Information Society - TKK

Report
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
© Sakari Luukkainen
TMitTI 2
Content
• 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
© Sakari Luukkainen
TMitTI 3
Technology cycle
Technological
Substitution
Technological
Discontinuity
Variation
Technological
Discontinuity
Era of
Incremental
Change
Variation
Era of
Incremental
Change
Era of
Ferment
Selection
Dominant
Design
© Sakari Luukkainen
Era of
Ferment
Selection
Dominant
Design
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
© Sakari Luukkainen
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
© Sakari Luukkainen
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
© Sakari Luukkainen
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
© Sakari Luukkainen
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
© Sakari Luukkainen
TMitTI 9
Type of Lock-in
Switching Costs
Contractual commitments
Compensatory or
liquidated 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
© Sakari Luukkainen
TMitTI 10
Managing Lock-in – Customer view
• Bargaining before lock-in taking into account lifecycle 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
© Sakari Luukkainen
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
© Sakari Luukkainen
TMitTI 12
Market Share (%)
Positive Feedback
100
Winner
50
Battle zone
Loser
Time
© Sakari Luukkainen
TMitTI 13
Adoption Dynamics
Number of Users
Saturation
Critical
mass
Takeoff
Launch
Time
© Sakari Luukkainen
TMitTI 14
Internet Servers
120
80
40
0
1991
1993
1995
© Sakari Luukkainen
1997
1999
2001
Source: Koski, H., Rouvinen, P., & Ylä-Anttila, P. (2001)
TMitTI 15
Fax-service
Source: Varian
© Sakari Luukkainen
TMitTI 16
Demand-side Economies of Scale
Value to User
Virtuous
cycle
Vicious
cycle
Number of Compatible Users
© Sakari Luukkainen
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.
© Sakari Luukkainen
TMitTI 18
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
© Sakari Luukkainen
TMitTI 19
Networks and Positive Feedback
• 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.
© Sakari Luukkainen
TMitTI 20
Compatibility
Performance vs Compatibility
Evolution
Improved
Design or
adapters
Revolution
Performance
© Sakari Luukkainen
TMitTI 21
Your Share of Industry Value
Openness vs Control
Proprietary
Optimum
Your Reward
Open
Total Value Added to Industry
© Sakari Luukkainen
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
© Sakari Luukkainen
TMitTI 23
Mobile market in Finland
• GSM was launched in 1991
(ferment)
• Saturation of mobile
subscriptions was reached
quite early on in Finland
(incremental phase)
90
Percent of homes with mobile phones
• During the 1990s Finland was
the forerunner in mobile voice
and SMS (dominant design)
100
• Currently only slow growth
80
70
60
50
40
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
• In new mobile multimedia
services no forerunner
position any more
© Sakari Luukkainen
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%
© Sakari Luukkainen
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
© Sakari Luukkainen
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
© Sakari Luukkainen
TMitTI 27
Competition
• Campaigns are timed at the
end and beginning of the
school semester and before
Christmas
160000
140000
• Also the launch of the
number portability
arrangement was followed by
aggressive campaigns
Ported numbers
120000
100000
80000
60000
40000
• The significant number of
portings in February is mostly
from ACN
20000
0
8/03
9/03
10/03
11/03
12/03
1/04
2/04
Month
Source: Numpac 2003
© Sakari Luukkainen
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
© Sakari Luukkainen
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
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
GPRS Internet
access
© Sakari Luukkainen
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
© Sakari Luukkainen
openness

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