1. TMitTI 1 © Sakari Luukkainen T-109.4300 Network Services Business Models (3 cr) Sakari Luukkainen Helsinki University of Technology Telecommunications Software and Multimedia Laboratory

2. TMitTI 2 © Sakari Luukkainen Goal of the course The course is especially designed to Telecommunications Software A2 Study Module and to Master's Programme in Mobile Computing To describe describe the challenges service providers face in offering new mobile services taking into consideration both the business aspects and the fast developing technology requirements and possibilities The course focuses on theoretical models of the network services commercialization process as well as practical case examples related to mobile multimedia services

3. TMitTI 3 © Sakari Luukkainen Graduating the course The preferred prerequisite for this course is basic knowledge of telecommunications networks and business economics 10 lectures (incl. visiting lectures from industry), on Wednesdays hall T2, at 10.15-12 Exam requirements consist of the lectures and the following book: Bernd Eylert: The Mobile Multimedia Business, Requirements and Solutions, 2005

4. TMitTI 4 © Sakari Luukkainen Graduating the course First examination is 9.5.2006 at 9 - 12 in lecture hall T1 and the enrollment to the exam will be done via Topi, 4 exams / year Exam consists of three essay questions of which two is compulsory, six concept definitions and one applied question concerning some real life business case The exam results will be published within a month in the course www-page and T-109 notice board

5. TMitTI 5 © Sakari Luukkainen Prerequisites Industrial Management B1 Compulsory courses S-38.3001 Telecommunications Forum 1-5 T-109.5410 Teknologiajohtaminen tietoliikenneteollisuudessa 3 S-38.3041 Operaattoriliiketoiminta 3-5 Optional courses T-109.7510 Research Seminar on Telecommunications Business 5 T-110.5110 Tietokoneverkot II – edistyneet ominaisuudet 4 T-124.5100 Verkottuneet liiketoimintaprosessit ja –mallit 4 TU-91.2005 Strategic Management of Technology and Innovation 5 T-86.5300 ICT Enabled Commerce 4-6 Networking Business A3

6. TMitTI 6 © Sakari Luukkainen Current slowdown in the mobile communications business - the development only have moved first two steps forward and now one step backward – back to the realistic growth track Media catalysts overestimated expectations in growth phase, and panic in decline phase High 3G license costs delay development Most of the success is related to GSM technologies Recent hyper price competition in the finnish mobile voice and SMS market - GSM related mobile services have become commoditized If so fast price decline and technological maturity precedes again global development, the whole value chain would require ever increasing cost reductions if new innovations and related business opportunities do not arise Background of the course

7. TMitTI 7 © Sakari Luukkainen No history data of business related to new business opportunities of emerging mobile technologies – difficult to forecast, unreliable market research During the starting phase of new technology cycle several emerging technological variants and their substitutes try to obtain the uncertain market acceptance Market uncertainty is currently high - many technical possibilities open up with unclear market need - many failures and unexpected success Background of the course

8. TMitTI 8 © 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 A similar phenomen has happened with the Internet, nobody predicted in the early 90´s what Web is today and its impact to society Source: Gaynor, 2002

9. TMitTI 9 © 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 Source: Gaynor, 2002

10. TMitTI 10 © Sakari Luukkainen Era of Incremental Change Era of Ferment Technological Discontinuity Dominant Design Variation Selection Era of Incremental Change Era of Ferment Technological Discontinuity Dominant Design Variation Selection Technological Substitution Technology cycle

11. TMitTI 11 © Sakari Luukkainen Positive Feedback Market Share (%) Time 100 50 Winner Loser Battle zone Source: Shapiro & Varian, 1999

12. TMitTI 12 © Sakari Luukkainen Demand-side Economies of Scale Value to User Number of Compatible Users Virtuous cycle Vicious cycle Source: Shapiro & Varian, 1999

13. TMitTI 13 © 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.

14. TMitTI 14 © 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

15. TMitTI 15 © Sakari Luukkainen Adoption Dynamics Number of Users Time Saturation Launch Takeoff Critical mass Laggards (16%) Late majority (34%) Early majority (34%) Early adopters (13,5%) Innovators (2,5%) Source: Rogers, 1995

16. TMitTI 16 © Sakari Luukkainen Internet Servers 199119931995199719992001 0 40 80 120 Source: Koski, H., Rouvinen, P., & Ylä-Anttila, P. (2001)

17. TMitTI 17 © Sakari Luukkainen Fax-service Source: Varian

18. TMitTI 18 © Sakari Luukkainen Lock-in in the ICT markets 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 & Elisa example: low number of moving customers before portability of telephone number iki.fi e-mail solution to reduce switching cost Proprietary interfaces Source: Shapiro & Varian, 1999

19. TMitTI 19 © Sakari Luukkainen Lock-in in the ICT markets 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 Source: Shapiro & Varian, 1999

20. TMitTI 20 © Sakari Luukkainen Business Model – definition in course Describes how to extract value from a mobile service innovation It converts new technology to economic value (utility for customers) Plan by which a business intends to generate revenue and profits taken into account the dynamics of related value chain

21. TMitTI 21 © Sakari Luukkainen Mobile business value chain Content provider Application provider Network/ Service Operator Enduser Terminal manufacturer

22. TMitTI 22 © 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 then extended into data services using WAP protocol The reason of failure were low level of relevant applications to endusers parallel with high pricing – high experimentation barrier 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

23. TMitTI 23 © Sakari Luukkainen Mobile market in Finland GSM was launched in 1991 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 growth In new mobile multimedia services no forerunner position any more Source: Ficom 2003

24. TMitTI 24 © 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) 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%

25. TMitTI 25 © Sakari Luukkainen Mobile market in Finland Competition has been price-based, revenue per subscriber (ARPU) has decreased significantly to about 30 e / month, roaming still significant revenue source because of scarce competition Scarce competition through differentiation Currently mobile data services (excluding SMS) create only few procents of operators revenues (disappointment in WAP, MMS, 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

26. TMitTI 26 © Sakari Luukkainen Mobile content economics Capacity needed Value/price to enduserValue for operator (€/MB) SMS160 bytes0,14 € / message875 MMS30 kB0,39 € / message13 Voice (fixed)16 kb/s0,12 € / min1 GPRS Internet access (+VoIP)115-348 kb/s1 € / MB1 Music streaming128 kb/s0,5 € / min0,5 Video streaming384 kb/s1 € / min0,35

27. TMitTI 27 © Sakari Luukkainen Conclusion Flat-rate pricing and VoIP comes to mobile, price near current ARPU Back to consolidation path Price competition will settle down and open market for differentiation by 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

28. TMitTI 28 © Sakari Luukkainen Agenda 25.1. Introduction, Sakari Luukkainen 1.2. Mobile Com. Markets (course book chapter 2), Sakari Luukkainen 8.2. Services and Applications (chapter 3), Sakari Luukkainen 15.2. Mobile TV Case, Eino Kivisaari 22.2. Spectrum, Regulation and Lic. (chapters 5,6), Sakari Luukkainen 1.3. Mobile Consumer Behaviour (chapter 7), Sakari Luukkainen 8.3. Internet and Mobile Netw. Convergence, Timo Ali-Vehmas 15.3. Content Production in Mobile Case, Aape Pohjavirta 22.3. Mobile Services and Bus. Processes, Sakari Luukkainen 29.3. Mobile Appl. Devel., Case Mind on Move, Teemu Ropponen 9.5. Examination