo-political levels. In a global economy, nations are looking to preserve the industry profits and strength of its leading players for the local markets while attacking the global markets.

24

http://www.broadband.gov/plan/ 25

US Wireless Data Updates, 2007-2010, Chetan Sharma Consulting

http://www.broadband.gov/plan/


24 Comparing mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Ubiquitous mobile broadband has become the stated goal of governments worldwide. Research has shown the positive impact of broadband availability on productivity and growth26. Some nations will achieve this through direct collaboration of regulators and the industry players while others will leave it to the industry players to find their way and meet the stated national regulatory goals. In some cases, the political system will work hand-in-hand to keep the nation competitive while in others the political class will have a hard time grasping the basics of competitive mobile markets. The current decade will see emergence of new players and new powerhouses. The regulatory policies and actions will go a long way in determining the market structures and competitive landscape of the global mobile markets and ecosystems.

Comparing mobile markets In studying the competitive landscape, there is always a temptation to compare markets. Players in the ecosystem also use statistics from the global markets to justify some decisions, strategies and proposals. As we proposed earlier, market dynamics should be understood holistically. For example, US and UK might look similar from the market concentration perspective but differ vastly on the metrics of ARPU, Subscribers, Postpaid penetration, and Data ARPU. China and India are the two fastest growing markets on the planet but exhibit vastly different competitive dynamics. While China is the second least competitive market in the world as measured by HHI3, India is the most competitive. Their scale look similar in terms of the number of subscribers but the revenue and ARPU metrics vary. Neighbors US and Canada have much in common in terms of mobile spend as a % GDP and the postpaid penetration but the internal dynamics are quite different. While there is appearance of healthy competition in Canada with HHI3 at 0.31, the competition hasn’t really driven the prices lower for the consumers to the extent they have in the US. We compare select developed and developing markets to illustrate the markets variations and similarities in a multi-dimensional analysis. We analyze the developing and the developed markets27 separately as the variance in variables is significant. The values of variables are normalized for their respective groups. The developed market grouping was further split into developed - postpaid markets (Japan, US, Canada) and developed - prepaid markets (Spain, UK, France, Italy, Germany. The developing segment analysis is focused on the BRIC (Brazil, Russia, India, China) nations.

26

Wireless Broadband, Conflict and Convergence, Vern Fotheringham and Chetan Sharma, IEEE/John Wiley, 2009 27

The dichotomy between the developed and developing nations is a very simplified concept that has been around for about 50 years. It is clear that a transformation in the distribution of wealth worldwide will change the picture in the next 10 years. Countries that are considered developing in today’s definition will become economic superpowers in 10 years specifically China and India and more dominant than some of the developed nations, even if they have not caught up then with some in terms of GDP per capita. Many observers today assume that the middle class of India and China together in 10 years will represent about the same group size that the middle class of other “rich” countries. However, for purely the purposes of comparison and illustration, we will use the existing definitions to discuss the shift in the mobile ecosystems.



We analyze the following variables:

1. Market Size This determines how big is the market in terms of the number of subscriptions. The top three markets by size are China, India, and US. China and India are more than twice the size of the US market in terms of the number of subscriptions. The market size indicates the scale of opportunities in a given country.

2. Subscriber Penetration This relates to the maturity of the market and how widely is mobile being used in the country. In the prepaid markets this figure can get artificially inflated as consumers tend to carry multiple SIMs, 30% of which are generally inactive.28

3. Postpaid Penetration Postpaid penetration defines the level of revenues in a given market. Higher postpaid markets like Japan, Canada, and the US have higher ARPUs and longer Lifetime Value numbers. Prepaid users are more fickle but are more free to move around operators compared to the postpaid subscribers who get locked in 2-3 year contracts (though by the choice and because of the lure of subsidized devices)

4. Mobile Spend as a % of GDP This metric reflects how affordable mobile services are in a given country. It doesn’t paint the complete picture for comparison purposes as the service levels can be different in different countries. However, the metric does provide a measurement of how much the consumers spend on mobile services relative to their income.

5. ARPU This is the most basic metric that illustrates what consumers are paying for their mobile services on a monthly basis. Generally, the emerging and prepaid markets have lower ARPU and postpaid markets have higher relative to others.

6. Mobile Data % It is no news that mobile data revenues are slowly eroding mobile voice’s dominance on revenues. In Japan, mobile data is already contributing more than 50% of the overall revenues. This metric indicates the prominence of mobile data in a given market.

7. Operator Concentration This is basically represented in the HHI3 index and shows how the industry is concentrated amongst the top operators. Even with 3 operators, the market share can differ quite a bit which impacts the HHI3 Index.

28

This is generally true in both the developed and developing prepaid markets



8. Revenue Per Minute Drop

One measure of how the market is performing competitively is how the prices for the consumers are going down over time. Looking at the drop in the voice revenue per minute gives us one such measure.

9. Overall Revenue Overall service revenues in a given market indicate the market power of the country. In 2010, the US generated almost $165 billion in overall service revenues which was more than China and Japan (the number 2 and 3 nations) combined.29 While India’s market size if measured in subscriptions is almost twice that of all the countries in Western Europe, its overall service revenue just exceeds France a country with 1/10th of its subscriptions.

10. Service Maturity The Service Maturity index reflects the maturity of the networks, devices, and services in a given market. They can vary by market for example, while the US is leading 4G deployment, Japan has almost 100% 3G penetration. Similarly, while Japan has been introducing cutting edge mobile services in the market in the last decade, the US market has been ahead in introducing smartphones and connected devices. In the sections and the figures below, we compare the 8 developed markets and the 4 emerging markets across the 10 different variables.

Developed postpaid markets As we mentioned before, the predominantly postpaid markets are high ARPU and high Revenue markets. Due to yearly contracts, the churn is lower relative to the prepaid markets. There are only 6 global markets which have more than 70% postpaid penetration with US, Canada, and Japan being the most prominent ones.30 The operator concentration is the highest in Japan and Canada. The US market has been gradually consolidating over the years and is likely to resemble the other industrialized nations.

After leading in mobile data for almost the entire decade, Japan ceded the leadership to the US in 2010 (in data revenues) though it became the first major country to exceed 50% in mobile data revenues in 2011. In Canada, while the HHI3 index indicates a good competitive structure, the costs to the consumers have declined the least amongst all the major markets. The operators haven’t really competed on price and have remained content with dominating their geographical turfs. The regulators have tried to introduce competition but it has done little to change the domination of the top 3. Figure 14 shows how US, Canada, and Japan compare across the 10 variables discussed above.

29

US Wireless Data Market Update 2010, Chetan Sharma Consulting, 2011 30

The other three are Korea, Finland, and Austria. Of the western European nations, only France has the postpaid penetration above 60%



Figure 14. Competitive landscape comparison for developed postpaid markets

Developed prepaid markets The big 5 western European nations of UK, Spain, Italy, Germany, and France average 128% subscription penetration. However, the high penetration rates in prepaid markets are misleading as consumers typically have multiple SIMs and at any given time approximately 30% of the accounts are inactive. The market structure is very similar with the top 3 controlling over 92% of the market on average.



Figure 15. Competitive landscape comparison for developed prepaid markets The fierce prepaid competition and fickle customer loyalty forces operators to engage in price wars and as such the revenue per minute has declined on average by 44% over the last 5 years which is similar to the US decline but higher than the Developed Postpaid Markets we discussed in the last section by 15 percentage points. The Western European operators such as Vodafone, Telefonica, T-Mobile, and Orange have scale by operating in multiple countries. After leading in much of the 2G expansion, Europe fell behind in 3G. Some of the operators were also burnt by the expensive spectrum auction in the early 2000s. Figure 15 compares the 10 variables for the western European nations.

Developing nations - BRIC The developing markets of India, China, Brazil, and Russia have almost 2 billion subscriptions with India and China growing at a fierce pace in the last 5 years. India is likely to edge out China in reaching a billion subscriptions by 2012.31 These markets are characterized by high prepaid penetration, low ARPU, SMS dominating mobile data, and higher % GDP contribution. The decline in revenue per minute on average has been similar to the developed prepaid markets at 44%. However, the market structures amongst these countries vary. India is the most competitive market in the world with 6 operators with more than 10% market share leading to

31

While China is ahead of India in terms of total subscriptions as of Q1 2011, the gap has narrowed down tremendously over the last two years thanks to some astonishing numbers produced by the Indian market. We expect that the Indian market will overtake the Chinese market in terms of the total number of subscriptions by the end of 2011.



the lowest HHI3 value of 0.10 amongst all major nations. Russia and Brazil are also quite competitive with HHI3 value of .21 and .22 respectively. China represents the other extreme with China Mobile dominating the Chinese landscape with almost 70% market share and the HHI3 index of .51. Only Mexico is less competitive than China. India’s market structure resembles that of the US a 10-15 years ago and is all set to hit a wave of consolidation as various players struggle to keep the margins up in a very price sensitive and hyper competitive marketplace. Figure 16 compares the 10 variables for the BRIC nations.

Figure 16. Competitive landscape comparison for BRIC nations


30 | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Figure 17. Competitive landscape comparison amongst different types of markets Figure 17 shows the all the market segments discussed above normalized on the same scale. This clearly shows how the three different types of markets vary in characteristics, for example, subscriber penetration and operator concentration is highest in developed - prepaid markets, revenue, ARPU, mobile data revenue is highest in developed - postpaid markets, and the market size is the biggest in the developing - BRIC nations. The RPM decline is highest for both the developed - prepaid and developing - BRIC nations which are also heavily prepaid. By comparing the markets across multiple dimensions, one can get a better picture of the dynamic environment as well as the competitive landscape in a given market or the type of market.


31 Analyzing the US market | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Analyzing the US market The US mobile market presents a great study of free market competitive forces at work over the past two decades. Unlike some of the other western European and Asian markets, regulators allowed multiple players to compete. McKinsey, infamously miscalculated the advent of the mobile revolution in the US. In 1980, AT&T commissioned McKinsey to forecast users by 2000. Their prediction was 900K subs32 which was off by a factor of 120 as the actual figure was over 109 million. As such AT&T missed the market until 1993 when it acquired McCaw Cellular to become the biggest mobile operator in the US. At the time, there were 5 operators with market share between 10-15% making it a very oligopolistic structure. The HHI was 0.10 and HHI3 was at 0.05. however, the market was in its infancy with only 21 million subscribers. Over the course of the next 18 years, the market would grow and consolidate in expected ways.

Figure 18. The gradual consolidation of the mobile market in the US There were big mergers and acquisitions along the way like BellAtlantic/GTE, SBC/Ameritech, Vodafone/Airtouch, Sprint/Nextel, Cingular/AT&T, AT&T/BellSouth, Verizon/Alltel culminating with the proposed AT&T/T-Mobile merger in 2011. As the subscriber base grew 1192%, the revenues grew in accordance at 1471% over the 16 year time period. The average voice revenue per minute declined 91%. Figure 18 charts the evolution trajectory of the US

32

http://www.americanheritage.com/articles/magazine/it/2007/3/2007_3_8.shtml

http://www.americanheritage.com/articles/magazine/it/2007/3/2007_3_8.shtml


32 | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

market in the last 18 years. For the most part, the consolidations followed an expected trajectory of a mature mobile market. Figure 19 shows the decline in revenue per revenue segment - messaging, voice, and data.

Figure 19. Operator revenue micro trends (US) Incidentally, the news of the AT&T/T-Mobile merger broke while we were researching this paper.33 We had pondered on the viability of 4 operators in the US market in the past.34 So, the news wasn’t a surprise as we had expected something to break loose and conform to the natural market evolution. T-Mobile US has been under tremendous pressure for the last 2 years being unable to expand its postpaid base despite modernizing its network/backhaul and introducing a slew of impressive handsets. It was getting squeezed both from the top (Verizon and AT&T) and from the bottom (MetroPCS, etc.) while duking it out with Sprint in the middle. The decision window was closing as Deutsche Telekom had to decide if it wanted to invest in LTE or not (in the US market). Given that the parent business has been under pressure as well, it decided to take the most attractive available option. US has also become the epicenter of mobile broadband. In 2010, its per capita mobile data consumption was second only to Sweden.35 The continuous acceleration in consumption also means stress on the spectrum resources which are increasingly in short-supply. Since it takes a

33

http://www.mobilizeeverything.com/home.php 34

US Mobile Market Updates 2009-10, Chetan Sharma Consulting 35

For a more detailed analysis mobile data consumption trends, please refer to “Managing Growth and Profits in the Yottabyte Era,” Chetan Sharma, 2009-2010

http://www.mobilizeeverything.com/home.php


33 Engineering perfectly competitive mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

significant amount of time in procuring adequate spectrum,36 operators have looked at every opportunity to acquire more spectrum. The proposed merger will obviously have an impact on the market structure. The market power will get concentrated in the top 2. The HHI3 Index will go from .22 to .31 but the HHI3 value will be at par with UK, Canada (though the Canadian market is not a good proxy for a competitive market as the top three operators have behaved like monopolies in sync), and some of the other markets. The biggest task for the US regulators will be to analyze the impact on the consumer interest and service pricing on a market-by-market basis. Putting things into perspective, this move is not unusual for a developed market. On average, the top 3 operators in the developed markets around the world control 94% of the market. The proposed merger roughly resembles the merger that took place in UK last year when T-Mobile and Orange, the number 3 and 4 player (each having approximately 19% of the share) respectively in the market merged to form Everything Everywhere and become the number 1 player in the market with 38% market share. However, if we look at the history of competitiveness in the US mobile market, the market and revenue concentration will be at its highest in the history of the US wireless industry. Such a move is likely to have an impact on the ecosystem depending on the regulatory policies. While some of the other telecom groups seek scale by acquisition outside their boundaries, the US operators have been content with flexing their muscles within their borders. The proposed merger will make AT&T (if approved in its current form)37 the biggest mobile operator in the world by both the overall revenues and the data revenues. Thus the top 2 operators by market influencing and purchasing power will be concentrated in the US making up for 20% of the global revenues.38

Engineering perfectly competitive mobile markets In general, we found that the markets with HHI3 with less than 0.35 value are operating in good competitive harmony, at least relative to each other. Each market is unique and has different market forces at work including regulatory, middle class growth, market size, penetration of Internet, Consumer Price Index (CPI), and others and as such they operate and behave differently. In India, due to the significant competition, the price of the services to the consumer has fallen precipitously such that the cost of per minute is only 1c. This is to be expected – higher competition gives better pricing for the consumers. In general, the introduction of the new players have helped readjust pricing (of course pricing is impacted by multiple factors such as operational efficiency, competitive pressures, technology innovation, regulatory rules, etc.) In the US, through the pricing ebbs and flows, the ARPU has remained remarkably consistent over the last 10 years at $50 which is highly unusual. The primary reason is as the cost per unit consumed went down, the consumption went up to maintain the similar levels of revenue per

36

Solutions for the Broadband World, Chetan Sharma, 2009, RCR Wireless 37

It is almost certain that in case of approval, AT&T will have to divest several T-Mobile markets/spectrum holdings. 38

Source: Chetan Sharma Consulting, 2011


34 Regulations and the role of regulators | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

user over a long period of time. The uptick in data consumption mostly balanced any decline in voice revenue during the last decade. In Japan, the regulators have controlled NTT DoCoMo’s power and have pushed to make the #2 and #3 players stronger. Korea has followed a similar model. Regulators in these countries are also averse to big M&As. In mature markets, if left to market forces, the mobile markets generally find equilibrium in 3 players becoming generalized players while leaving the rest of the market for niche operators. In the US, the 10% of the market is focused on the lower-tier of the demographic chain and is fiercely competitive. It should be noted that Tracfone has become the biggest prepaid operator in the US and registered highest net growth in the US last year with a healthy 30% margins. In fact, it is this dynamics of being squeezed from the top (AT&T and Verizon) and the bottom (MetroPCS, etc.) that is forced T-Mobile to consider the sale of the company. T-Mobile despite some clever marketing of HSPA+ and relentless drive to launch Android smartphones, lost postpaid subscribers in each of the last 4 quarters in 2010. The market choices for such players were pretty straightforward – learn to live with lower margins or seek an effective competitive proposition – merge. Merging of two large players isn’t easy and it presents its own unique challenges but scale does provide significant advantages in industries where cost of entry is very high.

Regulations and the role of regulators In a highly capital-intensive and consumer-critical industry like mobile, the role of regulators is very important. They need to stay ahead of the curve, anticipate issues that will arise in the future, manage the competitive balance in the market that maximizes “consumer value” and ensure that the powerful players in the ecosystem are behaving nicely with the smaller fishes in the pond. While it is patently obvious that ex ante regulation is more effective than ex post, regulatory bodies often fall behind the curve as the market moves at breathtaking speed. The very definition of “communication” is misunderstood sometimes and the laws on the book don’t adequately reflect the emerging landscape. Regulatory system should focus on close supervision of the upstream enduring bottleneck elements of the incumbent but allow competition downstream.39 Some governments have long realized that regulators working with the industry players can actually create “national competitive advantage” over a period of time. At the same time, the policies and investments made can have a significant impact on the wellbeing of the consumer and the society as a whole benefits from such actions. Of course, there are risks of being “too protectionist” counter to the spirit of the WTO (World Trade Organization) but the communications infrastructure is so central to nation’s ebb and flow that there is a sense of urgency to find a balance. Developing countries face particularly challenging times as they lack effective regulations to address anticompetitive practices. The legal safety net is essential but the challenge is compounded where economic systems have relied on strong state intervention, resulting in

39 http://media.ofcom.org.uk/2010/07/13/competition-law-and-the-communications-sector/

http://media.ofcom.org.uk/2010/07/13/competition-law-and-the-communications-sector/


35 Globalization and competition | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

entire sectors and most dominant firms being state owned, controlled by the government or afforded special protection by government policies.40 The competitive framework becomes even more necessary in a globalized market place where in players from across the borders eye emerging markets for growth opportunities. Without the legal and regulatory framework, investors will be hesitant in entering the markets. As the technologies are converging, regulatory bodies are also converging to deal with the content and services that are delivered over a range of digital distribution networks and devices. FCC in the US, AGCOM in Italy, Ofcom in UK as well as Australia, Canada, Japan, Finland, Slovenia, Israel, Switzerland, South Korea, Malaysia, and South Africa have converged regulators.41 There is also increased cooperation amongst regulators on policies such as spectrum management, child online protection, intellectual property, roaming, termination rates, traffic management, net neutrality, etc. Regulators ought to assess the competing interests of filling up the treasury from spectrum auctions in the short-term vs. long-term national competitiveness. Spectrum auctions might make the industry less competitive not more by creating further barriers to entry. In some regions, it also promotes hoarding spectrum as financial assets without the commitment of investment. Also, regulators should be crisp, clear, and decisive in their message to the industry. There is nothing worse than the regulatory indecision and uncertainty as it only delays the investment cycles. Only by taking a long-view and by working hand-in-hand with the industry, can the regulators effectively pave the path for future mobile growth in a given country.

Globalization and competition The telecom growth in the developing countries over the past five years has been tremendous. In 1998, India and China had less than 1 million and 25 million mobile subscribers respectively. By 2010, India was adding 20 million subs a month (compared to the US, where the growth is around 1.5 million subscribers/month or Japan where the corresponding figure is less than 1 million). In fact, the majority of the growth over the next 10 years is going to come from the developing world. In 1998, the developed nations accounted for over 76% of the mobile subscribers worldwide. In 2010, this number dropped to 22% and by 2020, only 16% of the mobile subscribers will come from today’s developed nations.42 When local markets become saturated, companies look for revenues in overseas markets. European operators have been more bold and successful than their American and Asian counterparts in pursuing greener pastures overseas. The likes of Vodafone, Telefonica, France Telecom, and Telenor have honed in their foreign operational skills partly by operating in various European countries which provided enough variability and challenges for them to understand the dynamics of operating in foreign markets. However, operating in a relatively similar nation in Europe is easier than starting an operation in Asia, Africa, or South America.

40

Trends in Telecommunication Reform 2010-11, ITU 41

International Communications Market Report 2010, Ofcom, 2010 42

The Next 10 Years: 15 Trends That Matter, Chetan Sharma, Mobile Future Forward, Futuretext, 2010


36 Competition from outside, Changing ecosystems | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

Asian operators such as NTT DoCoMo and SK Telecom have ventured out to other markets over the last 10 years with limited success, primarily due to poor strategic direction and weak determination and understanding of how foreign markets operate. Money alone doesn’t buy efficiency. The new breed of operators such as Bharti and SingTel are seeking global expansion on the back of their operational experience. They are seeking markets where they can apply their operational model effectively. In 2010, Bharti acquired Zain to become the number 5 operator worldwide. On the back of their domestic market growth, operators from the emerging nations now occupy 5 of the top 10 spots in the global telecom groups. It is quite likely that some of the top 3 operators in the developed world will start to see decreased margins and become likely candidates for acquisitions by their Asian counterparts over the course of this decade. However, buoyed by national interests, government will resist such overtures and global consolidation in certain regions.

Competition from outside, Changing ecosystems Industries can also change by the competition from outside. The telecom industry is a perfect example. The likes of Google, Facebook, Skype, Microsoft, and Apple are slowly and steadily eating away the current and future revenues of the operators. It is apparent in the mobile applications space where the global “offdeck” revenues now exceed (figure 20) the “ondeck revenues.”43 Many operators (even the large ones) struggled with the appstores and have given up on gaining more revenues from the apps and downloads. Others are likely to give it up in the next 2-3 years. The phenomenon is likely to repeat itself across various regions as smartphone penetration on these markets approach 50%.

Figure 20. The shift in application revenues in the global markets44

43

Sizing up the global mobile apps market, Chetan Sharma Consulting, 2010 44

Sizing up the global mobile apps market, Chetan Sharma Consulting, 2010


37 Possibilities of new market structures | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

In such scenarios, to maintain their margins and share value, operators have to seek new sources of revenue and collaborate more with each other to provide a stronger response to the new threats. The areas of mobile advertising, mobile commerce, mobile payments, enterprise applications, mobile health all represent such opportunities and threats for the operators. In some instances, a new type of service model tries to disrupt the market. In the mid 2000s a wave of data-focused MVNOs tried to enter the market in the US to no effect. One by one, each of the MVNOs struggled, failed, and folded. Again, the primary reason was that they misread the market, didn’t keep their margin equation in check and didn’t have the perseverance it takes to compete in this highly competitive and capital-intensive industry.

Possibilities of new market structures iPhone launched the software era of the mobile industry. It was not that software services and applications didn’t exist prior to 2007, but Apple truly changed the game. Since then, Google’s Android has proven to be a worthy competitor and both players together with the new ecosystem are redefining the wireless industry. The emerging segment of “connected devices” is also disrupting the waters which when combined with the WiFi availability/usage is creating new distribution channels, business models, and ecosystems. Operators, device makers, and software vendors have to figure out how to play in this fluid economics where things change fairly rapidly. We could also see some operators going the vertical route by investing in technology and handsets to maximize the margins. For e.g. companies like MediaTek could provide branded operator handsets at a reduced price to the operators and use their strong distribution retail channels effectively. We are also likely to see some global alliances that help operators compete wherein consumers can purchase services in any country for any country without the toll of international operation. Operators will look at the services stack and find areas for collaboration while competing on other layers. The partnership that Orange and T-Mobile formed in the UK got expanded in a more broader Joint Venture between France Telecom and Deutsche Telekom to cover four areas of investment: customer equipment, network equipment, service platforms, and IT infrastructure.45

Implications for players in the ecosystem It is very clear that the ecosystem dynamics can change like the weather in Seattle, one just can’t take the competitive and friendly forces for granted. In the past, the silos and segments were clearly defined with little overlap. However, over the course of last couple of years, players have been migrating and surfing in segments across the board - from Apple to Visa, from P&G to AT&T, from Facebook to Time Warner, from Google to Best Buy, every company wants to capture the mindshare and piece of the consumer’s pocketbook. The fine line between partners and competitors can get obliterated in a quarter. Apple is competing with Cisco, Comcast is going after AT&T’s business, Visa and Verizon want to be the payment channel of choice, Amazon is gunning for Microsoft’s enterprise business, so on and so

45

http://moconews.net/article/419-t-mobile-parent-deutsche-telekom-france-telekom-announce-new-jv-in-euro/

http://moconews.net/article/419-t-mobile-parent-deutsche-telekom-france-telekom-announce-new-jv-in-euro/


38 The next 25 years | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

forth. One product launch, one acquisition, one alliance can change the game in an instant. And this is only the beginning.46 Globalization is forcing operators, who were once comfortable on their home turfs, to invest in emerging markets to capture value and future growth. From an infrastructure perspective, the investment in developing nations is at par in the developed nations as they plan to expand coverage and bring new subscribers onboard. Finally, there is a strong movement towards opening up access to the ecosystem so that the developers can offer applications and services on the mobile platform just like they do online. Such efforts will lead to more innovation and better services for the consumer including entertainment, enterprise services, and public safety. Understanding a given mobile market is crucial to all players in the ecosystem from OEMs, infrastructure providers, investors, regulators, startups, software and services providers, etc. furthermore, it is important to understand how the market is likely to shape in relation to its counterparts. Understanding the timing of critical industry events impacts the opportunity and revenue trajectory. Ill-timed moves or strategies that are not fully thought through can lead to significant consternation and despair. While some competitive forces take years to play out, their impact can be far-reaching. The competitive landscape has the impact on the profitability of the domestic industry and consumer value. In the face of continuous uncertainty, product strategists are constantly challenged to decide the optimal product mix and release time. How does one work on a long-term product roadmap amidst so many variables and a rapidly evolving landscape? The tool of scenario planning has been used for a long time in many industries through development of various scenarios and their integration into the decision making process. Similarly, customers need to align product availability and maturity with their own business roadmap to ensure that the new technology and products benefit, and not distract, the work force.47 However, external scenario assessment without a realistic due diligence of internal competencies will provide an incomplete picture for effective product strategy. Both external and internal scenarios should be designed, analyzed, and used in the same process to give the participants a complete view of pros and cons of each approach and each strategic path. One must take a holistic view of the potential future – both by understanding the impact of the external factors such as the technology evolution, the competitive movement, and the shifts in consumer behavior, as well as, keenly assessing the internal dynamics within a company. By having, a firm grasp on both aspects of scenario planning, executives can make much better decisions. This becomes particularly important in a rapidly changing industry landscape as communication and computing industries continue to collide, and forces of globalization render the national boundaries useless.

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Enterprise mobile product strategy using scenario planning, Sami Muneer - SAP and Chetan Sharma - Chetan Sharma Consulting, Enterprise Mobile Strategies, IOS Press, 2008


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The next 25 years It is pretty clear that “mobile” will become the platform of “everything.” Anything that can be connected, will be connected and the information will make us smarter and more efficient, it will improve our daily lives, enhance our social engagement, and help cultivate new interests and relationships. This decade will create new players that will be dominate over the many incumbents who fail to adapt and seize new initiatives. Overall, the future is extremely bright and full of opportunities to make things better whether it is in the enterprise or for the consumers. But, how will the competitive landscape shape up over the next 25 years. The last 25 years in mobile were about connectivity and subscriber growth. Revenue was something that resulted from the two. Almost in every market, the wireless industry grew out of the traditional wireline industry. The first mobile operators were the wireline players who expanded in the then “niche” mobile markets. Now that mobile has completely changed the “communications paradigm,” it is time to rethink the evolution over the next 25 years. There is tremendous pressure at the seams where in players and regulators have to deal with not only the domestic market dynamics but rethink market structures in light of national competitiveness and globalization. There are forces at work to decouple access with services and have the ecosystem stack reconfigured every few quarters. Will the regulators and the incumbents be able to shape the markets for the next 25 years or the disruptive forces going to disassemble and reassemble pieces of the value chain? Who is able to extract the most value? Are there going to be alternate ecosystems that threaten the existing landscape or will the emerging companies play in the niches? It is clear that in open, mature, and competitive markets, market forces have a way of finding a sustainable equilibrium point. It is the journey that can be messy and unstructured. There will be billions of dollars at stake with each segment vying for a good seat at the table. Regulators (and the political class) will need to be nimble and up-to-speed on emerging trends. They will need to think of long-term horizons rather than short-term skirmishes. The regulatory bodies in various countries have rightly placed their countries innovation and job growth prospects at the footsteps of mobile broadband.48 However, they will need to a) think longer-term, b) be proactive rather than reactionary to industry events and c) have a collaborative approach with the industry. Their role in managing the spectrum resources and the competitive landscape will become more important than ever in how the mobile industry and as a result the larger economy thrives in a given nation. Consumer preferences and behavior will also evolve with new technology and this will have direct impact on how they spend their money. If we take a look at the spending habits of the US consumers on “access and communication services” which includes the spending on Telephone, Cable, Internet, and Cell phones, the total “access” spending over the course of the last decade has been consistently around 4% of the total personal income per capital. However, the share of each of the services has been changing steadily. Telephone used to have 65% share of the spending but is going to be below 30% by end of 2010. Others have been climbing at the expense of telephone revenues, especially the cell phones which since 2007

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America’s Mobile Broadband Future, Julius Genachowski, 2009


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command the highest share. So, the overall spending has stayed constant while there has been significant reallocation of spending. Similarly, within cell phone services, data has gone from being less than 1% of the overall revenues to over 35% in 2010 and is going to be more than 50% of the overall revenue mix by early 2013.49 Mobile operators need to figure out how to manage these reallocation undercurrents and maintain the overall life time value of the customer. It will come from re-architecting of the business and technology practices as well as through the introduction of new services. It should be noted that over the last 10 years there has been a gradual move from on-deck traffic to off-deck traffic with on-deck accounting for very little traffic in most developed markets. So, operators will have to rethink business models that are just based on selling bandwidth. They need to migrate to models that are more based on value to the end customer and the ecosystem. In fact, it will be wise to figure out the business models prior to the technology investments.

Summary and Conclusions To say that we live in interesting times will be an understatement. The mobile world is going through significant transition and the players are adjusting to the shifting sands of time. The markets and competitive landscapes are continuously evolving and as such we will be updating this paper as we continue to research the subject of competitiveness in various markets. Some of the conclusions based on the current study are:

1. Mobile broadband is central to nation’s competitiveness The availability of mobile broadband and the new economy that it enables is going to be central to nation’s competitiveness during this decade. It is easier to state this on paper vs. actually define policies and industry framework to implement.

2. The Rule Of Three defines mobile markets The Rule of Three is evident in all major markets. While the percentage market share might vary, on an average, the top 3 control 93% of the market in an given nation. It doesn’t matter if the market is defined by “controlled regulation” like in China, Korea, and Japan or if it is “open market” driven in markets such as the US, UK, and India. Eventually, only top 3 operators control the majority of the market. There are niches that others occupy but they are largely irrelevant to the overall structure and functioning of the mobile market.

3. Markets might look similar but are generally different Mobile markets evolve differently depending on a multidimensional equation. Comparing dissimilar market for competitive analysis can lead to misleading results and policies. While US and Japan are similar in on the Postpaid and ARPU front, the operator concentrations are different due to different regulatory regimes. Similarly, India and China are at the opposite end of the operator concentration spectrum while

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The Next 10 Years: 15 Trends That Matter, Chetan Sharma, Mobile Future Forward, Futuretext, 2010



growing at a similar pace. To be effective in comparative competitive analysis, one must consider several factors as discussed in this paper.

4. Prepaid markets have higher competition Prepaid markets by definition are more competitive with higher churn. The subscription penetration numbers are generally inflated due to inactive subscriptions and consumers are generally less loyal and bound by a single operator. As such the decline in price to the consumer is significantly higher than the postpaid markets.

5. Open and free markets are more competitive in the growth phase

Markets such as US and India experienced similar competitive environment in their hyper-growth phase. For the US, this phase was in the nineties-mid-2000s while India has been experiencing the similar environment in the last 3-4 years. In both cases, at the start there are 5-6 players with no more than 25% market share but higher than 10% of the mix but gradually the market forces enable consolidation. Over a period of 18 years, US is settling into a “top 3” operator market. India’s brutal price wars are going to trigger the consolidation in the next 12-24 months and will eventually settle into a structure similar to other markets.

6. Most markets are designed by the regulators to have no more than 3 operators

Most of the markets use the “controlled competition” principles. In some like Japan and Korea, the governments actively work with the industry in the interest of “global competitiveness” and “consumer welfare” while in others like in western Europe, regulators control the market by controlling access to the spectrum. In either case, they rarely let more than 3 players dominate the industry. In markets such as the US and India where the markets are relatively more open, market forces drive the markets towards top 3 concentration.

7. HHI alone is a not a good measure of competitiveness in a given market

As we have discussed in the paper, HHI gives a good view of the concentration of the players in the market but not necessarily the competitive forces or the market structure or the impact to customer value. To have a complete view, a holistic view and model is needed to fully understand the market forces at work.

8. In monopoly and duopoly markets, margins of the top 1 and 2 players are much higher In markets such as Mexico, China, the margins of the top players are much higher than the rest of the operators as they put price pressure on the smaller players while enjoying the economies of scale.

9. Consumer Value is not just dependent on “price” Consumer value in any market depends on price, affordability of services, service differentiation, innovation and the speed of introduction of the new services in the market, level of investment, and the growth of the market over a period of time. While



the measurement of price decline of Consumer Price Index (CPI) is useful, for a complete analysis, consumer value should be measured across the above mentioned variables.

10. Competition doesn’t always lead to price decline Competitive concentration doesn’t always lead to decline in the prices for the consumers at the same pace. In some markets like Canada where HHI3 is lower than Denmark, France, and Singapore, the price declines over the last five years have been relatively modest.

11. The competitive equilibrium point in the mobile industry is achieved by the market share ratio of 1.6 The competitive equilibrium point in the mobile industry seems to when the market shares of the top 3 are 46%:29%:18% respectively with the remaining 7% being allocated to the niche operators. To achieve some semblance of equilibrium in the market the top operator shouldn’t have more than 50% of the market share and the number three player shouldn’t have less than 20%. This helps create enough balance in the market to derive maximum value for the consumer.

12. Competitiveness should be studied across multiple dimensions Factors such as Size of the Market, Mobile Spending as % GDP, Subscriber Penetration, % Postpaid, ARPU (Average Revenue Per User), Mobile Data availability and penetration, Decline in Revenue Per Minute, Service Maturity, and total Revenues in the market are important dimensions and should be studied while looking at the competitiveness and concentration of the mobile markets.

13. Competitive forces have implications for rest of the ecosystem When the markets consolidate, it impacts the downstream ecosystem most immediately touched by the operators such as infrastructure providers and the device manufacturers. Applications and service providers that just rely on the availability of a transport layer are generally not directly impacted though a rise in prices can impact the use of their services down the road.

14. Pressure from within and outside is shaping the mobile ecosystem Apple and Google are reshaping the mobile ecosystem by redefining how the money flows in the ecosystem. The most immediate restructuring has been felt in the mobile applications space but there are a number of other emerging applications and services areas like commerce, payments, distribution wherein loyalties of players and consumers in the ecosystem are being tested and realigned. The mobile ecosystem will be shaped by these external forces more than the traditional internal dynamics.

15. Regulators should focus on transparency and competition Regulators often get mired in the mechanics of the ecosystem rather than focusing on making the markets competitive and the players more transparent in their messaging


43 Acknowledgements | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited

and services. If the focus is on the latter, market forces have a way of sorting things out as consumers always gravitate towards “value.”

16. Regulators should be nimble and adjust to changing dynamics in the competitive landscape Recognizing that the rationales for ex-ante regulation no longer hold as markets mature and become more competitive, gradual fine-tuning or, in some cases, even full withdrawal of targeted ex ante regulation becomes necessary to better reflect competitive conditions in the market and serve consumer interests. Regulators should also try to be a step ahead of “what’s coming” in the industry - areas like more commerce, payments, remittance need significant regulatory oversight due to the risks involved but if they don’t formulate the frameworks in time, growth in their respective nations will be stymied leading to competitiveness decline.

The competitiveness of mobile markets is a complex subject that needs to be studied across multiple dimensions in order to gain an understanding of how mobile markets evolve and what factors drive competitiveness such that the consumer value is maximized. Mobile will continue to be a fascinating industry over the course of this decade as the vision of ubiquitous computing comes to fruition. The factors that drive competition in a given market will continue to evolve and it is in the interest of the participants - operators, suppliers, regulators to understand the factors that drive supply-demand curves in a given country or a region. Mobile operators will face some hard choices in developing and protecting the role they want to play in a given region and the ecosystem at-large. The strategy they choose will have a direct impact on the expected EBITDA margins, investment required over the long-haul, how investors view them, and on the competitive landscape of the country. Given, the fast pace of globalization, new rules and trends might emerge over the course of this decade that further define “communications” and “computing” as we know it.

Acknowledgements The author thanks Vern Fotheringham, Prof. Jagdish Sheth, Prof. Can Uslay, Sarla Sharma, and Michel Gaultier, for their assistance.


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About Chetan Sharma Consulting

Chetan Sharma Consulting is one of the most respected management consulting and strategic advisory firm in the mobile industry. We are focused on evolving trends, emerging challenges and opportunities, new business models and technology advances that will take our mobile communications industry to the next level. Our expertise is in developing innovation-driven product and IP strategy. Our clients range from small startups with disruptive ideas to multinational conglomerates looking for an edge. We assist major brands formulate winning, profitable, and sustainable strategies. Please visit us at www.chetansharma.com

http://www.chetansharma.com/


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About the Author

Chetan Sharma is President of Chetan Sharma Consulting and is one of the leading strategists in the mobile industry. Executives from wireless companies around the world seek his accurate predictions, independent insights, and actionable recommendations. He has served as an advisor to senior executive management of several Fortune 100 companies in the wireless space and is probably the only industry strategist who has advised each of the top 6 global mobile data operators. Some of his clients include NTT DoCoMo, Disney, KTF, China Mobile, Toyota, Comcast, Motorola, FedEx, Sony, Samsung, Alcatel Lucent, KDDI, Virgin Mobile, Sprint Nextel, Skype, AT&T Wireless, Reuters, Juniper, Qualcomm, Nissan, Amdocs, Comverse, Reliance Infocomm, SAP, Merrill Lynch, Microsoft, American Express, and Hewlett-Packard.

Chetan is the author or co-author of six best-selling books on wireless including Mobile Advertising: Supercharge your brand in the exploding wireless market and Wireless Broadband: Conflict and Convergence. His books have been adopted in several corporate training programs and university courses at NYU, Stanford, and Tokyo University. His research work is widely quoted in the industry. Chetan is interviewed frequently by leading international media publications such as Time magazine, New York Times, Wall Street Journal, Business Week, Japan Media Review, Mobile Communications International, and GigaOM, and has appeared on NPR, WBBN, and CNBC as a wireless technology expert. He is also the chief curator of the mobile thought leadership executive forums – Mobile Future Forward and Mobile Breakfast Series.

Chetan is an advisor to CEOs and CTOs of some of the leading wireless technology companies on product strategy and Intellectual Property (IP) development, and serves on the advisory board of several companies. He is also one of the most sought after IP strategist and expert witness in the wireless industry and has worked on and testified in some of the most important cases in the industry such as Qualcomm vs. Broadcom, Samsung vs. Ericsson, Sprint vs. Verizon, and Upaid vs. Satyam. Chetan is a senior member of IEEE, IEEE Communications Society, and IEEE Computers Society. Chetan has Master of Science degree in Electrical Engineering from Kansas State University and Bachelor of Science degree from the Indian Institute of Technology, Roorkee.

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