TMitTI 1 © Sakari Luukkainen T-109.4300 Network Services Business Models (3 cr) Sakari Luukkainen...

© Sakari Luukkainen

TMitTI 1

T-109.4300 Network Services Business Models (3 cr)

Sakari LuukkainenHelsinki University of Technology

Telecommunications Software and Multimedia Laboratory


TMitTI 2

Goal of the course

• The course is especially designed to Telecommunications Software A2 Study Module and to Master's Programme in Mobile Computing

• To describe describe the challenges service providers face in offering new mobile services taking into consideration both the business aspects and the fast developing technology requirements and possibilities

• The course focuses on theoretical models of the network services commercialization process as well as practical case examples related to mobile multimedia services


TMitTI 3

Graduating the course

• The preferred prerequisite for this course is basic knowledge of telecommunications networks and business economics

• 10 lectures (incl. visiting lectures from industry), on Wednesdays hall T2, at 10.15-12

• Exam requirements consist of the lectures and the following book:

Bernd Eylert: The Mobile Multimedia Business, Requirements and Solutions, 2005


TMitTI 4

Graduating the course

• First examination is 9.5.2006 at 9 - 12 in lecture hall T1 and the enrollment to the exam will be done via Topi, 4 exams / year

• Exam consists of three essay questions of which two is compulsory, six concept definitions and one applied question concerning some real life business case

• The exam results will be published within a month in the course www-page and T-109 notice board


TMitTI 5

Prerequisites

Industrial Management B1

Compulsory courses

S-38.3001 Telecommunications Forum 1-5 T-109.5410 Teknologiajohtaminen tietoliikenneteollisuudessa 3S-38.3041 Operaattoriliiketoiminta 3-5

Optional courses

T-109.7510 Research Seminar on Telecommunications Business 5T-110.5110 Tietokoneverkot II – edistyneet ominaisuudet 4T-124.5100 Verkottuneet liiketoimintaprosessit ja –mallit 4TU-91.2005 Strategic Management of Technology and Innovation 5T-86.5300 ICT Enabled Commerce 4-6

Networking Business A3


TMitTI 6

• Current slowdown in the mobile communications business - the development only have moved first two steps forward and now one step backward – back to the realistic growth track

• Media catalysts overestimated expectations in growth phase, and panic in decline phase

• High 3G license costs delay development

• Most of the success is related to GSM technologies

• Recent hyper price competition in the finnish mobile voice and SMS market - GSM related mobile services have become commoditized

• If so fast price decline and technological maturity precedes again global development, the whole value chain would require ever increasing cost reductions if new innovations and related business opportunities do not arise

Background of the course


TMitTI 7

• No history data of business related to new business opportunities of emerging mobile technologies – difficult to forecast, unreliable market research

• During the starting phase of new technology cycle several emerging technological variants and their substitutes try to obtain the uncertain market acceptance

• Market uncertainty is currently high - many technical possibilities open up with unclear market need - many failures and unexpected success

Background of the course


TMitTI 8

What is market uncertainty

• Market uncertainty relates to the inability of vendors and service providers offering new communications solutions to predict what are the latent end users needs

• The uncertainty exists partly also because users do not know what they want until they see and use it

• When users are first introduced to new technology they tend to view it in the context of the older technology

• Users needs evolve hiearchically from basic features to more sophisticated ones along with the technology evolution as they become more educated about the benefits it provides

• A similar phenomen has happened with the Internet, nobody predicted in the early 90´s what Web is today and its impact to society

Source: Gaynor , 2002


TMitTI 9

Managing market uncertainty• The only way to meet uncertain markets is to experiment

several ideas and hope at least one will work

• When market uncertainty is high, being lucky with correct guess about the market is likely to produce more revenue than being right in markets with low uncertainty

• In high uncertainty competition is feature based and low price based

• The use of distributed architecture in the introduction phase of new communications platform when the market uncertainty is high

• Centralized management structure should then be used in later phases of the cycle when the technology and market is mature Source: Gaynor , 2002


TMitTI 10

Era ofIncrementalChange

Era ofFerment

TechnologicalDiscontinuity

DominantDesign

Variation

Selection

Era ofIncrementalChange

Era ofFerment

TechnologicalDiscontinuity

DominantDesign

Variation

Selection

TechnologicalSubstitution

Technology cycle


TMitTI 11

Positive FeedbackM

arke

t S

hare

(%

)

Time

100

50

Winner

Loser

Battle zone

Source: Shapiro & Varian , 1999


TMitTI 12

Demand-side Economies of Scale

Val

ue t

o U

ser

Number of Compatible Users

Virtuouscycle

Viciouscycle



TMitTI 13

Networks and Positive Feedback

• Increasing returns to scale (economies of scale) exist when the cost per unit decreases as more units of the good are produced.

• Recently, the term "increasing returns to scale" has been used to describe more generally a situation where the net value of the last produced unit [= (€ amount consumers are willing to pay for the last unit) - (average per unit cost of production)] increases with the number of units produced. This effect can be called also demand side of economies of scale.


TMitTI 14

Networks and Positive Feedback

• A network exhibits network externalities when the value of a subscription to the network is higher when the network has more subscribers.

• Metcalfe´s law: n * (n-1) = n2 – n

• Dominant design is a technology that wins the allegiance of the market place, it usually takes the form of a new product (or a set of features) synthesized from individual technological innovations introduced independently


TMitTI 15

Adoption Dynamics

Num

ber

of U

sers

Time

Saturation

Launch

Takeoff

Criticalmass

Laggards (16%)Late majority (34%)Early majority (34%)Early adopters (13,5%)Innovators (2,5%)

Source: Rogers, 1995


TMitTI 16

Internet Servers

1991 1993 1995 1997 1999 20010

40

80

120

Source: Koski, H., Rouvinen, P., & Ylä-Anttila, P. (2001)


TMitTI 17

Fax-service

Source: Varian


TMitTI 18

Lock-in in the ICT markets

• Investments in varying complementary assets related to the actual ICT investment influence switching costs

• When the switching costs from one brand to another are substantial, customers face lock-in

• Sonera & Elisa example: low number of moving customers before portability of telephone number

• iki.fi e-mail solution to reduce switching cost

• Proprietary interfacesSource: Shapiro & Varian , 1999


TMitTI 19

Lock-in in the ICT markets

• Existing installed customer base with high switching cost is significantly valuable asset

• Collective switching costs, group pricing of mobile calls

• Total switching cost = costs the customer bears + costs the new supplier bears

• The present discounted value to a supplier of locked-in customer is equal to total switching costs, plus the quality or cost advantage of current supplier’s product



TMitTI 20

Business Model – definition in course

• Describes how to extract value from a mobile service innovation

• It converts new technology to economic value (utility for customers)

• Plan by which a business intends to generate revenue and profits taken into account the dynamics of related value chain


TMitTI 21

Mobile business value chain

Contentprovider

Applicationprovider

Network/ServiceOperator

EnduserTerminalmanufacturer


TMitTI 22

Mobile business

• Traditional mobile telecommunications operators operate based on walled garden business model where applications available to endusers are fully controlled by them

• Voice based walled garden model was then extended into data services using WAP protocol

• The reason of failure were low level of relevant applications to endusers parallel with high pricing – high experimentation barrier

• The content providers get in walled garden model less than 50% of revenue compared to i-mode´s semi walled garden model where they get 91%

• Separation of service (MVNO) and network provision will drive service innovation in Europe


TMitTI 23

Mobile market in Finland

• GSM was launched in 1991

• During the 1990s Finland was the forerunner in mobile voice and SMS

• Saturation of mobile subscriptions was reached quite early on in Finland

• Currently only slow growth

• In new mobile multimedia services no forerunner position any more

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Per

cen

t o

f h

om

es w

ith

mo

bile

ph

on

es

Source: Ficom 2003


TMitTI 24

Recent developments

• The most significant development (25.7.2003): the introduction of the number portability arrangement by regulator in order to reduce switching cost

• Makes number portability easy for subscribers• Increased competition has resulted in declining user

loyalty and increased customer churn

• Diverse new entrants (MVNO) emerged (full control over SIM cards, branding, marketing, billing and customer care, might have own CC, MSC, HLR, IN)

• Finnish authorities have intervened to guarantee equal network usage fees to all competitors

• At the beginning of March 2004 network operators cut their fees by approximately 30%


TMitTI 25

Mobile market in Finland

• Competition has been price-based, revenue per subscriber (ARPU) has decreased significantly to about 30 e / month, roaming still significant revenue source because of scarce competition

• Scarce competition through differentiation

• Currently mobile data services (excluding SMS) create only few procents of operators revenues (disappointment in WAP, MMS, low GPRS usage etc.)

• Price competition will have to settle down in the long term

• Increasing importance of multimedia services as a new growth source


TMitTI 26

Mobile content economics

Capacity needed

Value/price to enduser

Value for operator (€/MB)

SMS 160 bytes 0,14 € / message 875

MMS 30 kB 0,39 € / message 13

Voice (fixed) 16 kb/s 0,12 € / min 1

GPRS Internet access (+VoIP) 115-348 kb/s 1 € / MB 1

Music streaming 128 kb/s 0,5 € / min 0,5

Video streaming 384 kb/s 1 € / min 0,35


TMitTI 27

Conclusion

• Flat-rate pricing and VoIP comes to mobile, price near current ARPU

• Back to consolidation path

• Price competition will settle down and open market for differentiation by mobile multimedia services

• New mobile services to increase market segmentation: e-mail, information, music, PoC, videophone, TV…

• Bundling of equipment, subscription and services could help 3G adoption rates, but it also promotes walled garden business model

• Key issue to promote service innovation by low usage barriers and experimentation with reasonable cost structure and openness


TMitTI 28

Agenda

25.1. Introduction, Sakari Luukkainen 1.2. Mobile Com. Markets (course book chapter 2), Sakari Luukkainen8.2. Services and Applications (chapter 3), Sakari Luukkainen15.2. Mobile TV Case, Eino Kivisaari22.2. Spectrum, Regulation and Lic. (chapters 5,6), Sakari Luukkainen1.3. Mobile Consumer Behaviour (chapter 7), Sakari Luukkainen8.3. Internet and Mobile Netw. Convergence, Timo Ali-Vehmas15.3. Content Production in Mobile Case, Aape Pohjavirta 22.3. Mobile Services and Bus. Processes, Sakari Luukkainen 29.3. Mobile Appl. Devel., Case Mind on Move, Teemu Ropponen

9.5. Examination

TMitTI 1 © Sakari Luukkainen T-109.4300 Network Services Business Models (3 cr) Sakari Luukkainen...

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