Jarkko Vesa ITS 2004, Berlin 1 Regulatory Framework and Industry Clockspeed: Lessons from the Finnish Mobile Services Industry ITS 16th Biennial Conference Jarkko Vesa, Research Fellow Helsinki School of Economics, Information Systems Science

Jarkko Vesa ITS 2004, Berlin 2 Background of the paper The Finnish mobile market has traditionally been considered one of the leaders in the wide-spread adoption of mobile phones and the use of mobile telephony both by business users and consumers. However, the emerging non-voice mobile services (a.k.a mobile Internet services) have not taken off as expected. This paper argues that one reason for this development has been the regulatory framework that prohibits Finnish network and service operators to adopt business models that have proven to be more successful as the industry is transforming from a ”person-to-person” paradigm towards an increasing use of ”person-to-content” type services.

Jarkko Vesa ITS 2004, Berlin 3 Definition of mobile services (Non-voice) Mobile Services Conversational (excl. voice calls) Data Access Content ”Person-to-Person” E.g., SMS, MMS, mobile chat ”human centric” ”Person-to-Content” E.g., ordering ringtones ”machine centric” ”transfer fees” E.g., GPRS, 3G, ? Vesa (2004)

Jarkko Vesa ITS 2004, Berlin 4 The role of regulation in the mobile industry Mobile services are transforming from a simple, highly standardized “product” to a complex good. Economic theories argue that the level of standardization of products and services has direct implications on the optimal way of producing them, i.e. whether to integrate vertically or to use the markets. Earlier analyses of the success of non-voice mobile services in Japan have indicated that an integrated business model appreas to be more successful as the industry moves from voice-centric to data-centric services. However, sometimes regulatory environment prevents operators from adopting a business model that would be optimal for the new and more complex industry - as the case of Finland will show later.

Jarkko Vesa ITS 2004, Berlin 5 Proposition #1: Regulatory environment “Regulatory environment that has been optimized for traditional mobile voice services is not always optimal for the more more complex mobile services of the future.”

Jarkko Vesa ITS 2004, Berlin 6 The transformation of the mobile industry According to the theory of industry evolution, all industries are constantly changing. These changes are related both to the boundaries of industries as well as the industry itself. An industry may experience an “environmental shock” (Mitchell and Singh, 1996), which can be described as “sudden and substantial changes in technology or market segmentation” [e.g., the introduction of 3G networks and the 3G licence auctions]. This development is sometimes called also as “paradigm shifts” or “disruptive changes”. It has been suggested that “mobile phones are changing their DNA” (Novari, 2003).

Jarkko Vesa ITS 2004, Berlin 7 Proposition #2: Industry transformation “The mobile industry is going through a major transformation within the industry, and also the boundaries of the industry itself are currently being re-drawn”

Jarkko Vesa ITS 2004, Berlin 8 The concept of industry clockspeed One way of describing the rate of change of an industry is the notion of industry clockspeed (Fine, 1996). There are several ways to measure industry clockspeed “process technology clockspeed” (i.e., capital equipment obsolescence rate) “product technology clockspeed” (i.e., the rates of new product introduction or intervals between new product generations) “organizational clockspeed” (i.e., rates of change in organizational structures). In addition to the internal metrics, the rate of change in the industry’s external environment (i.e., developments in technology, consumer preferences, and market conditions) differs from industry to industry. Several of the these factors are clearly visible in the mobile industry.

Jarkko Vesa ITS 2004, Berlin 9 Proposition #3: Industry clockspeed “The mobile industry can be best described as a high- clockspeed industry where technology, organizational structure and market conditions are constantly changing.”

Jarkko Vesa ITS 2004, Berlin 10 Mobile services industry in Finland Traditional person-to-person mobile services (i.e., voice calls and sms) have been very successful in Finland: high penetration rate of mobile phones (appr. 90%) tariffs of mobile phone calls are among the lowest in the world. Since the number portability of mobile subscriptions was introduced in 2003, there has been the highest rate of ported mobile phone numbers in the EU countries. The main criteria when selecting a mobile operator appear to be the pricing of calls and short messages, the amount of free airtime, and the value of giveaways offered by mobile operators. Operators are not allowed to bundle subscription and handset The ongoing price war will drive several smaller operators out of business (Tolonen 2004).

Jarkko Vesa ITS 2004, Berlin 11 The structure of the Finnish mobile market horizontal/modular Network operators Mobile portals Services & Apps Content providers Handset makers Service operators NokiaSony EricssonMotorolaSamsungSiemens SoneraElisaFinnet Saunalahti ACN Elisa Cubio MTV3DNA Sonera Spinbox Fujitsu Sonera Plaza ZEDMTV3 Club Nokia buumi.net SoneraMTV3OpenbitTrackwellEniro NewsGamblingBankingEntertainmentWeather Figure 1.

Jarkko Vesa ITS 2004, Berlin 12 Interplay between regulation and clockspeed - the winner’s curse The Finnish mobile services market structure is very different from the mainstream of market structures for instance in the EU. It is argued here that the reason for the current situation is the regulatory environment - and not the intentional strategic choice by the operators. During the analog NMT mobile networks, the business model in Finland vertically integrated: the Finnish PTT TELE controlled the whole value chain, i.e. the network, handset business and services (=voice calls). Along with the digital GSM networks and deregulation, the mobile industry transformed from a vertical/integrated structure to a more horizontal and open market (see Figure 2). It was in fact the SIM card that physically separeted the subscription from the handset in Finland (as SIM-lock is prohibited there). The regulatory framework created in the 1990’s was very successful.

Jarkko Vesa ITS 2004, Berlin 13 Vertical Integrated Horizontal Modular Digital (GSM) 1990’s Industry structure Product architecture Figure 2. Transformation of the Finnish mobile voice services markets Analog (NMT) 1980’s

Jarkko Vesa ITS 2004, Berlin 14 Too much competition is bad for the future mobile services As a result of the horizontal/modular “mix-and-match” market structure, the competition in the Finnish mobile services has been intensifying at an increasing rate. The number of service operators has increased dramatically: Today there are about fifteen virtual network operators in a market of five million people and approximately 90% penetration rate. The competition is focusing mainly on price due to commodization of mobile phone calls and high quality of all three mobile networks (difficult to differentiate service offering). However, it is justified to ask whether the current model is optimal for the future mobile services. This paper argues that a regulatory framework, which was originally optimized for traditional voice services, is not necessarily optimal for the new and more complex mobile services of the future.

Jarkko Vesa ITS 2004, Berlin 15 Analysis of KPIs of Finnish mobile operators As simplistic way of “testing” the propositions and arguments presented in this paper is to take a closer look at the key performance indicators (KPIs) of the Finnish mobile operators: The share of non-voice mobile data services of the average revenue per use (ARPU) is about 12%. However, if the highly popular use of SMS (which is mainly used for messaging) is excluded, the percentage of non-SMS mobile data services (“P2C”)is estimated to be around 1%. While the trend in other European countries is towards an increase in the share of non-voice services (e.g. the use of Vodafone Live! service increases steadily every quarter), in the Finnish market the new services (including even MMS) are not gaining a bigger share of ARPU. As other European markets have moved towards a operator-driven and more vertical/integrated structure, the Finnish market remains the same.

Jarkko Vesa ITS 2004, Berlin 16 Figure 3. The Finnish mobile market has been left behind in the transformation Vertical Integrated Horizontal Market-driven Modular Industry structure Product architecture Mobile Multi- media Voice- centric model FINLAND UK, FRANCE, GERMANY, ITALY...

Jarkko Vesa ITS 2004, Berlin 17 Why does the Finnish market look so different from the rest of the Europe? It is argued here that altough non-voice mobile services have been more successful in markets where mobile operators take a leading role as the “orchestrator” of mobile services development and delivery (Vesa 2003, 2004) in order to offer a true end-to-end mobile service, this business model has not been a true option in Finland - due to restrictions in the existing laws and regulations. As a result, the Finnish mobile industry does not have the opportunity to redesign their business models towards a more integrated model, even though the theories of industry evolution and the real-life experiences would recommend this approach: The Finnish mobile operators are not allowed to bundle subscription and handsets, which appears to be a key element in creating more user-friendly mobile services.

Jarkko Vesa ITS 2004, Berlin 18 The implications of the current regulatory environment in Finland The Finnish operators have big problems in moving their existing customer base towards more data-centric - and higher value - mobile services (providing that they are even interested in doing that, because the current voice-only GSM and SMS is a true “cashcow” for the leading players). Furthermore, none of the “big players” of the mobile world are present in Finland: Altough the limited size of the market and the funny language may be bigger obstacles for them to enter the Finnish market, even a bigger hinder is propably the fact that the vodafones and t-mobiles of the world would have to change their business model to comply with the Finnish regulatory environment - hardly an attractive alternative. Even the investment banks have expressed their concern regarding the over-zealous regulatory in Finland (Vepsäläinen 2004).

Jarkko Vesa ITS 2004, Berlin 19 Discussion and conclusion The objective of this paper was to demonstrate how the regulatory environment of a market defines the feasible business models for mobile operators. By using the Finnish mobile services market as an example, the paper showed how the laws and regulations have in fact halted the natural evolution of the industry by preventing mobile operators from adopting business models that have proven successful in other markets. This has led to a situation where the speed of change in the industry, the clockspeed, has slowed down - turning the previously advanced mobile market of Finland into a mediocracy in international comparisons. For national regulator authorities (NRAs) the findings of this paper should act as an example of how regulatory environment has to evolve as the industry it regulates goes through major transformation [...as they have recently started to do - but that’s another story!]