1. Timetable 20.9. Introduction, Sakari Luukkainen
27.9. Solution Business, Case Sun Microsystems, Topi Talonen
4.10. Market Dynamics of Telecom Industry, Sakari Luukkainen
Standardization Strategy, Sakari Luukkainen
Case GSM, Sakari Luukkainen
R & D Management, Sakari Luukkainen
1.11. Linking Business Thinking with Research, Teppo Paavola
8.11. Product Strategy, Sakari Luukkainen
Platform Leadership, Sakari Luukkainen
Case Nokia Symbian Product Platforms, Lea Lahti
29.11 Technology Foresight, Sakari Luukkainen
Examination
© Sakari Luukkainen

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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
© Sakari Luukkainen

8. 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

9. 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

10. 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

11. 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

12. Positive Feedback Winner Market Share (%) Battle zone Loser Time 10050
Battle zone
Loser
Time
© Sakari Luukkainen

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

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

15. Fax-service
© Sakari Luukkainen
Source: Varian

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

17. 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

18. 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

19. 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

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

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

22. 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

23. 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

24. Recent developments
The most significant development ( ): 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

25. 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

26. 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

27. 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

28. 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

29. 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
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

30. 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: , 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