TMitTI 1 © Sakari Luukkainen Timetable 20.9. Introduction, Sakari Luukkainen 27.9. Solution Business, Case Sun Microsystems, Topi Talonen 4.10. Market

© Sakari Luukkainen

TMitTI 1

Timetable

20.9. Introduction, Sakari Luukkainen 27.9. Solution Business, Case Sun Microsystems, Topi Talonen 4.10. Market Dynamics of Telecom Industry, Sakari Luukkainen 11.10. Standardization Strategy, Sakari Luukkainen 18.10. Case GSM, Sakari Luukkainen 25.10. R & D Management, Sakari Luukkainen 1.11. Linking Business Thinking with Research, Teppo Paavola 8.11. Product Strategy, Sakari Luukkainen 15.11. Platform Leadership, Sakari Luukkainen 22.11. Case Nokia Symbian Product Platforms, Lea Lahti 29.11 Technology Foresight, Sakari Luukkainen

14.12. Examination


TMitTI 2

• Market uncertainty (Gaynor)

• Recognizing lock-in (Varian chapter 5)

• Managing lock-in (Varian chapter 6)

• Networks and positive feedback (Varian chapter 7)

• Current mobile market situation in Finland

Content


TMitTI 3

Era ofIncrementalChange

Era ofFerment

TechnologicalDiscontinuity

DominantDesign

Variation

Selection

Era ofIncrementalChange

Era ofFerment

TechnologicalDiscontinuity

DominantDesign

Variation

Selection

TechnologicalSubstitution

Technology cycle


TMitTI 4

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


TMitTI 5

Market uncertainty and Internet

• A similar phenomen has happened with the Internet

• Nobody predicted in the early 90´s what Web is today and its impact to society

• Understanding market uncertainty affects directly to R&D

• When Netscape started its development there was extreme uncertainty, it altered the traditional sw development process in a way that allowed taking into account early feedback from users


TMitTI 6

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


TMitTI 7

Recognizing Lock-in

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

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

• Proprietary interfaces


TMitTI 8

Recognizing Lock-in

• 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 9

Contractual commitments Compensatory orliquidated damages

Durable purchases Replacement of equipment

Brand-specific training Learning new system

Information and db Converting data to new format

Specialized suppliers Finding of new supplier

Search costs Learning about quality of altern.

Loyalty programs Lost benefits from existing supplier

Type of Lock-in Switching Costs


TMitTI 10

Managing Lock-in – Customer view

• Bargaining before lock-in taking into account life-cycle cost

• Being aware about whole cost structure before investment decision, e.g. maintenance contracts are typically offered afterwards

• Second sourcing and open systems

• Long view to the next supplier choice situation

• Keeping record about perceived cost structure


TMitTI 11

Managing Lock-in – Supplier view

• Investments to build large installed base

• Concentrating on influential customers with high switching costs

• Differential pricing

• Being aware of customer`s timing in brand selection points

• Reselling and bundling of complementary products and long maintenance contracts

• Usage of purchase history of existing customers in the marketing of new products


TMitTI 12

Positive FeedbackM

arke

t S

hare

(%

)

Time

100

50

Winner

Loser

Battle zone


TMitTI 13

Adoption Dynamics

Num

ber

of U

sers

Time

Saturation

Launch

Takeoff

Criticalmass


TMitTI 14

Internet Servers

1991 1993 1995 1997 1999 20010

40

80

120

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


TMitTI 15

Fax-service

Source: Varian


TMitTI 16

Demand-side Economies of Scale

Val

ue t

o U

ser

Number of Compatible Users

Virtuouscycle

Viciouscycle


TMitTI 17

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 18


• 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 19


• Virtual Network is a collection of compatible goods (that share a common technical platform).

• In a virtual network network externalities arise because larger sales of component A induce larger availability of complementary components B1, ..., Bn, thereby increasing the value of component A. The increased value of component A results in further positive feedback.

• For example, all VHS video players, cassettes and accessories make up a virtual network. Similarly, all computers running Windows or mobile phones and their accessories can be thought of as a virtual network.


TMitTI 20

Performance vs Compatibility

Com

patib

ility

Performance

Evolution

Revolution

ImprovedDesign oradapters


TMitTI 21

Openness vs Control

You

r S

hare

of

Indu

stry

Val

ue

Total Value Added to Industry

Proprietary

Open

Your Reward

Optimum


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 extended into data services using WAP protocol

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

• 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 (ferment)

• During the 1990s Finland was the forerunner in mobile voice and SMS (dominant design)

• Saturation of mobile subscriptions was reached quite early on in Finland (incremental phase)

• 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) have 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 has decreased significantly

• Scarce competition through differentiation

• Currently mobile data services (excluding SMS) create only few procents of operators revenues (disappointment in WAP, 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

• New services targeted to latent user needs – market uncertainty


TMitTI 26

Competition

• Aggressive discounts in the form of free calls have been offered to new subscribers

• Increasing traffic, price elasticy

• These discounts make it hard or even impossible for service providers to recover initial costs from new subscribers, especially with increased customer churn

• Costs of getting new subscriber is 370 €, with 7 € margin pay back time is 4,4 years (Brummer 2004)

• Corporate customers have been able to renegotiate their contracts, still high switching cost, only small churn

• Post-paid services have always been dominant in Finland

• Only 5% market share for pre-paid, compare with over 80% in some European countries and 50% in Sweden, terminal and subscription bundling – high switching cost


TMitTI 27

Competition

• Campaigns are timed at the end and beginning of the school semester and before Christmas

• Also the launch of the number portability arrangement was followed by aggressive campaigns

• The significant number of portings in February is mostly from ACN

0

20000

40000

60000

80000

100000

120000

140000

160000

8/03 9/03 10/03 11/03 12/03 1/04 2/04

Month

Po

rted

nu

mb

ers

Source: Numpac 2003


TMitTI 28

Competition

• Aggressive campaigns are only effective with a specific customer segment (under 30 age group)

• As this segment is more likely to churn, long term profits from these customers are hard to earn

• More traditional service providers may be able to keep their most profitable customers – less expensive• Customers that value the image and reliability of their

provider• Customers that use more services and also new

services

• However scarce competition through differentiation of content services, terminal renewing cycle affects, also mobile service needs develop hierarchically, mainly entertainment applications


TMitTI 29

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 16 kb/s 0,12 € / min 1

GPRS Internet access 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 30

Future projections• Price competition continuos short term (overcapacity, price

elasticity), significant cost reduction needed because of conflict between customer value and operating cost (WLAN?)

• Back to consolidation path because of economies of scale

• Price competition will have to settle down in the long term and open market for 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

Documents

TMitTI 1 © Sakari Luukkainen Timetable 20.9. Introduction, Sakari Luukkainen 27.9. Solution Business, Case Sun Microsystems, Topi Talonen 4.10. Market