The distribution of value in the mobile phone supply chain

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Presentation transcript:

The distribution of value in the mobile phone supply chain Journal Presentation The distribution of value in the mobile phone supply chain Telecommunications Policy 35 (2011) 505-521 Jason Dedrick , Kenneth L.Kraemer, Greg Linden 電管一 R96004047 江濡伃

Introduction Supply Chain The series of organizations and processes through which a product passes from raw materials to the consumer’s hands. Firms of supply chain In order to benefit within this network Not only create but also capture value Division of value competitors v.s Firms v.s suppliers & customers Many domestic handset producers rely on foreign suppliers of components and manufacturing services. Ex. Domestic: R&D, management, marketing Foreign(low wage): some labor-intensive assembly

Issues Who is capturing value in the current industry structure? The market power of different firms in the supply chain. How do the existing rules of competition affect carrier profits, subscriber fees, and the rate of technology uptake by consumers? How do handset subsidies affect the profitability of carriers and handset makers, and the consumer cost of services?

Competition in the mobile phone supply chain Industry supply chains in telecommunications have been steadily disintegrating across corporate and national boundaries. Change “vertically integrated” into “globe-spanning supply chain” ex. AT&T Mobile operators are the final links in the chain to the consumer .  Key role Subsidy strategy US carriers subsidize the cost of many of the best-selling high- end handsets in exchange for a period of exclusivity from the manufacturer.

Data sources and analytical approach The analysis leads to an estimate of the handset maker’s product-level gross profit. Gross profit = Wholesale price - Cost of goods Shows what share of a firm’s sales price is retained after the direct costs of producing a product are deducted. Data sources: the prices charged to cellular subscribers, estimates of phone subsidies from carriers, and statements of average value per phone in company annual reports.

Three phones Motorola V3 RAZR Treo 650 CDMA RIM Curve 8300 The most purchased handset model in the US before 2008. Combine features of a PDA, touchscreen and keyboard. From business users to the consumer market.

Comparison of inputs

Suppliers’ gross profit share Supplier Choice Base transaction costs other hard-to-observe forces slightly lower in Europe

Handset firm value capture Gross profit handset maker > combine all the suppliers The price received by the handset maker = the price paid by the consumer + the subsidy paid by the carrier

Carrier value capture Phones in the US are typically sold through a close arrangement between phone maker and carrier. Ex. RAZR  Cingular, with T-Mobile added after about 6 months. Curve 8300 launch as Cingular & AT&T exclusive Treo650 Sprint , with Verizon added after about 6 months. Subsidized phones are frequently sold with a two-year contract. ex. RAZR subsidy $100 Carrier profits come from subscriber fees (subtract subsidy)

Gross profit in the Motorola V3 RAZR Fig. 1. Gross profit in the Motorola V3 RAZR supply chain. Source: Authors’ calculations.

Operating profit in the Motorola V3 RAZR Fig. 2. Operating profit in the Motorola V3 RAZR supply chain. Source: Authors’ calculations.

The economics of handset subsidies The subsidization of handsets within a bundle remains a strong force in some countries, particularly the United States. According to one analyst, the average handset discount offered by carriers in the US has climbed from 60% of retail price in 2006 to 80% in 2008. US carriers have ever flirted with offering no-contract plans Ex. Verizon : introduced a no-contract option, but offered only the same monthly pricing. T-Mobile: Even More Plus plans, which offered no-contract service at a discount.  remove soon .

Why do carriers use handset subsidies? To consumer Bundles make it difficult for consumers to know how much they are paying for the phone To carrier The high monthly service fees may continue long after the carrier has recovered the full retail price of the handset. Kim etal.,2004 In Korean, the elimination of subsidies in 2000 led to a drop in service charges of about 15% at the two biggest carriers. The relationship between carrier and handset maker influence the selling volume of handset.

Market power in the supply chain Both Handset makers and carriers each try to increase their market power so as to command a greater share of the value they create. Handset makers build brand image with consumers or create complementary assets. Carriers (1)Be protected by a more tangible switching cost in the form of locked phones, long-term service contracts, and early termination fees. (2)build their own brands

Policy implications (by the preceding analysis) Whether policies that support domestic handset manufacturers are worthwhile if the producers rely on foreign suppliers of components and manufacturing services. This research has confirmed the results of previous studies that the greatest returns in global value chains accrue to the brand-name firms ( handset makers) that orchestrate them. Thus there is some justification for supporting domestic handset makers because the financial benefit to countries is largely a function of the success of the firms located there; home countries capture value in the form of high wage jobs and returns to shareholders.

Policy implications (by the preceding analysis) (2)Whether the use of carrier subsidies for phones in exchange for fixed-term contracts is socially beneficial. In the absence of subsidies, fewer units of smartphones would have been sold. Long-term exclusive agreements involving successful handsets, such as that between Apple and AT&T (which lasted more than three years), may even have the ability to affect competition in the carrier’s market, with AT&T reporting that some 40% of its iPhone users came from other carriers. An alternative is to limit bundling to the two years following the introduction of a new technology (e.g., LTE) by a carrier.

Limitations in this research the analysis is forced to rely on rough estimates for certain variables because the actual costs and prices are not public and therefore not known with any precision. the analysis has not attempted to estimate the value received by handset makers from third-party ‘‘apps’’ (software programs that run on the phone), which are rapidly growing in importance as an element of the value network. Within these limitations, the study analyzed the handset value chain from components to consumer.

Summary and conclusions It showed that a brand-name handset maker stands to capture greater financial value from each phone than any of its suppliers. The carriers capture a great deal of value (at least in terms of gross profit) from each handset. However, the carriers must also shoulder the burden of network installation, maintenance, and upgrades. Because of subsidies and the resulting customer commitments  consumer accept higher service charges.

Summary and conclusions Brand building and management of customer relationships are critical to capturing value and growing the market. Value-adding complementary goods and services such as downloadable third-party applications have successfully increased the value of smartphone ownership for handset makers, carriers, and consumers. Whereas most carriers compete and invest only in their headquarters market, the leading handset makers compete, invest, and source globally.

THE END