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

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

Technology cycle Technological Substitution Variation Selection Discontinuity Variation Era of Incremental Change Era of Ferment Technological Discontinuity Selection Variation Dominant Design Era of Incremental Change Era of Ferment Selection Dominant Design © Sakari Luukkainen

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

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

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

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

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

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

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 © Sakari Luukkainen

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

Positive Feedback Winner Market Share (%) Battle zone Loser Time 100 50 Battle zone Loser Time © Sakari Luukkainen

Adoption Dynamics Saturation Number of Users Takeoff Launch Critical mass Time © Sakari Luukkainen

Internet Servers 1991 1993 1995 1997 1999 2001 40 80 120 © Sakari Luukkainen Source: Koski, H., Rouvinen, P., & Ylä-Anttila, P. (2001)

Fax-service © Sakari Luukkainen Source: Varian

Demand-side Economies of Scale Virtuous cycle Value to User Vicious cycle Number of Compatible Users © Sakari Luukkainen

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

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

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

Performance vs Compatibility Evolution Improved Design or adapters Compatibility Revolution Performance © Sakari Luukkainen

Openness vs Control Proprietary Your Share of Industry Value Optimum Your Reward Open Total Value Added to Industry © Sakari Luukkainen

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

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 Source: Ficom 2003 © Sakari Luukkainen

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

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

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

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 Source: Numpac 2003 © Sakari Luukkainen

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

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 Music streaming 128 kb/s 0,5 € / min 0,5 Video streaming 384 kb/s 1 € / min 0,35 © Sakari Luukkainen

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 © Sakari Luukkainen