ECON 314- Presentation Market in Mobile Network

Presentation Outline 1.Background of Mobile Market in Hong Kong 2.After market services- Positive Network Effect 3.Discounted prices of handsets for subscribers Different monthly charges and plans 4. Free value-added services Mobile Number Portability 5.3G service

Background Keen competition among network providers after the implementation of Mobile Number Portability The monthly charge drops sharply Hong Kong's Position in the World of Telecommunications Mobile Phone Penetration Rate** - 2nd Highest in Asia Pacific Source: ITU Digital Access Index 2002 (Published in November 2003)

Telecommunication Indicators in Hong Kong for the fiscal year ending 31 March 2005 Mobile Services Cellular mobile telephone subscribers Million Digital cellular subscribers Million Percentage of population (%) 118.8%

The Mobile Market 3G operators first launched its services in Hong Kong in 2004 Competition in the 2G mobile market continues to be intense Main mobile network providers in HK: Sunday, PCCW, Smartone, People, One2Free,…

Various Services Songs downloading $5/song Banking services $8/month Online betting services $8/month International roaming services $55/month

Why so many services? Why so cheap?

Network Effect The value of a network depends on the no. of people connected to it Increase the no. of users Increase the value of the network

Network Effect To attract more users Outcome: 1. more and more services 2. lower price provide more services more services attract more users

Positive Feedback the strong get stronger the weak get weaker  one single firm dominates the market But why still so many network providers?

Collective Switching Cost Better off if shifting to the best network Due to intra network service, users stay in the network which his friends use No one is willing to lead the move stay in the same network

Buying Cell Phone Can buy from everywhere –Specialty shop (Nokia, Samsung, Motorla) –Large supply chain (Boardway, Fortress, Wilson……) –Small retailer –Network provider

Where to buy? Specialty shop –Better confidence and better after sales services Large supply chain –More gift Small retailer –Cheaper Network provider –Cheapest when sign contract with them

Example Nokia 6280 –Specialty shop : $ 2780 –Large supply chain :$ 2480 –Small retailer : $ 2280 –Network provider : $ $2480

How can network provider charge such a low price? Sign contract The longer contract, the lower price

Example (Con’t) Number of monthMonthly fee Cell phone price 12$128$ $168$ $188$980

How service provider get profit by selling in low price Fixed Cost –The operation system, network etc. Variable Cost is relatively low –i.e, with the increase of customer use their services, the total cost won’t increase much

How service provider get profit by selling in low price (Con’t) Attract customer by selling cell phone in low price Not sure whether they will incur loss when selling cell phone But we are sure if people buy cell phone in such low price, they need to sign contact to use their services for a period of time.

Why people choose to sign contract? After having a cell phone, they need an operator anyway. Once the gain in price reduction is larger than the charge in monthly fee, they will sign the contract.

Different Monthly Plan Monthly charge$50$80$108$138 Minutes Charge for extra minute $1.1$1.0$0.9$0.8

For example, in the $50 plan, it cost 1 dollar to have 6 minute, but if you exceed 300 minute, it cost you $1.1 per minute, so people will tend to choose $80 plan if they use around 300 minute in order to avoid high extra charge.

Value-added Services Text-messaging SMS Statistics for Special Dates (unit in thousands) New Year Day Chinese New Year Day Valentine’s Day Christmas Day Year SentReceivedSentReceivedSentReceivedSentReceived ,71611, ,93612,16310,77812,9048,04110,979---

Value-added Services Free Value-added Services: –Intra-operator SMS –Call forwarding –Caller number display –Call waiting –Voice mail –Conference call –Missed call alerts

Example SmarTone-Vodafone –Monthly Plan VS. Stored-Value SIM Card

Monthly Plan Monthly FeeBasic + Intra minsFree Service $ Intra SMS -Full Value- added services

Stored-Value SIM Card –Call minutes ($0.2/min)550*$0.2 –Caller Number DisplayFree –Call waiting Free –Call Forwarding ($15/month)$15 –Voice Mail ($15/month) $15 –SMS ($0.2/intra sms)10*$0.2 $142

Implications Bundling –Different services are bundled in a tariff plan Customers are locked-in –Free intra-operator sms –Discounted intra-operator minutes

Mobile Number Portability Mobile Number Portability (MNP) –enables customers to retain their mobile telephone numbers when changing from one mobile network operator to another mobile network operator –Implemented from 1 March, 1999

Month Number of Successful Portings Jan ,965 Feb ,677 Mar ,854 Apr ,539 May ,658 Jun ,521 Jul ,298 Aug ,627 Sep ,893

Benefits avoid the costs and inconvenience associated with a number change –cost savings from not having to change mobile number –cost savings from switching to more efficient operators

Benefits keen competition among operators –improvements in efficiency –price reductions result from increased competition avoid repetition and associated costs –savings as a result of there being fewer number changes

Future trend: 3G Evolution start: since 1999 in Japan Now: 60 3G networks in 25 countries Reason for change: limited capacity of the existing 2G networks

What is 3G? 1st generation (1980s): Analogue network 2nd generation (1990s): Digital network Wireless telephone technology Speed: 9.6 kilobits per second

What is 3G? 3rd generation: wireless mobile technology with data and voice transmission capacities high speed mobile services ( Video calling, messaging, , games, news and information services) Speed: Two megabits per second UMTS (Universal Mobile Telecommunications Services)

Strategy adopted Similar to the “Nintendo and Sega Case” 3G network providers: CSL, Hutchison, SmarTone, SUNDAY Others: “Wait-and-see” strategy

Challenges for network provider 2G network: Huge initial capital invested Start from 1990s Budget not yet recover High entry fee: 3G service licenses New network required

Challenges for network provider Lack of 2G mobile user buy-in for 3G wireless service Lack of coverage High prices of 3G mobile services mobile phone handsets currently available failed to excite public imagination

Cost Minimization Government: Flexibility in license payment Fixed license payment for the first 5 years Suggestion from Industry: Separating service provision from network operation Mobile Virtual Network Operator (MVNO)

Thank You!

Q & A