TMitTI 1 © Sakari Luukkainen Timetable Introduction, Sakari Luukkainen Technology Marketing, Jari Haggren Market Dynamics of Telecom Industry, Sakari Luukkainen Standardization, Sakari Luukkainen Case GSM, Sakari Luukkainen Product Strategy, Eino Kivisaari Product Strategy, Eino Kivisaari R & D Management, Sakari Luukkainen R & D Management, Case TeliaSonera, Jyrki Härkki Corporate Venturing, Case Nokia, Taina Tukiainen Technology Foresight, Sakari Luukkainen Examination

TMitTI 2 © Sakari Luukkainen Determinants of technology strategy Technology Strategy Technical Capabilities Experience INTEGRATIVEMECHANISMSINTEGRATIVEMECHANISMS GENERATIVEMECHANISMSGENERATIVEMECHANISMS Strategic Behaviour Internal Environment External Environment Organizational Context Technology Evolution Industry Context Source: Burgelman & Rosenbloom

TMitTI 3 © Sakari Luukkainen 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 Content

TMitTI 4 © 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 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 along with the technology evolution as they become more educated about the benefits it provides

TMitTI 5 © Sakari Luukkainen Market uncertainty and Internet A similar phenomen is occuring 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

TMitTI 6 © 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

TMitTI 7 © 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 solution to reduce switching cost Proprietary interfaces vs. open system

TMitTI 8 © 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 that customer´s total switching costs, plus the quality or cost advantage of current supplier’s product

TMitTI 9 © Sakari Luukkainen Contractual commitmentsCompensatory or liquidated damages Durable purchasesReplacement of equipment Brand-specific trainingLearning new system Information and dbConverting data to new format Specialized suppliersFinding of new supplier Search costsLearning about quality of altern. Loyalty programsLost benefits from existing supplier Type of Lock-in Switching Costs

TMitTI 10 © 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 through life-cycle

TMitTI 11 © 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

TMitTI 12 © Sakari Luukkainen Positive Feedback Market Share (%) Time Winner Loser Battle zone

TMitTI 13 © Sakari Luukkainen Adoption Dynamics Number of Users Time Saturation Launch Takeoff Critical mass

TMitTI 14 © Sakari Luukkainen Internet Servers Source: Koski, H., Rouvinen, P., & Ylä-Anttila, P. (2001)

TMitTI 15 © Sakari Luukkainen Case: Fax-service Source: Varian)

TMitTI 16 © Sakari Luukkainen Demand-side Economies of Scale Value to User Number of Compatible Users Virtuous cycle Vicious cycle

TMitTI 17 © 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.

TMitTI 18 © 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) = n 2 – 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 in prior product variants

TMitTI 19 © 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.

TMitTI 20 © Sakari Luukkainen Performance vs Compatibility Compatibility Performance Evolution Revolution Improved Design or adapters

TMitTI 21 © Sakari Luukkainen Openness vs Control Your Share of Industry Value Total Value Added to Industry Proprietary Open Your Reward Optimum

TMitTI 22 © Sakari Luukkainen Mobile market in Finland During the 1990s Finland was the forerunner in mobile voice and SMS Saturation of mobile subscriptions was reached quite early on in Finland Currently only slow to moderate growth in both fixed and mobile telecommunications In new mobile data services not any more clear forerunner position Source: Ficom 2003

TMitTI 23 © Sakari Luukkainen Categorization of industry actors Network operators Traditional companies that have gradually built their infrastructure All mobile traffic still passes through their infrastructure, regardless of new service providers Service providers Traditional telecommunications service providers + diverse competitors Branding partners Outside partners that lend their brand name to service providers

TMitTI 24 © Sakari Luukkainen NetworkServiceBrand TeliaSonera Hesburger SaunalahtiPasseli Globetel ACN Finland Finnetcom NetFonet CDF Mobile Radiolinja OrigoRadiolinja Cubio Tele2 MTV3 Song Networks Kolumbus Finnet VerkotDNA Fujitsu Services PGOne GoMobile Wireless Maingate Current actors

TMitTI 25 © Sakari Luukkainen Recent developments The most significant development ( ): the introduction of the number portability arrangement 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%

TMitTI 26 © Sakari Luukkainen Competition After introduction phase much of the competition has been and continues to be price-based Aggressive discounts in the form of free calls have been offered to new subscribers 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 Source: Kohonen 2004

TMitTI 27 © 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

TMitTI 28 © 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 Customers that value the image and reliability of their provider Customers that use more services and also new services These customers can be developed further However scarce competition through differentiation Source: Kohonen 2004

TMitTI 29 © Sakari Luukkainen Service offerings 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 Pre-paid likely to become more popular Currently mobile data services create only few procents of operators revenues (disappointment in WAP, low GPRS usage etc.) Increasing importance of content services

TMitTI 30 © Sakari Luukkainen Mobile content economics Capacity needed Value/price to enduserValue for operator (€/MB) SMS160 bytes0,14 € / message875 MMS30 kB0,39 € / message13 Voice16 kb/s0,12 € / min1 GPRS Internet access kb/s 1 € / MB (ADSL 35 € / month)1 Music streaming128 kb/s0,5 € / min0,5 Video streaming384 kb/s1 € / min0,35

TMitTI 31 © Sakari Luukkainen Future projections Price competition will have to settle down in the long term New offerings to target niche customers Rationalization of customer service -> move to Internet based customer service Rationalization of sales channels -> subscriptions no longer sold through specialized sales points Bundling of equipment, subscription and services may be possible Bundling could help 3G adoption rates 3G will need a boost completely new services Source: Kohonen 2004