1. 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)
Jason Dedrick , Kenneth L.Kraemer, Greg Linden
電管一 R 江濡伃

2. 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

3. 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?

4. 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.

5. 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.

6. 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.

7. Comparison of inputs

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

9. 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

10. 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)

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

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

13. 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 .

14. 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.

15. 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

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. THE END