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Emergent 4G LTE Greenfield Opportunities and Innovative Business Models in the Mobile Ecosystem - Erik Holthe Eriksen - 2011

Emergent 4G LTE Greenfield Opportunities and Innovative Business Models in the Mobile Ecosystem - Erik Holthe Eriksen - 2011

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Published by Erik H Eriksen
The technological shift towards full IP-based LTE will create newcomer/’greenfield’ opportunities for data service providers to drive growth with new services through innovative business models. In this master thesis, written at NTNU, NHH and MIT Sloan, I have explored business models to exploit emerging 4G LTE technology shift while leveraging affordable availability of mobile broadband technology and infrastructure. The goal has been to understand the market, find opportunities and a business model that creates value and fits with the current market conditions and trends.
The technological shift towards full IP-based LTE will create newcomer/’greenfield’ opportunities for data service providers to drive growth with new services through innovative business models. In this master thesis, written at NTNU, NHH and MIT Sloan, I have explored business models to exploit emerging 4G LTE technology shift while leveraging affordable availability of mobile broadband technology and infrastructure. The goal has been to understand the market, find opportunities and a business model that creates value and fits with the current market conditions and trends.

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THE EVOLVING NATURE OF INNOVATION IN THE MOBILE ECOSYSTEM: EMERGENT GREENFIELD OPPORTUNITIES AND NOVEL BUSINESS MODELS FOR

NEXT-GENERATION MOBILE OPERATORS by Erik Holthe Eriksen Bachelor of Electrical Engineering, Forsvarets Ingeniørhøgskole, 2002 Officers’ academy, Norwegian Military Academy (Krigsskolen), 2008 A thesis submitted in partial fulfillment of the requirements for the degree of Master of Technology Management (MTM) Norwegian University of Science and Technology – NTNU Dep. of Industrial Economics and Technology Management Visiting fellow Massachusetts Institute of Technology – MIT Sloan School of Management 2011

Signature of Author: ______________________________________________ Erik Holthe Eriksen, 1. February 2011 Certified by: _______________________________________________ Per Jonny Nesse, Thesis Advisor, IOT/NTNU ______________________________________________ Endre Sjøvold, Program Director, IOT/NTNU

Accepted by:

NORWEGIAN UNIVERSITY OF SCIENCE AND TECHNOLOGY, NTNU

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ABSTRACT

THE EVOLVING NATURE OF INNOVATION IN THE MOBILE ECOSYSTEM: EMERGENT GREENFIELD OPPORTUNITIES AND NOVEL BUSINESS MODELS FOR NEXT-GENERATION MOBILE OPERATORS

Erik Holthe Eriksen Thesis Advisor: Per Jonny Nesse, NTNU

At the end of 2010 there were over 1 billion mobile data users worldwide and the number of apps had reached 500.000. There were 700 million social networkers, public cloud spending of 23 billion USD and 5 billion non-computer devices. A low number of mobile users are today consuming close to all of the available bandwidth with increased download of web, video, VOIP and email. The need for increased mobile bandwidth is higher than ever and Long Term Evolution (LTE) is said to reach an inflection by 2012-13. LTE will begin building momentum in 2011. Developed markets will most likely prefer LTE to WiMax and auctioning of frequency spectrum is on the way in many countries. One of the key challenges for operators is return of investments (ROI) and holding on to customers who want a low cost per bit, and are beginning to view mobile broadband as a commodity and utility. The technological shift towards full IP-based LTE will create newcomer/’greenfield’ opportunities for data service providers to drive growth with new services through innovative business models. This evolution will also attract many new and existing players who will gradually change the mobile operator ecosystem. In this thesis I have explored innovative business models to exploit emerging 4G and LTE technology shift while leveraging affordable availability of mobile broadband technology. The goal has been to find opportunities and a business model that creates value and fits

with the current market conditions and trends. I have investigated developed markets (Finland), forecasted trends, uncovered technological and business opportunities, and found novel ideas and models. The initial brainstorming and empirical findings session was done over a month’s work in Boston and Helsinki through a pre-startup project with students from Massachusetts Institute of Technology Sloan School of Management (MIT Sloan), Norwegian University of Science and Technology (NTNU) and Aalto University in Helsinki. The project was also supported by Hewlett-Packard communications and media solutions (HP CMS). A survey was conducted with 200 mobile customers. In-depth interviews were done with technology companies and key governmental officials in Finland. The interview with Peter Vesterbacka of Rovio/Angry Bird was published in Dagens Næringsliv newspaper, http://www.dagensit.no/article2079580.ece, and an article was written for the MIT entrepreneurship review, http://miter.mit.edu. Finland was used as a case study due to its early adoption mobile market. Market investigation has been done using a system dynamics approach together with Porter’s five forces to better understand competitive rivalry, complexity, barriers to entry, buyer power, supplier power and threat from substitutes. A collection of ideas was analyzed and presented using Osterwalder’s business model framework where cost, revenue and profitability was assessed. This has shown to be a risky, complex and capital-intensive task. Profitability is very sensitive to infrastructure capex and market share. Based on findings and analysis, a greenfield operator seems to fit well with the current market conditions and trends. A new entrant, with no legacy investment, seems to be free to choose the best technology and best commodity business model. The key elements to a value proposition has seemed to be the provision of fast inexpensive data with simplicity, cost leadership, lean operation and differentiation through quality of service, business-class services, wholesale, and added value services.

Table of Contents
List  of  figures  ...............................................................................................................................  iii   Acknowledgments  .....................................................................................................................  iv   Chapter  1:  Introduction  ............................................................................................................  1   Background  and  purpose  ...................................................................................................................  2   Problem  and  scope  ...............................................................................................................................  3   Hypotheses  and  limitations  ..............................................................................................................  5   Chapter  2:  Methodology  ...........................................................................................................  7   Focus  group  .............................................................................................................................................  8   Survey  ......................................................................................................................................................  10   Interviews  ..............................................................................................................................................  13   Chapter  3:  Theory  .....................................................................................................................  15   The  business  model  ontology  .........................................................................................................  16   Porter’s  5  forces   ...................................................................................................................................  20   System  dynamics  .................................................................................................................................  21   Chapter  5:  Technology  overview  ........................................................................................  22   LTE  technology  .....................................................................................................................................  23   Mobile  standards  evolution  ............................................................................................................  26   LTE  benefits  ...........................................................................................................................................  28   Chapter  4:  Empirical  findings  ...............................................................................................  31   Ideas  from  focus  group  .....................................................................................................................  32   Interviewing  officials  and  experts  ................................................................................................  35   Questionnaire  understanding  subscribers  ...............................................................................  39   Chapter  6:  Market  opportunities  and  threats  ................................................................  45   Macro  and  industry  trends  ..............................................................................................................  46   Market  overview  .................................................................................................................................  47   Operators  cost  structure  ..................................................................................................................  48   Market  dynamics  and  forces  of  rivalry  .......................................................................................  50   Threat  of  substitutes:  .......................................................................................................................................  51   Barriers  to  entry:  ................................................................................................................................................  52   Supplier  power:   ...................................................................................................................................................  54   Buyer  power:  ........................................................................................................................................................  55   Concluding  remarks  ...........................................................................................................................  58   Chapter  7:  Business  model  ....................................................................................................  61   Value  proposition  ...............................................................................................................................................  62   Target  customer  segments  ............................................................................................................................  63   Distribution  channels  .......................................................................................................................................  64   Customer  relationships  ...................................................................................................................................  64   Value  configuration  and  activities   ..............................................................................................................  64   Core  capabilities  and  resources  ..................................................................................................................  65   Partner  network  .................................................................................................................................................  66   Cost  structure  .......................................................................................................................................................  66   i

Revenue  streams  ................................................................................................................................................  68   Profitability  ...........................................................................................................................................................  70  

Chapter  9:  Concluding  remarks  and  recommendations  ............................................  73   Glossary  ........................................................................................................................................  75   Bibliography  ...............................................................................................................................  77  

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LIST OF FIGURES

Figure  1:  Phases  in  an  innovation  project  for  startups  (Innovasjon  Norge,  2008).  ....................................................  5   Figure  2:  Business  idea,  model,  case  and  plan.  ...........................................................................................................................  17   Figure  3:  What  questions  to  ask  on  creating  a  business  model  (Nesse,  2011)  ...........................................................  17   Figure  4:  Osterwalder’s  building  blocks  of  a  business  model  (Osterwalder,  2004)  .................................................  18   Figure  5:  Describing  Porter’s  5  forces.   ............................................................................................................................................  20   Figure  6:  System  dynamics  model  ....................................................................................................................................................  21   Figure  7:  Map  of  LTE  in  Europe  (Frost  &  Sullivan,  2010).  ....................................................................................................  22   Figure  8:  Spectrum  needs  (IDC,  2010).   ...........................................................................................................................................  25   Figure  9:  Speed  versus  mobility  with  evolving  standards.  ....................................................................................................  27   Figure  10:  Key  LTE  benefits.  ................................................................................................................................................................  28   Figure  11:  LTE  service  offerings  (Hontzeas,  2010).  .................................................................................................................  29   Figure  12:  Figures  showing  mobile  data  explosion  (IDC,  2010).   .......................................................................................  45   Figure  13:  Mobile  internet  ramping  faster  than  fixed  ever  did.  Apple  leading.  (Morgan  Stanley,  2010)  .....  46   Figure  14:  Global  mobile  broadband  forecast  2015  on  the  left  (4G  Americas,  2010)  and  LTE  forecast  in   western  Europe  on  the  right  (BMI,  2010).  ....................................................................................................................................  47   Figure  15:  High-­‐level  capex  and  opex  for  mobile  operators  (IDC,  2010)  ......................................................................  48   Figure  16:  Tower  site  installation  capex  (IDC,  2010)  .............................................................................................................  49   Figure  17:  Mobile  broadband  argued  to  be  profitable  in  article  by  Ericsson.  (Blennerud,  2009)  ....................  49   Figure  18:  Consumers,  technology  vendors,  operators  and  regulators  dynamically  impact  each  other.  .....  50   Figure  19:  Diffusion  of  innovation  and  technology  s-­‐curve.  ................................................................................................  51   Figure  20:  Monetization  of  data  will  favor  operators  with  LTE  capability  in  the  future.  ....................................  52   Figure  21:  Dynamics  of  regulative  push  (Eriksen,  2010)  ......................................................................................................  53   Figure  22:  Dynamics  of  technology  progression  (Eriksen,  2010).  ....................................................................................  55   Figure  23:  Customer  driven  dynamics  in  a  system  dynamics  model.  ..............................................................................  56   Figure  24:  Examples  on  classifying  customers  using  Hax’s  delta  model  on  strategic  positioning  (Eriksen,   2010).  ..............................................................................................................................................................................................................  57   Figure  25:  A  system  dynamics  perspective  of  technology,  customer  and  regulation  push  (Eriksen,  2010).  59   Figure  26:  Osterwalder  business  model  canvas  (Nesse  P.  ,  2011).   ....................................................................................  61   Figure  27:  Showing  sudden  increase  in  costs  at  52%  and  80%  network  coverage.  ................................................  68   Figure  28:  Cashflow,  capex  remaining,  network  opex  versus  net  revenue.  ..................................................................  68   Figure  29:  5  year  financial  projections.  .........................................................................................................................................  70       Table  1:  Technical  and  financial  parameters  when  calculating  cost  of  building  network.  .................................  67   Table  2:  Income  statement.  ..................................................................................................................................................................  69  

   

iii

ACKNOWLEDGMENTS

I wish to express sincere appreciation to Per Jonny Nesse and Endre Sjøvold at NTNU for their assistance in the preparation of this manuscript. I will also forward a special thanks to Michael Chiu (MIT Sloan Fellow), Azamat Abdimominov (MIT SDM-program), Juris Bariss (MIT Sloan Fellow), Henry Minsky and HP team, all with whom I discussed many ideas at MIT Sloan School of Management. Further, I thank Tove Krokstad at NTNU, Chan Q Phan, Ellen Shea and James Utterback at MIT Sloan for coordinating the NTNU MTM and MIT Visiting Fellows program. I want to thank Ikon AS consultancy firm for supporting me in this program. Last but not least I would like to thank my beloved family for their support and patience.

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CHAPTER 1: INTRODUCTION

“Developing a strategy in a newly emerging industry or in a business undergoing revolutionary technological changes is a daunting proposition. In such cases, managers face a high level of uncertainty about the needs of customers, the products and services that will prove to be the most desired, and the best configuration of activities and technologies to deliver them. Because of all this uncertainty, imitation and hedging are rampant: unable to risk being wrong or left behind, companies match all features, offer all new services, and explore all technologies. During such periods in an industry's development, its basic productivity frontier is being established or reestablished. Explosive growth can make such times profitable for many companies, but profits will be temporary because imitation and strategic convergence will ultimately destroy industry profitability. The companies that are enduringly successful will be those that begin as early as possible to define and embody in their activities a unique competitive position. A period of imitation may be inevitable in emerging industries, but that period reflects the level of uncertainty rather than a desired state of affairs. In high-tech industries, this imitation phase often continues much longer than it should. Enraptured by technological change itself, companies pack more features - most of which are never used - into their products while slashing prices across the board. Rarely are trade-offs even considered. The drive for growth to satisfy market pressures leads companies into every product area. Although a few companies with fundamental advantages prosper, the majority is doomed to a rat race no one can win. Ironically, the popular business press, focused on hot, emerging industries, is prone to presenting these special cases as proof that we have entered a new era of competition in which none of the old rules are valid. In fact, the opposite is true.” (Porter, 1996) Business Plan as a thesis: A business plan or feasibility study can include an industry analysis, a market assessment, and plans for product development, marketing, financing, and staffing (MIT Sloan School of Management, 2009).
1

Background and purpose

The premise of mobile technology shift and disruptive innovation is upon us. Mobile broadband is becoming widespread, faster and is replacing fixed broadband. New technology offers opportunities. Telcos have high legacy costs and access is becoming a commodity. There exists a power struggle between Telcos and so-called over-the-top providers who are leapfrogging these legacy costs and infrastructure dependencies. Skype is offering free mobile broadband and Telcos are struggling on monetizing on their services. Broadband is becoming a necessity that citizens are required to have. Customers are struggling to understand the different subscriber plans and are already paying a high amount. Other opportunities arise with the access of devices, mobile VoIP, cloud computing, telepresence, vehicles, telemetrics, location based services and improved logistics. LTE will provide an IP core network that will decrease opex and open up for new players. I would like to find opportunities that solve a real pain point for customers, are big enough to justify capex, take advantage of the LTE technological benefits, creates growth and are unique. The purpose of this study is further to analyze the market and find business opportunities that arise within this technology disruption. The results will we be discussed and used in a business model. If there is an opportunity or part of an opportunity that is viable in this study, then I would like to pursue this in a startup or present it to investors post graduation. Many ideas suggested in this study are neither novel nor unique but could leverage the business model innovation yet to be unraveled by dominant design in the mobile operator industry.

2

Problem and scope

Problem statement: What  business  model  would  seem  viable,  given  that  we  were  to  start   a   new   mobile   network   operator   seeking   to   take   advantage   of   emerging  4G/LTE  technology  shift?     -­‐ What  is  important  to  consider  when  creating  a  business  model?   -­‐ Does  4G/LTE  technology  shift  represent  a  business  opportunity?   -­‐ What  are  the  current  market  conditions,  opportunities,  threats   and  future  trends?   -­‐ What  business  ideas  seem  to  fit  the  market?   -­‐ How  could  a  viable  business  model  look  like?   -­‐ What  are  the  cost  structures  and  revenue  streams?  
In every new innovation or change in the industry there comes opportunities. In this thesis I will explore and discuss business models that could exploit emerging 4G and LTE technology shift. The goal is to get an increased understanding of the market ecosystem and customer needs in order to find out what kind of, if any, novel business model would fit this market. The scope of this thesis is a pre-development phase for a new mobile operator focusing on market investigation, idea generation and business model development. General structure and scope of thesis:

1. Main  topics   a. Describing  technology  and  business  opportunities/threats   b. Explaining  mobile  ecosystem,  market  overview,  dynamics  and  trends.   c. Finding  and  prioritizing  business  ideas   d. Creating  a  profitable  business  model.   2. Methodology   a. Presenting  focus  group,  interviews  and  survey   3

3. Theoretical  framework   a. Defining  what  a  business  model  is  (Osterwalder).     b. Define  framework  suitable  for  analyzing  and  mapping  market   dynamics  (system  dynamics)  to  better  understand  market   c. Define  framework  for  analyzing  entry  barriers,  competition,   opportunities  and  threats  to  find  a  strategy  (Porter’s  5  forces)   4. Technological  shift   a. Define  the  technology.  Verify  that  4G/LTE  represents  an  opportunity   5. Market  opportunities  and  threats   a. Macro  and  industry  trends.  Market  overview  and  dynamics.   b. Consumer  survey  to  find  current  pains  and  underserved  markets.     c. Interviewing  officials  and  experts  in  Finland  to  understand  market   6. Finding  business  ideas   a. Brainstorm,  discuss  and  prioritize  ideas   7. Value  proposition  and  business  modeling   a. Discussing  value  proposition,  customers  relationships,  customer   segments,  channels,  revenue  streams,  cost  structure,  partners,   activities  and  resources  using  Osterwalder’s  framework.   b. Creating  an  adaptive  financial  model  capturing  capex  and  opex,  cash   flow,  NPV,  revenue  projections  and  profitability.   8. Conclusion   a. Business  opportunities  due  to  technological  change   b. Market  overview,  opportunities  and  threats   c. Recommended  business  model.   d. Limitations  on  findings  and  results.  Suggest  further  research.  

4

Hypotheses and limitations

Mobile telecom remains a highly profitable business in most markets and broadband access is becoming a commodity in the western world. I have several hypotheses in my field of study where LTE offers the key advantages. Auctioning of spectrum could favor small players offering something different and relevant. Large markets are highly competitive but opportunities could exist in smaller. Mobile telecom market is transforming with deverticalization of the industry, fewer entry-barriers, merging of voice and data, and incumbents burdening with legacy infrastructure. Owning network could be key and gives more power, but is costly. Seemingly there are many investors. Services like Facebook, Skype, YouTube, Google, Viber and apps are eating up incumbents’ profits and not paying Telcos for infrastructure usage in a net neutral market (in most western countries). This thesis does not cover the scope of a full business concept and business plan, but gives a model of possible implementation and ways of earning revenue. The model contains some estimates and indeterminate parameters due to unavailability of data (e.g. cost of spectrum & equipment, partner cost- and revenue-sharing). A simplified version of stage gate model on innovation projects has been made by Innovation Norway (see figure below).

Figure  1:  Phases  in  an  innovation  project  for  startups  (Innovasjon  Norge,  2008).    

 

There are several innovation phases of a startup before entering market and creating growth; ideas have to be generated, markets analyzed, and models/concepts investigated to decide if profitable. Market investigation has been an important phase to describe the market structure, forecast market development and explaining how the market functions. This thesis focuses on market and demographic information in developed markets like Finland, Norway and the US where mobile broadband is growing and handheld devices well adopted. Market entry and growth are phases not covered in this thesis. 5

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6

CHAPTER 2: METHODOLOGY

Most of the data used in this thesis has been provided by literature mentioned in the bibliography and with the help of a student focus group, surveys and interviews.

7

Focus group

The purpose of a focus group method is to share knowledge and create awareness on a topic, e.g. capturing hidden knowledge. The focus group, interested in the mobile technology business, helped this thesis on market analysis, understanding technology and market dynamics, idea generation and business development. The group ended up competing in the MIT’s 100k and NTNU’s venture cup business plan contest with a future mobile operator with the brand name Ukko. The group may also pursue to start a mobile operator post-graduation. Advantages of working in a group are creativity, discussing pros and cons, collective brainstorming and realistic analysis of adoption factors. Such adoption factors we discussed were perceived attributes like relative advantage, compatibility, complexity, trialability and observability (see Rogers 5 factors of innovation in the appendix). The method relies on a groups’ knowledge, hence risk of incorrect data. The goal was also to find a team for business contests as part of the learning experience and to start a mobile operator post-graduation. I traveled to Boston for 3 weeks and 1 week in Finland to contribute and gather data. Team member Juris Bariss (Latvia) holds a M.Sc. in electrical engineering and is studying for an MBA at MIT Sloan as a Sloan fellow. He has extensive background as an engineer and manager in the telecommunications and retail industry. Michael Chiu (USA) holds a Ph.D. in mechanical engineering and is a MIT Sloan fellow from 2008. He is both an entrepreneur and a manager with experience from developing new technologies and a broad range of experience in the semiconductor industry. Erik Holthe Eriksen (Norway) is studying for an MBA in technology management at NTNU MTM and MIT Sloan. He is an electrical engineer and a navy officer from the Norwegian military academy with several years’ telecom and IT experience working for the navy and as a consultant. Azamat K Abdymomunov (Kazakhstan) is a MIT Sloan SDM and Harvard Kennedy School graduate with experience from politics and system design. Henry Minsky (USA) is a software architect educated in EECS at MIT. The focus group also had discussions with HP CMS, IDC and 2 PhD students at the Aalto University. The groups’ analysis has contributed much to the discussions in this thesis. Brainstorming was done by having each member write different mobile business ideas on 10-20 yellow stick-its on a board and then grouping similar ideas together into buckets. Some ideas were conceptual for a mobile operator and high level, and some were characteristic- and feature-like that would be added features for a mobile operator (e.g. cloud computing). Each idea was given a pitch 8

by the responsible idea creator and the group voted by saying it was of low interest, medium interest or high interest. The ideas were analyzed to create a high-level business concept and specific featured services were grouped in what the group called petals (features) on a flower (core business). This brainstorming method was quite effective. The initial analysis on the market overview and trends was done through research on the Internet and collective brainstorming. Results from this can be found in the market analysis and business ideas chapter. The group prioritized and bucketed ideas to help turn them into a business model. Some of the ideas are core differentiators and some are add-on services that can be improved in the future. Some ideas seemed novel and useful but not all, e.g. Internet of things and machine-to-machine (M2M) devices is risky due to uncertain market timing.

9

Survey

Survey is a good method to use to get opinions and statistical data for a large volume of people, and which can be used to complement in-depth interviews and focus groups findings. Survey, as a method, was used to better understand customers’ current pain points and future needs as mobile and data users. The survey was distributed to approximately 3000 Facebook users and 500 email addresses totaling approximately 3500. The answers generally support market findings on the Internet, in-depth interviews and other surveys across the industry. The questions in the survey were targeted on the market overview and understanding customers as part of the problem/challenge. The survey focused on consumers’ usage frequency and willingness to pay versus mobile service/feature needs. The key was to find users consumption of data and pains together with the willingness to pay to understand consumers better. The reason for asking about features was to get a feeling of what type of data gets transferred the most, find underserved markets and find what add-on value a service provider could plan for in the future. There were 215 respondents. This makes the survey quite representative since a lot less that 3500 is supposed to have read the survey. I estimate that approximately 300 saw the Facebook posting out of the 3500 possible. This means that more than 60% of these responded, which can be considered as representative for mobile users mostly in the age range 25-45 in the western world. Most questions were mandatory but a few were open and optional. Of the 215 respondents, 32 were from Finland, 64 from Norway, 71 from USA and 48 from other countries (Kazakhstan, UK, Latvia, Lithuania, Saudi Arabia, Ukraine, Russia, Chile, Sweden, Denmark, Switzerland, Germany, Turkey, South Africa, Mexico, Belgium, Spain, Poland, Brazil and India). Most respondents were from the age group 25-45 (75%) and only 12% under 25 years old. As the survey was distributed to our job and school network of people, the responses might however only have validity relative to students taking a business or technology education (well educated). Reaching younger people under the age of 20 was difficult due to the complexity of the survey, their motivational interest and our limited distribution network (not enough Facebook friends in that age range). Posting the survey on a Facebook wall had the advantage that we could reach many respondents but the drawback were that we couldn’t follow up respondents 10

afterwards, or know how many saw the survey being posted. The theory below on validity and reliability is also representative about in-depths interview as a method (previous subchapter). The survey was tested several times to improve validity. There may be some confusion in the question on devices since smart phones are mentioned but not cell phones. Validity is the strength of responses, e.g. if questions and answers are credible and relevant? To test the validity that we were asking the right questions and getting answers that are statistically representative, the questions were passed around a test group before distributed and it was further improved through 3 phases. We started the survey by asking about some demographics like age and nationality, device use, monthly price paid today and consumption of data. A validity challenge was that the consumers could have hidden fees or not be certain about cost of monthly plan. Further, respondents couldn’t ask questions to the panel if there were unresolved questions regarding technology knowledge or future technological possibilities. Some respondents might have misunderstood questions or given false answers, e.g. if their employer pays the bills or misunderstanding the differentiation between circuit switched voice and voice over IP. The results also show that two respondents answered that they use their TV connected to 2G/3G networks, which shows an uncommon statement although it may be probable for mobile TVs. Some respondents also misunderstood the question regarding data consumption because of somewhat unclear options of low, medium or high-level mobile user. In part two we try to gain knowledge about which services and features consumers would see themselves using in the future. The feature-ideas that were chosen in the survey were brainstormed and categorized by the focus group. In retrospect the results on rating features and services can seem somewhat random and less valid since it is difficult for consumers to predict the future. The surveys’ respondents were of many different nationalities and there were market differences between countries. In Finland we found cheaper broadband offerings than in the US – e.g. only 2 euros for an unlimited plan. Reliability in research methods is the quality of repetitiveness, i.e. if a person was to take the test twice, he or she would give similar answers. Generally the survey can be considered concrete and relevant since most respondents had a mobile phone or tablet and hence were relevant as providers of answers. The survey would most likely have 11

provided similar answers if taken twice due to the reliable facts consumers provide. On the other hand questions regarding future thoughts might change over time due to technology evolution. Respondents were typically well-off students who have the economic power to buy a smart phone, laptop and/or tablet. When deciding on the type of data service in the survey, there is less reliability when analyzing Wi-Fi hotspots since hotspots are more common in certain areas than other. If the interviews were to be repeated in other countries by the same user, then the answers might be different.

12

Interviews

In-depth and qualitative interview as a method can be done to further understand a topic through e.g. experts’ opinions and to gain a representative knowledge. The goal of qualitative interviews was to capture the description from the expert who has knowledge about his area of expertise and environment. Interviews were conducted in Helsinki, Finland and made possible through the focus groups and HP CMSs connections. Summary of the interviews is attached in appendix b. Validity is the strength of responses, e.g. are questions and answers credible, true and relevant? Validity is important to evaluate in order to assure that we are asking the right questions and getting answers that are statistically representative. Thinking of Nokia and the Finnish as early adopters, Finland is regarded as a good place to start. With regards to validity it is thought that if a plan works in Finland it will work in other countries. Officials, mobile technology experts and entrepreneurs were interviewed to test the focus group’s understanding of the technology, market and business ideas in practice. Reliability in research methods means the quality of repetitiveness and consistency of the measurement, e.g. a person’s chance of giving similar answers if given the question twice. Questions were made in advance with accordance to subject’s background and their field of work. The quality repetitiveness is not that good because some questions were made up during the interview. Specifically we targeted fields like healthcare, mobile network management systems, frequency regulation, security networks, mobile experts and advisors. The following were interviewed: • • • • • • • Peter Vesterbacka of Rovio/Angry Bird Visa Koivu - Senior communications consultant to the Public Sector Finland Leonard Scheepsma - Business Development Manager Tekelec EMEA Ian Opperman - Head of the ICT teams at CSIRO Jouko Virtanen - CTO Helsinki University Hospitals Antti Kohtala - Senior Advisor at the Ministry of Traffic and Communications Aki Siponen - CIO Ministry of Defense 13

• •

Yrjö Pylvänäinen - Technology Director for State Security Networks Bill Rogas - IDC advisor within mobile networks.

Interview subjects were selected based expertise on the subject matter. The results from the interviews have been used for background data, and understanding the market conditions and trends. The main focus was on technology, market, business models, revenue streams and cost structure. The interview with Peter Vesterbacka of Rovio/Angry Bird was published in Dagens Næringsliv newspaper, http://www.dagensit.no/article2079580.ece, and in MIT entrepreneurship review, http://miter.mit.edu/article/angry-birds-will-bebigger-mickey-mouse-and-mario-there-success-formula-apps.

14

CHAPTER 3: THEORY

     

15

The business model ontology

A business model is key in determining if profits can be made from an idea or innovation. Chesborough and Rosenblom wrote a paper called “The role of a business model in capturing value from innovation” where they present a framework for business models1. Osterwalder built further on this model in his framework on the business model ontology. The definition of a business model according to Osterwalder is (Osterwalder, 2004): “A business model is a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm. Therefore we must consider which concepts and relationships allow a simplified description and representation of what value is provided to customers, how this is done and with which financial consequences. Based on initial understanding of the technology, market, opportunities and business ecosystem, the focus group and I came up with business ideas. The business model chapter presents alternative ways of implementing and earning revenue from ideas. The model breaks these into components of the business model canvas (see figure). Understanding ideas, model, case and plan: Business idea: An idea for a business or for a way of making a profit. (Nesse P. , 2011) Business model: “ Describing alternative ways of implementing a business idea, describing the logic of generating a profit with basis in our business idea. Several ‘business models’ may implement the same idea. “ (Nesse P. , 2011) Business case: “A business model contains a number of indeterminate parameters, exact prices, costs, sales volumes, revenue numbers, partnerships, etc. The ‘business case’ appears by fixing these indeterminate variables to some value, and eventually computing the resultant economic values like net present value, etc.” (Nesse P. , 2011) Business plan: “A plan for implementing a particular business case, based on some business model for a particular business idea. “ (Nesse P. , 2011)

1

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.123.2039&rep=rep1&type=pdf

16

Figure  2:  Business  idea,  model,  case  and  plan.  

Figure  3:  What  questions  to  ask  on  creating  a  business  model  (Nesse,  2011)    

Business startups need to answer who we are selling the product to, what problems does it solve, how will customers be reached, how will customers pay, how will the product be developed, what is the competitive strategy and who are your partners and competitors. The business model ontology by Osterwalder contains 4 pillars, which are subdivided into 9 building blocks. These 9 components are connected, where infrastructure (top left) flows into product value proposition, which then connects to customer interface (top right).

17

Customer and infrastructure connects to financial aspects to provide profit, which confirms the level of success.

Figure  4:  Osterwalder’s  building  blocks  of  a  business  model  (Osterwalder,  2004)    

Description of the business model components:

1. Value proposition: Assertion on what the company is offering their customers in terms of products, services and value. Which problems is it solving? What is the uniqueness and the competitive advantage? 2. Market segmentation and target customer: What is the potential type of customer and market for this product? Who is the customer and why? What is the strategic positioning towards customers and what is the market strategy (4xP: product, price, place, promotion)? Does the product fit into the market and does it replace or complement products? 3. Distribution channel: How are the customers reached? What is the link between the value proposition and the customers, e.g. directly through a sales force or website, or indirectly through resellers, brokers, 3rd parties. 4. Customer relationship: What kind of relationship does the company want with each customer segments, considering that CRM costs money? How do we get them and keep them. Do we acquire new customers, enhance profitability from existing customers and/or extend duration of existing? Personalization, appreciation, trust and brand seem important for customers relying on mobile operators. 5. Value configuration: Competitive strategic management on how the company operates, how it arranges activities and delivers value to customers. What are the key activities? This is the company internal value chain, platform and delivery system. 6. Core capabilities What are capabilities and resources? Are they in-house or placed at a partner? What are the core competencies and what is relied on others? 7. Partner network: Who are the key partners and suppliers in the business ecosystem. Who provide outsourced capabilities/resources and why?

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8. Revenue streams: How does the pricing model look like and where does revenue come from? E.g. can we change average revenue per user or earn revenue from elsewhere? 9. Cost structure: What are the costs and risks? Are the costs fixed or variable? What are the operational (OPEX maintaining network) and capital expenditures (CAPEX on building mobile network)? This involves creating, marketing and delivering the product. It puts a price tag on all the resources, assets, activities and partner costs (cost saving through outsourcing?) (Nesse P. , 2011)

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Porter’s 5 forces

A task facing every business is creating competitive advantage. Analyzing externally on competitive forces in an industry is an important task in order to identify opportunities and threats (Hill, 2004). Michael E. Porter’s 5 forces provide a framework for this. I have used this to analyze technological and business opportunities, market dynamics, threat from substitute and existing technology, risk from potential competitors, power of hardware suppliers, mobile operators, regulators and mobile subscribers (buyers).

Figure  5:  Describing  Porter’s  5  forces.2  

Goals using Porter’s framework in this thesis are identifying the degree of rivalry, finding competitive forces and strategies. Barriers to entry are important to uncover in order to handle risk involved, e.g. regulative barriers, economies of scale and power struggles of being an MNO versus MVNO. Other factors to consider are threats of substitute products and services based upon buyer’s propensity to substitute and switching costs. There are also bargaining power of suppliers (handset vendors, NEP’s, billing and policy management systems, MNO’s) and customers. Commoditization is shifting to more customer power.
2

http://www.quickmba.com/strategy/porter.shtml

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System dynamics

Figure  6:  System  dynamics  model3    

System dynamics is used to create a system to better understand the relationships between variables and behavior of complex systems over time. The model is useful for learning system thinking, analyzing assumptions about how things work, understanding an ecosystem and leveraging variables to reach goals. The model can also be used to create different scenarios and understanding how this changes variables over time. It was originally developed in the 1950s to help managers improve their understanding of industrial processes. The basis of the system is identifying the structure and variables, then the dependencies with circular and interlocking relationships that regulate each variable. The model is used in this thesis to understand market dynamics and mapping the ecosystem surrounding a telecom company.

3

http://www.systemdynamics.org/DL-IntroSysDyn/start.htm

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CHAPTER 5: TECHNOLOGY OVERVIEW

 

LTE will create an enhanced broadband market in which everyone and everything will be connected. It will transform how users receive, consume and interact with information and content, distributed over mobile networks. LTE is much more than just a new air-interface. It is a complete ecosystem that will meet market demands for the next decade. — Nokia Siemens Networks

  Figure  7:  Map  of  LTE  in  Europe  (Frost  &  Sullivan,  2010).  

 

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LTE technology

LTE was introduced in the 3rd Generation Partnership Project (3GPP, Scientists and engineers from 60 vendors, operators and research institutes) and Release 8 is valid at the moment (3GPP, 2010). LTE is a next generation edge-to-edge broadband IP network technology. 4G LTE is a radio access network technology that uses Orthogonal Frequency Division Multiple Access (OFDMA) in downlink up to 100 Mbit/s and Single Carrier Frequency Division Multiple Access (SC-FDMA) in the uplink up to 50 Mbit/s. LTE in general strictly refers to radio access. A broader 3GPP program is called system architecture evolution (SAE) and that includes an IP evolved packet core (EPC) that support IMS (Mottishaw, 2009). SAE will help operators reduce cost per megabyte and maintain data service profitability by policy control and charging mechanisms that are critical in order to monetize on new features. LTE-advanced will launch in 2012. Mobile VOIP is something we would see more of and the benefits are integration with fixed IT solutions and a further step towards unified communication, e.g. IM, email, office phone. In LTE, there is no circuit-switched part to handle voice calls like with 2G or 3G, although LTE and 2G can co-exist. There seems to be 4 different ways that voice will be transferred over and they are fallback to 2G/3G CS, MMTel Multimedia telephony over LTE, Over-the-top (OTT) like Skype, and Circuit switched over packet switched. OTT and MMTel are viewed as the permanent LTE voice solutions. MMTel incorporates multimedia feature-richness needed to compete with OTTs, leverage the worlds biggest mobile user community (MSISDN), high-quality end-end Quality of service, global reach, emergency calls and regulatory service support. OTT solutions are getting popular and apps are installed in smartphones already that support calling. OTT does not have the same user experience in non-continuous LTE coverage because of lack of handover mechanisms to the CS network. Operators are acting fast to consolidate global voice over LTE solutions (Ericsson, 2010). LTE introduces 5 different terminal classes from voice class to terminal that supports highspeed data transfer, and all terminals support the 20 MHz bandwidth. In terms of traffic management terminals can be steered to the most convenient radio access technology depending on the service usage and their subscription type (e.g. gold user, silver user etc.). If 23

one side of the connection is through GSM and the other side by LTE, the billing is made separately for each side. LTE EPC core network supports legacy standards like 2G and 3G. There needs to be deployed many base stations to get coverage in an area and build out depends on topology, population density among other factors. Base stations are usually divided into 3 sectors and supports relaying to e.g. femtocells in which gives greater coverage inside buildings. In terms of range of an LTE sector (of a 3 sectored LTE base station) is maximum 2 – 2.5 km. One LTE base station can support (3 sectors, 20 MHz bandwidth, 4x4 MIMO) around 3x60=180 Mbps capacity (300 Mbps peak data rate) in downlink and nearly 3x25=75 Mbps in uplink. In Helsinki for instance there are 10 base stations and 32 cells. LTE voice supports up to 2000 VoIP calls in parallel per sector (i.e. 6000 calls per base station). With regards to data, if there are 50 active ftp users in a sector and each one is downloading 3 MB files, then average download time is about 2.5 seconds. When deploying LTE one of the top challenges is having sufficient fiber backhaul infrastructure between base stations and available frequency spectrum. Spectrum licensing is a barrier to entry due to high cost although this varies. Smaller players have an advantage sometimes with regards to cost. LTE supports variable bandwidths of 1.4, 3, 5, 15 and 20 MHz. It is getting deployed in a host of bands like 700 (US), 800 (Japan/Germany), 900 (Sweden, Greece), 1500 (Japan), 1800 (Germany, Greece), 2000 (Germany) and 2600 MHz (Germany, Sweden, Finland, Norway, Netherlands, Saudi Arabia). With multiple frequency bands there is the issue of having multiband smartphones since different countries will have issues re-farming or farming the same frequency spectrum. 190 MHz was auctioned in the 2.6 GHz band in Finland in November 2009 for a total cost of 3.8 million euros (20 years).

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Figure  8:  Spectrum  needs  (IDC,  2010).    

The main barrier to enter wireless business is the availability of spectrum. Spectrum for LTE networks is still available in smaller and emerging markets as they have not yet finalized their auctions. Furthermore, there may be a second round of auctions in existing markets (e.g. 800 MHz in Finland) that will provide additional opportunities. Natural competitors are the big telcos and others already offering LTE. We will have to compete on buying spectrum, getting the right partners and acquiring customers. A barrier to entry is government’s requirement to provide coverage for a certain population percentage. According to interview objects, Finland seemed ok with e.g. 50% national coverage.

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Mobile standards evolution

GPRS (2,5G): General Packet Radio Service in which builds on GSM is designed to provide packet data services at higher speeds than those available with standard GSM, circuit-switched data services. Download speeds are practically maximum 50 kbit/s, with support of mail, WAP and internet access. EDGE (2,75G): Enhanced Data for GSM Evolution is a high-speed mobile data standard that relies on the GPRS packet switched network and achieves download speeds in practically 200 kbit/s. W-CDMA (3G): Wideband Code Division Multiple Access requires a new access network and enhanced core, which can enable speeds up to 384 kbit/s. HSDPA (3,5G), High Speed Downlink Packet Access, is a packet-based W-CDMA downlink with data transmission up to 8-10 Mbps (20 Mbps for MIMO) over a 5MHz bandwidth in WCDMA downlink. (UMTS) HSUPA (3,75G), High-Speed Uplink Packet Access, is a data access protocol for mobile phone networks with extremely high upload speeds up to 5.76 Mbit/s. HSDPA and HSUPA technologies use the GPRS packet network. 4G LTE builds on the packet switched network and supports legacy network. LTE is expected/available longer than 3G and many mistakes in 3G regarding architecture and access technology have been improved in LTE. WiMAX has already been deployed in some countries while the competitor LTE is still in the trial phase (e.g. cities in Norway, Sweden and Finland). For developing markets in which do not have any GSM infrastructure and requires a simpler technology than WiMAX has a more favorable option. WiMAX networks can be deployed in multiple bands of different frequency ranges and uses also OFDM. WiMax and LTE might end up complementing each other. LTE is “3.9G” and actually not completely 4G although recognized as 4G by ITU. The unavailability of LTE devices is delaying the launch in many countries like Finland. LTE-advanced, LTE will soon be replaced by LTE advanced (almost IMT advanced) and is true 4G, although each generation seems hard to understand at times. One main advantage is speed at 1 Gbps and improved services like positioning, multimedia broadcast service, etc. From LTE to LTE advanced it is mostly a software upgrade and no hardware upgrade on the base station, although changing the antenna could be necessary. SON in 26

LTE-A (self-organization, automation) will reduce operational and capital expenditures. Relaying will improve coverage performance of the network with less capital expenditure. Also, increased MIMO-antenna mode and carrier aggregation (multiple carriers) will provide larger capacity than LTE. 5G (2015/16) adaptive radio is the next generation (focusing on dynamic spectrum access, cognitive radio, adaptive usage of WiMAX, LTE, Wi-Fi, Bluetooth, etc.).

Figure  9:  Speed  versus  mobility  with  evolving  standards.    

 

Different types of providers exist. Today, operators either own network or partially own it: 1. MNOs: Mobile network operator: Backhaul advantage, high legacy costs, wide coverage, flexible plans, powerful, risk of becoming a commodity. 2. Full and part MVNOs: Mobile virtual network operator. Renting network, marketing and pricing based, less powerful, flexible, some legacy costs 3. OTT providers (over-the-top-providers): Provides popular services, are powerful, has no legacy costs on network, does not own network but could in the future.

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LTE benefits

The drivers for the adoption of LTE are in increased quality of service, spectrum flexibility, support for high mobility, cost advantage and the routing of data traffic. Increased multimedia content, online gaming and video is pushing for more speed. LTE is preferred since it significantly decreases the data congestion, can be operated with improved spectrum efficiency and be deployed on the same infrastructure and backhaul as GSM predecessor. I have mapped out key LTE benefits in the mind map below. The benefits are an argument for a business opportunity that is happening now due to available spectrum and IP standardization.

Figure  10:  Key  LTE  benefits.  

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The table below shows benefits of services in an LTE environment.

Figure  11:  LTE  service  offerings  (Hontzeas,  2010).    

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CHAPTER 4: EMPIRICAL FINDINGS

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Ideas from focus group

In the focus group at MIT Sloan we brainstormed several ideas and some of them may prove value further towards a business model. We tried to find business operating models and feature services that could prove viable to a data only LTE mobile operator. We discussed several ways of differentiating mobile services into buckets, whether they were public vs. private sector, high vs. low bandwidth, free vs. chargeable, newness vs. extension of existing, machine vs. personal, business vs. government vs. consumer, local vs. regional vs. national, 3rd party needed vs. in-house. We agreed that priority of ideas should be built upon LTE advantages. Most ideas were discarded so the following had the most interest. 1. ‘JetBlue’ Model: High interest Simple Lean operation focused on customer value and reliable execution. E.g. RyanAir has figured out how to use an airline as a loss-leader to sell other, add-on services (food, baggage, vacations) and to connect consumers with under-utilized resources (e.g. vacation destinations in Eastern Europe from whom they get margin $$) to expand the market to those who wouldn’t normally take airline vacations. -­‐ -­‐ -­‐ Elimination of legacy costs and low-margin services. Standalone business plan. More value if bundled with Cloud services (#3 below). Push user data and life to proprietary ‘cloud’, will increase stickiness. Multiple tiers? o Tier 1: Free with enough bandwidth for messaging and text email o Tier 2: Full featured with throttling on bandwidth (no HD video streaming) o Tier 3: Full bandwidth with download limits (max MB/month) o Additional bandwidth can be purchased as needed 2: LTE applied to mobile entertainment: Moderate interest (-) -­‐ -­‐ This is not a standalone business, but possibly a margin add-on to base service Will require partnerships with content providers

3: LTE for mobile cloud service: Moderate interest (+) -­‐ Not a stand-alone business, many existing competitors. 32

-­‐ -­‐

Could be a nice add-on to bare-bones (JetBlue) service model. Sell priority. Could be good business for partners

4: LTE for Automotive integration/ information: Moderate interest -­‐ -­‐ -­‐ Very difficult to implement as a standalone business due to powerful car industry. No clear differentiable benefit offered by LTE (3G solutions exist) May be opportunity as part of ‘Internet of Things’ (#5 below)

5: Internet of things: Moderate Interest -­‐ -­‐ -­‐ LTE offers disruptive value in terms of IP addressability, mobility/coverage/bandwidth Standalone business possible through the development of hardware (radio ASIC), API and developer community. Primary concern is adoption rate. Best way to implement will be to start by partnering with a wholesale wireless provider or create a MVNO. 6: Traffic Management and leasing capacity: High Interest (-) -­‐ -­‐ -­‐ Not a standalone business, rather a means of increasing margin by segmenting customers/value and selling prioritized services. Probably already exists in some forms, but is an LTE/EPC core advantage. Will require multiple brands (consumer, business, government) to avoid customer confusion. Establish franchise model to lease network as an MNE. 7: Smart City: Moderate Interest (+) -­‐ -­‐ -­‐ -­‐ -­‐ Can provide an entry point to market with captive customer base to provide stable revenue stream. Free citizen access for basic service. Focus on reducing costs to municipalities and providing an amenity to residents Higher bandwidth service can be sold at higher prices. This could be a hyper-local, standalone business model, i.e. sell to individual municipality with no need for roaming/cross-border coverage. Cities have no bargaining power, i.e. this is a bit of a monopoly/utility business.

8: Military/Security: Moderate interest (-) -­‐ Focusing on police, military and emergency networks requires strong and specific market relationships in a specialized industry. 33

-­‐

May be able to provide access through LTE or use existing TETRA infrastructure/towers. Government saves Capex and you have access to towers.

9: Telepresence: Moderate Interest (-) -­‐ -­‐ Not sure how LTE provides differentiation other than higher speed. Some challenges in monetization, but there are many valuable uses.

10: Location Based Services: Moderate Interest (-) -­‐ -­‐ Not sure how LTE provides differentiation, other than higher speed. Some challenges in monetization, but there are many valuable uses.

4: LTE for payment industry: Low interest -­‐ No clear differentiable benefit offered by LTE (3G solutions exist, LTE incrementally better)  

34

Interviewing officials and experts

“There are too many people working in Telcos!”, Peter Vesterbacka I present the most valuable data gathered from interviews done on industry experts in order to learn about industry, regulations and technology choice, hence to gather different opinions about a possible strategy for a business model. Full interviews are in appendix. According to Peter Vesterbacka in Rovio (developer of the most popular app called Angry birds), the most likely opportunities for emergent new telcos are: • • • • • • • • Providing operator app stores Making lean Opex (Ryan air) Partnering with services and big brands Competing on price and/or providing it free Innovating revenue models (Kindle 3G, provide merchandise) Looking at ad-based models Connecting with users (CRM is important) and building audience Mobile payment, home health care and eGovernment services/kiosks.

Peter also thinks that most mobile use will still be at home or in the office (80%) and that people will be moving away from traditional voice. An operator should team up with services like Spotify and Skype. The mobile revolution is exciting but one should also remember hitting the right timing, e.g. M2M devices might be too early to deploy. Visa Koivu - Senior communications consultant to the Public Sector Finland gave an overview of “non-consumer businesses” in Finland. Network needs are reliability and serviceability. There are opportunities in overlapping with government and emergency networks, but many systems are proprietary. Network is very closed inside the government. o Federal: $1B in ICT spend o Municipality: $1B in ICT spend o Health and Social Aid: $1.5B in ICT spend Leonard Scheepsma - Business Development Manager Tekelec EMEA who provides policy systems, said that policy management systems could control bandwidth throttling, distinguish different subscription plans, control so that e.g. Skype does not become a threat. Rules are set in a database with XML interface where even users can provide settings for 35

throttling. A subscriber profile would typically consist of policy control, messaging DB, MME, HSS, AAA, number portability, SDM, diameter routing, GMSC (HLR). He also had opinions on that one either should do OTT service or create an MVNO agreement with services that provide circuit switched services and use VOLGA fallback in order to capture roaming customers. He advises not to invest in IMS infrastructure. He said, “Get the best vendors and base on IP”. Ian Opperman - Head of the ICT teams at CSIRO, says Australia are planning for 5000 base stations and using a standard called LTE-R for rural and remote (tweak). Mobile plans are sold based on amount of data mainly and they don’t provide unlimited data. He says mobility is not the most important but connectivity. The benefits of mobile broadband are for workers that need mobile for WebEx and video conferencing (require >200kB/s). Jouko Virtanen - CTO Helsinki University Hospitals says that hospitals have their own systems internally but opportunities exist for the 8000 mobile phones (1000 is3g), remote EKG and medical telemetry, video chat (psychiatric care “net therapy”, doctors, reminders for outpatient care, VTC for hospital administration), and ambulance communication, but few with need of specific LTE advantages over 3G. Antti Kohtala - Senior Advisor at the Ministry of Traffic and Communications, indicated that licensing of spectrum for new carriers was evaluated on more of a case-by-case basis rather than a formal policy. It seemed that the benefits to the public of a given proposition were given strong weight as compared to just maximizing government revenues from public auction of the spectrum. How is spectrum awarded in Finland? This is done purely through an auction process. Does your agency have a preference regarding MVNE/MVNO operations? No, both are OK as are full service operators and data-only operators. The spectrum holder gets to choose how to best monetize the spectrum within license terms. What frequency bands are available? • • 800MHz in future pending agreement with Russia. Likely used for rurally. 2.6GHz just auctioned, likely to be deployed in cities only

Aki Siponen - CIO Ministry of Defense, indicated that there were a number of areas where it would make sense to contract commercial service providers for extended coverage, such 36

as for border patrol and public safety. Core military communications would remain separate using proprietary equipment. The procurement process of the government creates a number of barriers for equipment providers. Yrjö Pylvänäinen - Technology Director for State Security Networks (TETRA, 112 services etc.), say they have 1300 towers that require mission critical 100% availability with guaranteed capacity for calling. They have been looking at 450 MHz spectrums, which may be available, but requires custom LTE equipment to access. Bill Rogas - IDC advisor within mobile networks: What is changing in the network? • Research in motion (RIM) on messaging platforms: #1 is instant messaging (IM), #2 is Facebook, and #3 is E-mail. • Internet traffic across various customer classes is different. The shift to smartphones has increased consumption. Android and iPhone on top. Upload traffic is greater than download traffic on Facebook. • Carriers need to look at traffic differently. E.g. charge by application, not by traffic consumption. Prior to smartphones, capex for LTE requirements were modest increments over 3G, but with new bandwidth requirements new towers will be needed • 4 categories: Rural, Suburban, Urban, Dense Urban. Dense urban and urban are converging. NSN are recommending cell sites at less than 400m to provide adequate bandwidth. Another big issue: time of day • DSL (pre-work, post work, late at night for consumers, workday for businesses). For mobile there is continuous bursts Capital Cost • Main capex item is the cell tower and not base stations equipment. 60% is tower, 20% is backhaul, vase station <25%. Other issues are electricity, backhaul, civil services, and towers. • Tokyo (NTT DoCoMo). Standalone structure is $200K. Malaysia: $100K. Hong Kong: 10-20K. Indonesia, Philippines: High 200M towers are $200K. In US, cell 37

towers are shared, but not in APEC. In India shared between cooperators, not competitors. In past 2 years, cell tower ownership is changing to 3rd parties, but this transition isn't complete. • • Fiber backhaul is also expensive (or next generation packet microwave). RAN, Backhaul, OSS/BSS, Storage, servers. Historically modeled as $/subscriber. For LTE, this may change. Pricing on packet core may be on users/system + GB/sec or # of ports. • To size the need for towers, look at # of towers existing operators have. In Hong Kong, 6.2M people, 120% penetration = 2000 towers. Other model: 800 people per cell, for LTE it is 500 per cell Innovations and the Sony story: • One day, they would own mobile capacity and that all Sony devices would connect. Nice idea, but too early. Sony is coming out with a PlayStation smartphone. Toyota is considering a cloud/LTE OnStar system Questions: Is no circuit switched voice possible? Yes this is highly possible. 80-100 kb/s is required for packet switched voice calls. Antii Pellinen - Venture Concept Partner that has created Haloya VoIP, video

conferencing and messaging platform. He first started of the meeting with surprising me that he has an unlimited data plan for 2 euros a month through an Android device! He believes there will be HD video calling in the future with LTE devices. Haloya differentiates by partnering with operators (revenue sharing) to provide unified communication solutions for consumer and business market.

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Questionnaire understanding subscribers

} Key findings: ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ Smartphones (28% penetration 15-24 year olds) and tablets are getting adoption Subscribers demand more data services than operator can provide. OTT providers are getting adoption. Subscribers still want voice, but don’t care what kind Subscribers care less about the pipe and more about the features, QOS and devices High-cost opportunity: 25-45 year olds willing to pay for data (38% for $100 unlimited data) Low-cost opportunity: <25 seem to prefer low-cost high-data plans. Complexity, transparency, high-price and variable costs (e.g. roaming) Lock-in Speed and consumption limits } Consumer pains:

The respondents are widely spread among platforms and mobility types. 88% of respondents have a smartphone, 21% a tablets, 95% a laptops and 29% a TV to access either mobile or fixed internet. Smartphones and tablets are most used to access both WiFi and cellular networks, with laptops also coming close. Surprisingly not many tablet 39

users are cellular users (63% uses Wi-Fi and 32% uses cellular). Only 63% of smartphone and tablet users use Wi-Fi hotspots (in the US Wi-Fi hotspots are more common than in Europe). Only 29% of laptop users use cellular networks, e.g. with the USB-dongle. Only 3% of home desktop users have access to internet through cellular network (USB-dongle).

Demographics on different payment plans show a widespread audience that pay from under $15 to $150. 32% pays from $75-$150 and 26% pays from $15-$45. The pricing differs some in Europe and USA so this is something that needs to be considered, e.g. we came upon an unlimited cellular data plan in Finland that costs 2 euros/month. Many of the respondents complained about complex plans and we don’t think everyone has a clear understanding of how much they pay. Widespread pricing plans will most likely still exist in the future based on consumption and speed.

40

Usage patterns vary so much but we tried separating into 4 groups. Most users are either medium (42%) or high-level users (40%). Only 10% are low-level users and this shows that our respondents are quite heavy internet users. The heaviest users at 12% show that not everyone needs an unlimited top-speed plan.

41

Findings on future use

In question 6 (see appendix) we asked about what services and features users see themselves using in the future. Facebook/Skype voice calling is something respondents want it seems (36% frequently), but there is a dilemma that they might not know what 4G LTE voice call is yet. 41% of users would still call using 2G network (circuit switched) topping LTE VoIP calling and OTT VoIP. This shows that the market does not yet understand the technology that is coming. Today users most likely trust the 2G voice and VOIPs quality of service is limited so respondents want to stick with what they know works. Search tools are rated the highest (83% frequently or always), followed by news apps in 2nd place, maps & travel, Skype voice call, texting, office/productivity, photo uploading/downloading, internet TV, communicating with home devices and Skype video calling. Other suggested features were music streaming, online shopping, privacy features, personal productivity, backups, joint workspaces, health & sports, coupons, NFC apps and M2M apps with e.g. car-to-car communication.

42

In this survey 38% said they wouldn't mind spending 100 dollars on unlimited data. 68% could pay $50 per month. Most wanted the unlimited plan (72-96% of respondents who answered). 22% would consider a basic plan for $10 per month. We asked about complaints and pains. There were many different answers showing that this is something that bothers consumers. There is a lot of pain on the plans that are offered. Many complain are about complex pricing and services. Speed is not always high enough. Fees are sometimes hidden and not transparent. The provider often locks consumers in. Roaming charges is a complaint. Limitations on SMS usage are also a complaint.
 

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CHAPTER 6: MARKET OPPORTUNITIES AND THREATS

Mobile telecom has evolved dramatically over the past 30 years and consumer adoption has kept up with the rapid pace of this technology. Mobile data consumption is exploding at the moment (see figure below). Mobile telecom technology has a life of about ten years. 3G networks were first deployed in 2001 and today 4G-LTE (Long Term Evolution) offers a new opportunity to reshape the industry. The first of the next generation of 4G-LTE systems are just now being deployed with the expectation that the market and profits will once again grow like it did with 2G and 3G. However, for mobile operators, the 4G revolution may also bring with it a major shift to the industry as it comes at a time when many other factors are converging.

Figure  12:  Figures  showing  mobile  data  explosion  (IDC,  2010).  

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Macro and industry trends

There are several changing global trends due to increased use of internet and mobile devices. Technology is changing our lives in terms of communication patterns, conflict and political influence, globalization, opening governments, changing supply chains and commerce. I further see the following trends involving mobile and internet technology. Trend 1 Trend 2 Trend 3 Trend 4 Wireless and mobile network evolution (LTE, femtocells, WiMAX, Wi-Fi). Fixed Network Evolution (copper ->fiber). Mobile becoming bigger than fixed within 5 years (figure below). 3G+social networking+video+VoIP+mobile devices are converging. Massive data growth is driving carrier/equipment transitions. Avg. cellphone: 75% voice…iPhone: 45% voice. Vodaphone data traffic was 70% of traffic in 2009 (figure below). Cloud Computing and Connectivity: Music, video, documents, apps, eBooks, shopping/stuff is in the cloud. ecommerce is growing. Social networking usage surpassed email in 2007 (figure below) Increased usage of mobile devices, touch and content consumption.

Trend 5

Trend 6

Figure  13:  Mobile  internet  ramping  faster  than  fixed  ever  did.  Apple  leading.  (Morgan  Stanley,  2010)  

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Market overview

Although mobile wireless penetration is still low at 13% in developed countries, it will increase tenfold towards 2015. Mobile communications market is enormous, with more than 4 billion subscribers worldwide (IDC, 2010) and total revenue exceeding $USD 1 trillion by 2012. The top 20% of these users, the one billion people from developed and affluent countries, currently have access to mobile data connectivity and as mobile penetration approaches 100%, data plans are the best means of acquiring new customers. Technology and usage trends further support this; there are in excess of 500 thousand mobile applications available that drive data adoption (Morgan Stanley, 2010) and wireless data revenue is growing slower than data traffic. In the US alone in 2010, mobile users paid an estimated $56B for data services. Since the introduction of the iPhone in 2007, ARPU for data services has more than doubled to nearly $17/month. Global revenues for mobile data are expected to reach $500B by 2015 (IDC, 2010).

Figure  14:  Global  mobile  broadband  forecast  2015  on  the  left  (4G  Americas,  2010)  and  LTE  forecast  in   western  Europe  on  the  right  (BMI,  2010).  

LTE is estimated to be at 273 million connections by 2015 (see figure above) and 29 million in western part of Europe by 2014. Revenue is expected to increase from existing subscriber pool, adding of new services, and revenue sharing with 3rd party service providers.

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Operators cost structure

Figure  15:  High-­‐level  capex  and  opex  for  mobile  operators  (IDC,  2010)  

Key capex cost levers are Radio Access Network (RAN), backhaul and IT. In general, technology has commoditized and costs have dropped. A greenfield operator could take advantage of IT automation systems like OSS, BSS, ERP, SDP and CRM that cost less and are more competitive. If MVNO is the only realistic option then costs would be MS&A, customer care and MNO leasing costs. Capex, build-out, competence and regulation vary between countries. • North America: High ARPU and high costs on tower sites. Lower urban deployment density than Europe. Saturated networks. Tranforming towards fiber. • • Finland: High ARPU and relatively low costs on tower sites. Improved capacity due to dens deployment. Saturated networks. Using fiber and microwave today. South Africa (emerging): Low ARPU. Low capacity despite low tower acquisition costs. Coverage remains a competitive advantage. Microwave is preferred.

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  Figure  16:  Tower  site  installation  capex  (IDC,  2010)    

 

Network quality matters increasingly so it would be less risky to enter somewhere in Europe where existing infrastructure is more reliable although more costly.

  Figure  17:  Mobile  broadband  argued  to  be  profitable  in  article  by  Ericsson.  (Blennerud,  2009)  

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Market dynamics and forces of rivalry

“Complexity usually arises from a small number of disproportionally complex procedures” (Henry, Kafura, 1984).

Figure  18:  Consumers,  technology  vendors,  operators  and  regulators  dynamically  impact  each  other.    

Factors are converging: • LTE itself will become the dominant global standard as its speed and IP-base core completes the convergence between mobile and internet. • The digital dividend is freeing spectrum worldwide and existing spectrum is being re-farmed to exploit the capabilities of LTE. • The structure of the telecom business is de-verticalizing, with operators selling their exclusive tower and backhaul assets in lease-back deals to MVNOs, RAN hardware commoditizing and IT systems switching to SaaS lowering capex. • Hardware and OTT service providers have gained power at operator’s expense. App stores from Apple and Android have co-opted the high margin revenues, gutted the voice and SMS cash cows and left operators with just the capex. • Focus may shift to increasing ARPU by new services and decreasing opex.

Mobile telecom has passed the high-growth phase of the S-curve and is moving towards a flatter growth that is more akin to a utility. With this transition, incumbent providers who have historically based their revenues on voice and SMS service will need to dramatically shift to adapt to a new all-IP-based world. This is a disruption that creates a new S-curve.

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Figure  19:  Diffusion  of  innovation  and  technology  s-­‐curve.4    

According to Cisco5 Starent Networks, the key drivers behind the adoption of LTE is is pushed mainly by three disruptions: • • New easy to use devices Available radio and network technology in the form of HSPA, LTE and EPC core helping optimize and monetize 4G networks and legacy any-G networks. • Billing plans are getting much more user friendly.

THREAT OF SUBSTITUTES: New innovations tend to break old earning methods. Although LTE is available in some countries with USB-dongles, the adoption rate is mostly by early adopters due to high cost and availability. 3G networks are an adequate substitute for many. Once LTE handsets are available in 2011 we will see an increase in usage. Substitutes like WiMax (more relevant to emerging markets), 3G, Wi-Fi and fixed access will most likely be competing with LTE on price. High speed fixed lines may be a substitute but trends are looking more mobile. EPC core with LTE will improve network, decrease opex, support legacy systems and be favorable for mobile operators in developed markets. Consumers will most likely choose best bundled quality service with lowest price and switching costs will probably decrease. Handset industry may practice lock-in on operator like Apple has done previously. The key

4 5

http://engmba.wikidot.com/scrib-book4 http://lteworld.org/video/what-driving-adoption-lte

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seems to be providing low cost and high quality LTE data service, with key add-on services and a lean operating model.

Figure  20:  Monetization  of  data  will  favor  operators  with  LTE  capability  in  the  future.  

BARRIERS TO ENTRY: Subscriber loyalty for existing operators is not too high but switching costs could be high. Becoming a mobile operator involves very high entry barriers due to complex ecosystem of powerful incumbents, highly regulated industry, costly initial capex, changing industry and technology. Examples of LTE service providers today are TeliaSonera in the Nordics, Qualcomm in India, Lightsquared and Clearwire in the US, but competition will be increasing as commitments have been made. Determination of needs in radio spectrum affects cost and performance. The industry is mature and sustainable, driven by economies of scale, there are many other factors determining technology choice for an operator, e.g. opening of standards and commoditization, supporting lobbies (suppliers, WiMax forum, GSMA, IEEE), governing of bands and network planning (towers, interference, power, performance, coverage). Telcos’ threat today is that over-the-top (OTT) companies like Google, Facebook and Skype could start competing with traditional Telcos and Telcos’ infrastructure only ends up being the pipe. If Skype were a carrier it would be the biggest operator in the world with its 663 million subscribers (2010)6. Telcos responses seem to be buying spectrum to maintain a high
6

http://en.wikipedia.org/wiki/Skype#Usage_and_traffic

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entry barrier for others and gaining revenue through provision of access.

Figure  21:  Dynamics  of  regulative  push  (Eriksen,  2010)  

The figure above shows a system thinking view of variables pushing regulation (in red). Telcos were traditionally big monopolies and heavily regulated. Since the dawn of the telecom industry, it has changed from analog technology and monopoly towards more digitization and liberalization. Today, most countries have several providers for telecom and regulators are pushing industry into competitiveness, e.g. MVNOs compete with big Telcos. The regulator does still have to balance between different goals. They want to decrease the uncertainty and risks in investments, on the other hand it pushes for lower barriers to enter (unmonopolizing), which in its nature increases the uncertainty. Moreover, as congestion increases, the regulator has to react by promoting co-investment. Telcos are hanging on to legacy systems and want to monetize on them as long as possible. Legacy voice systems work well better than VoIP so Telcos have a way of still taking revenue although this is about to change through better billing systems. Telcos are also trying to compete by adding cloud and value services competing with OTTs. On the other 53

hand Telcos are being pushed into becoming a simple utility provider as access is becoming a commodity. Prices on plans have reduced especially thanks to regulators letting in MVNOs price models to create competition. Incumbent operators have already reduced costs to a minimum on the network infrastructure side and are continuing to do so. Some Telcos, like Telenor, have even asked content providers like YouTube to pay up for congesting their network.

SUPPLIER POWER: The cost of maintaining the existing network without LTE will soon begin to erode operators' profit margins and will eventually outstrip revenue, hence a competitive pressure due to technology push from suppliers and buyers. Supplier concentration is high and many are providing LTE network equipment. Network equipment vendors in this market are powerful telecom providers like Ericsson, Alcatel-Lucent, Huawei, Nokia Siemens networks, Motorola, Nortel and ZTE already providing LTE equipment. On the other hand are device manufacturers (Apple, Nokia, Motorola, Samsung and Microsoft) and content providers (YouTube, Google, Facebook, apps) pushing the supply of new technology. Partnerships with IT providers of network management systems also seem very important. This supplier market is characterized by standards, economies of scale, and high competition. The figure below shows example variables like coverage, congestion, cost of deployment, operational cost, profitability and revenue that are dynamically affecting operators technology choice from suppliers. Such a diagram is effective in showing variables pushing technology progression.

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Figure  22:  Dynamics  of  technology  progression  (Eriksen,  2010).  

BUYER POWER: Fragmentation of the customer base, customer loyalty and customer mobility/migration are presently the most dominant in the customer driven dynamics. I show this in the figure below.

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Figure  23:  Customer  driven  dynamics  in  a  system  dynamics  model.  

Subscription plans usually separate into private customers, corporate customers and wholesale customers. Customer segments could further separate into low cost seekers who wants it cheap, convenience seekers, who wants convenience at low price, or sophisticated users who wants it all at any price, e.g. unlimited bandwidth and full roaming. The delta model (see also appendix) in the figure below shows options on different offerings for different segments. Young people are a segment that is crucial to understand since they represent early adopters in this market. The mobile wireless industry cannot provide unlimited data to everyone at a top speed and the pricing will most likely differentiate customers. Customers are already aware of mobile broadband and little learning is necessary. The customers role is determined by the level of intra-industry competition, some choose iPhone and others Android. Brand identity and getting people to change operator requires convincement since many customers are loyal to their operator. Large operators providing a bundle of services are preferred by many customers, while others settle with smaller and cheaper operators with less coverage. Customers’ switching costs are minimal but we see lock-ins from operators offering Apple iPhone or deals with twelve months contract. Seemingly, operators providing high quality data rates at lowest price will be favored. Addon services will probably also play a significant role and convenience. As shown in the 56

survey, customers complain about complex plans with hidden fees and they are seemingly self-segmenting. On a high level, leveraging the customer dynamics could also include providing flexible and transparent plans combining convergent services: voice, data and digital contents in a mix that minimizes the cost for the final user. Intelligent connectivity software solutions that can change bandwidth and service on-demand would give competitive advantage. Combining this again with the right mobile device, convenience and applications (apps) could be a winning model.

Figure  24:  Examples  on  classifying  customers  using  Hax’s  delta  model  on  strategic  positioning  (Eriksen,   2010).  

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Concluding remarks

Mobile broadband is here to stay. While existing providers continue to offer complex voice and data service plans, consumers are demanding simpler, cheaper, data focused connectivity. While mobile voice coverage is nearly saturated, mobile broadband penetration is still very low globally. 4G_LTE offers a new opportunity to reshape the industry, 4G-LTE are just now being deployed with expected substantial market and profit gain. The total market is enormos, with the top 20% of 4 billion users worldwide currently have access to mobile data connectivity. LTE is estimated to have almost 300 million connections by 2015 – about 29 million in western part of Europe alone. New entrants can take a high market share from fixed line providers. Incumbents have based their brands on voice quality and need to maintain their substantial investments in expensive legacy voice (fixed and 3G network) while they slowly transition to newer technologies to maximize profit on existing investments. This transition and period of rationalization presents a great opportunity for a new entrant, whom with no legacy investment, is free to choose the best technology, best commodity business model. He would be well positioned to create sharp strategic alliances for sharing sites, providing services and content through partnerships with 3rd party app enablers and offers a compelling opportunity using business model innovation as the primary differentiator. Checking local competitors and country specific costs seem crucial to develop an edge over rivals. Using Porter’s generic strategy model I recommend: • • • Offer the cheapest and leanest services in the market (cost leadership) Differentiate by offering add-on services, features and providing franchise. Focus on low cost market segments (e.g. convenience buyer, youth, vertical markets) • Differentiate by partnering with mobile device manufacturers, VoIP and telepresence providers, app developers and strategic network equipment providers. • Differentiate by utilizing new IT systems to simplify network and decrease opex. 58

Owning the network increases power but could be risky due to high capex on network, towers and frequency spectrum license. This pushes entrants into alternative strategies like leasing backhaul, backbone and RAN. The market will most likely experience difficulty increasing ARPU, but self-optimizing and intelligent bandwidth throttling could help drive revenue, e.g. HD-video bandwidth on-demand. The figure below shows the summarized system dynamics perspective of different variables and their relationships.

Figure  25:  A  system  dynamics  perspective  of  technology,  customer  and  regulation  push  (Eriksen,  2010).    

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CHAPTER 7: BUSINESS MODEL

Figure  26:  Osterwalder  business  model  canvas  (Nesse  P.  ,  2011).    

Based on analysis of market and technology shift, I present a business model (see figure 26) in this chapter capturing the ideas into model components. Then describing how they could be implemented and alternative ways of increasing profitability. Some components are deeper analyzed than others. A financial model was created in Excel to study forms of creating profitability and assess Capex on network build-out. The business model is in itself a concluding recommended business model based on research and empirical findings in this thesis.

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VALUE PROPOSITION Lets call the mobile operator UKKO. Ukko’s business model should be to deploy radio network coverage in key markets to provide access for tomorrow’s consumer and businessservices, and commoditize access for franchises by leapfrogging the legacy costs and high opex that constrain the existing operators. There is an opening for business models that address the mass market that prioritizes low-cost to high-quality and added-value services, similar to what JetBlue/Ryanair has done in the airline industry. Targeting high-density urban areas, adopters of mobile broadband, e.g. youth and businesses, and avoiding highcost roaming users will maximize profits while avoiding capital costs. The key elements to a possible value proposition are: • Simplicity in access: Consumers are pushing for clarity, predictability and value in their mobile service without excessive fees, roaming charges or data caps (similar to what fixed broadband has experienced). • Low-cost platform: Transparent, simple and contract-free pricing plans, consider free connectivity services for some segments by earning additional revenue from services, upgrades and self-serve on-demand, e.g. HD video. • Business-class service: Focused on regional businesses as a means to sell the highest-priority connections at higher margins with bandwidth throttling. • -­‐ -­‐ Provide fast and inexpensive data connection focused on dense urban areas while avoiding build-out of rural areas with low returns. Partner with existing brands to acquire and retain customers as well as to develop additional revenue streams through data mining and co-marketing. Development of a turnkey/franchise ‘LTE in a box’ business.

UKKO could compete by offering more compelling services, lower operating costs enabled by a simple business model, the adoption of a legacy-free 4G LTE network and by partnering with telecom service providers and consumer brands. Value-added services will be provided to vertical businesses that are expecting to boom, e.g. commodity utilities, commuting, manufacturing, tourism, security and devices. Spectrum in Finland could be acquired in 2011 and deployment could start in 2012 and reaching 52% population coverage within three years. With initial investment of 150 M$ and conservative assumptions for capital cost and OPEX, market share of 5% and ARPU of 62

240$ per year, the enterprise will generate positive cash flow in 2015 and positive NPV in 2018. Spectrum in Finland could be acquired in 2011 and deployment could start in 2012 and reaching 52% population coverage within three years. With initial investment of 150 M$ and conservative assumptions for capital cost and OPEX, market share of 5% and ARPU of 240$ per year, the enterprise will generate positive cash flow in 2015 and positive NPV in 2018.

TARGET CUSTOMER SEGMENTS

Demographics of mobile users have expanded far beyond high-margin business users. Mobile broadband usage is expanding and it now includes users that are much less mobile geographically than traditional business customers. UKKO Mobile will focus on developed and emerging markets for its initial deployments. Targeting high-density urban areas, adopters of mobile broadband, youth, franchises and businesses, and avoiding high-cost roaming users will maximize profits while avoiding capital costs. Financial analysis has shown (see appendix D) that choosing dense urban areas while avoiding build-out of rural areas, gives higher returns. UKKO will focus on consumer market segments ranging from youth to young professionals; those customers who choose social networking over voice, are less likely to roam outside of urban areas and are accepting of brand integration. Revenues will be generated both from the consumer as well as advertising partners. Customer retention costs will be minimized through brand sponsorship or by having customers provide their own hardware. Ukko will target convenience seekers wanting high quality at lowest price. The product fits the market and the goal is to take from competitors customer base by competing on price, speed, service and quality. Ukko will also capture customers who don’t mind giving up their fixed line.

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DISTRIBUTION CHANNELS Focusing on lean operations, e.g. Jetblue, means cutting costs on marketing and sales. On the other hand Ukko needs to reach customers. Sales will be done through a web-based customer service with provisioning and instant upgrades for additional devices, services (VoIP, HD-video), data, priority, etc. This will self-select customers who are low-cost, provide incremental revenue and attract existing wired users. Offering a bundle of services and popular devices should attract attention and save money on hiring sales people. Money will be used on advertising and 3 sales people will be hired in each city; one for youth, one for business and the last for franchises. Subscriptions will also be sold through MVNOs, equipment partners and device stores.

CUSTOMER RELATIONSHIPS Ukko wants a long relationship with the customers and this requires service improvement, high quality and low price. Connection with customers will be through easy to use web interfaces and a simple customer care solution based on email and data. Simple call center will be set to India. A customer relationship database will keep track of customers and follow them up on personalization based on customer type, appreciation, trust and brand. Ukko will be convenience providers and it will be simple for people to choose best plan. Regarding potential customers, Ukko will acquire new customers in the young and business market. Ukko will also steal existing mobile users from other operators. Ukko focuses on its “street-smart customers like young people and businesses. Franchise model will adopt new ways of connecting customers to brands.

VALUE CONFIGURATION AND ACTIVITIES Ukko will in this case study start with Finland where extensive research, financial analysis and interviews with partners and services has already been done. In the future, the focus will be on ongoing efforts in smaller and more emerging markets, such as South Africa and Togo. Ukko will build out base stations and support infrastructure to handle billing, QOS, and policy management. Ukko will exploit the de-verticalization of the mobile industry by 64

partnering with hardware, backhaul and business systems that are currently limited by the slow LTE deployment rates of entrenched operators. Using their capital, equipment and services, networks can be built and funded through ongoing operations. Municipalities could cover some of the expenses if operator guarantees basic access to all. Could build out M2M devices in municipality when the time comes. An additional opportunity may exist in the development of a turnkey/franchise ‘LTE in a box’ business that can be deployed in partnership with network equipment providers and regional entrepreneurs with access to capital and spectrum licenses. Partnerships with key vendors are needed to address franchise model in a profitable fashion. If successful, it will create opportunities for new players in the wireless space: greenfield operators with no legacy investment cost, free to choose the best technology and best business model. Decreasing IT expenditures by choosing a lean model will create a competitive advantage and increase profitability. Spectrum in Finland could be acquired in 2011 and deployment could start in 2012 and reaching 52% population coverage within three years. Following successful deployment in Finland, the know-how and built partnerships will be leveraged in more markets. Using a franchise model and local entrepreneurs, this model will be replicated in additional markets starting 2013. Due to the low capital investment, early cash flow and franchise approach, this model provides a variety of compelling options in terms of ongoing operations, partnerships and exit through sale to incumbents. Once the network is operational the opportunities for value added services and partnerships are very high. This will be developed further with key partners.

CORE CAPABILITIES AND RESOURCES The core capability will be mobile network itself and its staffing. Ukko need lots of competence but will focus on Jetblue model with low opex. Leaner operations will be the result from decreasing IT costs by using standardized IT with e.g. simpler billing systems. Simple billing systems and policy management systems will be key differentiator in lean model.Certain services, like VoIP, content providers, cloud services will be important resources. Business systems, like CRM, can be acquired through SaaS providers.

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Mobile network technology is much more accessible and scalable which will also decrease cost. Hardware suppliers will build and lease networks together with Ukko. Network relies on leasing backhaul fiber and/or microwave.

PARTNER NETWORK New partnership opportunities are available as mobile connectivity becomes a commodity. Strategic alliances with network equipment providers, VOIP providers, global web 2.0 players, content providers, billing systems, policy management, marketers and operational support systems are key for gaining differential advantage. Using investors, partners capital, equipment and services, networks can be built and funded through ongoing operations. Partnering with government to use available tower space, e.g. TETRA, is a way of decreasing tower lease cost. Partnerships with key network equipment providers are needed to address franchise model. Partnership with Municipalities is necessary in order to share costs and provide local infrastructure. Revenue sharing opportunities exist with consumer brands (Redbull), infrastructure sharing, content providers (Facebook) and service providers (Salesforce.com). Ukko has engaged a major VoIP provider (Haloya), billing/policy management system, SaaS and equipment providers. Call center is outsourced to India.

COST STRUCTURE The excel model is attached in a different file called “financial model” (appendix D). In this model one can estimate cost based on variables as coverage, population, cell size, network equipment capex, network opex, average revenue per user (ARPU) and market shares. Finland was used as an initial market and the results below are based on Finnish demographics, market and geography. Model inputs: • Capex of $150M to build out network. o RAN cost $100M. Covers 52% of population using NSN and IDC cost/coverage models. o Non-RAN cost $50M. 50% of RAN cost and covers all BSS/IPcore/CRM and startup. 66

o Discount rate of 15% used for ROI/lease calculations o License cost is NOT included in analysis • • Opex of $50M/year covering RAN maintenance, network opex and depreciation. Funding will be secured from existing hardware suppliers who in the past have been willing to provide up to 150% financing, as well as private equity investors. Inserting parameters making it possible to create different scenarios:

Table  1:  Technical  and  financial  parameters  when  calculating  cost  of  building  network.  

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Figure  27:  Showing  sudden  increase  in  costs  at  52%  and  80%  network  coverage.  

REVENUE STREAMS Tiered revenue plan developed with multiple segments o ARPU of $240/year. Focuses on ages 10-24, includes customer turnover o 280,000 customers = 5% of total population, 10% of covered market o 90/10 consumer/business split o 20% of revenue from brand marketing and MVNO

Figure  28:  Cashflow,  capex  remaining,  network  opex  versus  net  revenue.  

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Table  2:  Income  statement.  

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PROFITABILITY

Figure  29:  5  year  financial  projections.  

Spectrum in Finland could be acquired in 2011 and deployment could start in 2012, reaching 52% population coverage within three years. With initial investment of 150 M$ and conservative assumptions for capital cost and OPEX, market share of 5% and ARPU of $240/year, the enterprise will generate positive cash flow in 2015 and positive NPV in 2018.   Key Findings: • Coverage outside of urban areas is unprofitable. Focus on 50% of pop. in metro. • • Break-even operations at ARPU of $215/year (< $20/month) Positive NPV in 5 years at ARPU of $460 (~$40/month is comparable to some US-data plans) o Increasing coverage to 80% extends breakeven NPV to 15 years o At $240 ARPU, positive NPV in 8 years. • RAN cost $100M. Covers 52% of population using NSN and IDC cost/coverage models. o Non-RAN cost $50M. 50% of RAN cost. Covers all business support systems(BSS)/IP-core/CRM and startup. • There are significant opportunities to refine and improve profitability upside 70

o RAN costs are conservative @ $175K/cell. Urban-centric network should be cheaper o Room for higher ARPU rates; modeled at 40% of existing industry average o Vendor financing or leaseback arrangements may provide lower discount rates o Supplemental revenue possible through wholesale and MVNO sales

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CHAPTER 9: CONCLUDING REMARKS AND RECOMMENDATIONS

4G LTE offers a new opportunity to reshape the industry. 4G-LTE is just now being deployed with expected substantial market and profit gain from forecasted 300 million connections by 2015. Benefits provided through 4G LTE are higher speeds, higher capacity, reduced latency, increased quality of service, lower operating costs, and a growing number of applications and features. Existing providers continue to offer complex voice and data service plans. Consumers are seemingly demanding simpler, cheaper, data focused connectivity, which Ukko (new Greenfield operator) can provide. Incumbent Telcos have based their brands on voice quality and need to maintain their substantial investments in expensive legacy voice (fixed and 3G network), while they slowly transition to newer technologies to maximize profit on existing investments. This presents a great opportunity for a new entrant, whom with no legacy investment, is free to choose the best technology and best commodity business model. Building a new Greenfield operator business is a complex and capital-intensive task. Owning the network increases market power but could be risky due to high capex on the network, towers and frequency spectrum license. Profitability is very sensitive to infrastructure capex and market share and pushes entrants into alternative strategies like leasing backhaul, backbone and RAN. The market will most likely experience difficulty with increasing ARPU, but acquiring the best competence, IT systems, network equipment and increased quality of service through prioritization of traffic could help drive revenue (e.g. on-demand services). Low-cost offers may work, but free data plans will be very challenging since it requires above 240 USD per year per user in revenue. Owning spectrum license lowers the risk because of its durability (e.g. 15 years) and the fact that LTE technology will most likely be the long-term standard. There are many alternative models for additive revenue generation, such as M2M devices, wholesale and MVNO sales. Based on findings and analysis, Ukko could fit well with the current market conditions and trends. Entering this market does represent taking a capital-intensive high risk. Coverage outside of urban areas is unprofitable. Focus must be on 50% of population in metro areas through network coverage in key markets to provide access for tomorrow’s consumers and 73

business services. Targeting high-density urban areas, adopters of mobile broadband, e.g. youth and businesses, and avoiding high-cost roaming users will maximize profits while avoiding capital costs. The key elements to a possible value proposition and creation of competitive advantage are providing fast and inexpensive data plans for both voice (VoIP) and data with simplicity in access, cost leadership, lean operation, differentiating on quality of service, providing business-class services, wholesale/franchise offerings and novel technology-enabled services providing additive revenue. Assuming a market share of 5%, an initial investment of 150 million USD and ARPU of 240 USD per year, the enterprise will generate positive cash flow in 2015 and positive NPV in 2018. The study builds many of its considerations on the survey, interviews, available market data and work with the focus group (Ukko team). This could represent some limitations. Not all respondents fully understood what technology can offer. The study has focused on Finland as a case, but has also included other well-developed markets. Each market is quite different and is constantly changing. To fully realize the opportunities presented in this thesis, UKKO, the future greenfield operator, must perform further studies: • • • • Understanding of key markets where new spectrum will be made available Evaluate emerging markets and countries with infrastructure struggles Develop a business plan for each market Develop the right partnerships with particularly investors, network equipment and software providers. • Ukko should evaluate the MVNO model that represents a less capital-intensive option where radio network are leased.

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GLOSSARY

LTE. Long-term evolution is a generation of mobile radio and network technology. LTE advanced is considered 4G. 3GPP. 3rd generation partnership project. Responsible for GSM, GPRS, LTE standards. OTT. Over the top services. Services carried over the networks, delivering value to customers, but without any carrier service provider being involved and earning revenue directly from them. MNO. Mobile network operator. Owns network and offers services. Could also lease to MVNO. MNE. Mobile network enabler. Owns and leases network to MVNOs. MVNO. Mobile virtual network operator. Leases all or part of network from an MNE. NEP. Network equipment provider. Provides routing and switching hardware. Backhaul. Fiber or copper infrastructure and core network. EPC. Evolved packet core supporting LTE and any-G network. IP based. RAN. Radio access network equipment. Typical equipment like LTE radios on towers. ROI. Return on investment. CRM. Customer relationship management. BSS. Business support systems.

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BIBLIOGRAPHY

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