com/electron/mcop00. and Michael J. “M-commerce: The next big thing. “Mobile e-commerce.asp. this ﬁgure passes one billion by 2003. Stephen Hodges.
Analysys (a European telecom consultancy) report. Hence operators are keen to seek value-creating opportunities beyond the simple transport of data. or 7 percent of all e-commerce transactions.
Nick Barnett and Stephen Hodges are consultants and Michael Wilshire is a principal in McKinsey’s London office. standard protocols that deliver Internet-like services on smaller screens.” February 2000. as forecast.mckinseyquarterly. If. Wilshire
Mobile-telephone operators could compete on all levels of the mobile-commerce value chain—but they should think twice before they do.” on the next spread). mobile telephones will be as common as television sets. Such a penetration rate— combined with technology that provides for the fast transfer of data on mobile networks. This article can be found on our Web site at www.
. Within three years.1 Wireless operators are well placed to beneﬁt from this growth because they alone own and operate the mobile networks that make m-commerce possible. the annual value of goods and services transacted over mobile networks could reach $13 billion. But as available bandwidth proliferates and the coverage capabilities of networks converge.
pward of 300 million people —more than own PCs—across the
world subscribe to mobile telephones. the basic business of transporting data will become more competitive. All rights reserved. and the very personal nature of mobile telephones —will drive a mobile-commerce revolution (see sidebar.E L E C T R O N I C
C O M M E R C E
An operator’s manual
Nick Barnett. Copyright © 2000 McKinsey & Company. and proﬁt margins will fall.
The high speed at which Internet data can be downloaded is only one important characteristic of the new networks. Third-generation technologies
Unfortunately. In current wireless networks. almost twice the rate of a standard computer modem and enough to support high-quality streamed audio. the most common cellular standard. 3 Universal Mobile Telephone System. as GSM (Global System for Mobile Communication). In addition. That situation will improve this year. requires a circuit-switched connection: a user must connect to a server to check e-mail. First.
. handset penetration.164
T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 3
M-commerce: The next big thing
Four main forces underpin the mobile-commerce revolution: third-generation technologies. will raise the rate to 2 megabits per second—one-ﬁfth of the bandwidth available on the standard Ethernet in today’s offices (Exhibit A). This means that although a GPRS handset is. True third-generation networks.
1. so they pay higher costs and network capacity is wasted. asynchronous services. GPRS networks use a connectionless (packet-switched) communications mechanism. far below the 64-kilobit-per-second capacities of landline copper wires. permanently connected to the network.6 kilobits per second. Like the wired Internet. users ﬁnd themselves on-line even when they are not sending data (while reading or composing e-mail. and personalized services. General Packet Radio System. for example). is extended by the General Packet Radio System. This limitation has two drawbacks. the current (second) generation of wireless networks and handsets supports data rates of only 9. to which an address uniquely identifying the destination is appended. however. such as automatic forwarding of e-mail. in effect.
Third-generation technologies: A battle for bandwidth
Thousands of bits per second First generation: GSM1 2.000 Mediumquality video Graphics. are not possible. GPRS can support data rates of 112 kilobits per second. Data are split into chunks called packets. apart from the limited Short Message Service (SMS). based on the UMTS (Universal Mobile Telephone System) standard. the Wireless Application Protocol (WAP) and iMode platforms. most data communication. since the connection can be initiated only from the mobile handset. for example.000 High-quality video 1. audio Text Messaging SMS (Short Message Service) 2000 2002 2004 Second generation: GPRS2 Third generation: UMTS3
100 20 10 0 1998
Global System for Mobile Communication.
Sweden. The delivery of these services is independent of the underlying networking technology. Consumers can thus not only gain access to wireless services wherever there is a network presence but also keep tabs on time-critical information. wireless-network operators—at least those using the GSM standard—are uniquely able to determine the identity of a user. Germany. Belgium. enabling a whole range of new applications.
4. Italy. where mobile users aren’t charged for incoming calls).
telephones to access the Internet more often than they use personal computers. Second. Spain. France.C O M M E R C E : A N O P E R AT O R ’ S M A N U A L
it uses network capacity only when packets are actually being sent. and a personal-identiﬁcation number often protects them.
3. Finally. Since mobile telephones are not usually shared. Personalization
The wireless Internet has three main features that permit mobile interactive services to be more personalized than traditional Internet applications are. such as stock market reports or urgent messages. Norway. 2 Forecast. The WAP and iMode
Two of the leading platforms for delivering Internet content to mobile telephones and other wireless devices—the Wireless Application Protocol and iMode—were designed to take into account the constraints of wireless communications: limited bandwidth and endsystem processing as well as a constrained user interface. and the trend is expected to continue (Exhibit B).
2. just as Internet applications can. McKinsey analysis
. Lehman Brothers.1 percent 100 90 80 70 60 50 40 30 20 10 0 1993
Compound annual growth rate = 36%
Includes Austria. Handset penetration
The uptake of mobile telephones has been nothing short of phenomenal. and the United Kingdom. so applications can be used on different networks. Each platform deﬁnes a standard markup language that permits an application’s user interface to be speciﬁed independently of the end device. Finland. Source: Financial Times . operators can detect a user’s exact location.M . First. Nokia predicts that within three years people will use mobile
Europe picks up the phone
Mobile phone penetration in Europe. the telephone itself can be used as a means of identiﬁcation. mobile telephones are carried by their owners almost everywhere and kept switched on most of the time (especially in Europe.
which are formatted in a standard known as HTML (HyperText Markup Language). customer-facing content. such companies risk forfeiting long-term shareholder value unless they concentrate on areas in which they naturally hold a strong competitive advantage. Many wireless services will require some form of payment—usually from the user to the service provider to pay for. for security.166
T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 3
In theory. At the bottom is transport: the maintenance and operation of the infrastructure3 that provides for data communication between mobile users and application providers. The second link consists of basic enabling services. and economies of scale or scope in constructing the underlying technology platform. Transaction support is the third link of the value chain. Providers convert the content of Internet-based applications. data backup. The fourth link is presentation services. given the ﬁrst-mover advantages associated with much Internet-related business. The danger in the value chain to compete is that they will spread their skills and resources too thin. and the absence of strong competition at Operators will have to make all levels in the new industry might difficult decisions about where even tempt them to try. GPRS/UMTS (General Packet Radio System/Universal Mobile Telephone System) base stations. their powerful ﬁnancial muscle. mobile operators could compete at all levels of the m-commerce value chain. say. books or CDs —but possibly also in the other direction. The high stock market valuations of Internet-related companies. from the provision of basic technical services to the supply of lucrative. This infrastructure includes the backbone network. Moreover. and the gateway between the mobile network and the Internet. Transaction support provides the mechanisms for assisting those transactions. for refunds or customer reward schemes. and systems integration. Vendors wishing to target wireless customers need these services to make products available via mobile telephones.
. and for billing users. into a standard such as WML
Many Internet-related businesses are characterized by low but rising entry barriers created through economies of scale in building a brand. network effects (the increasing utility of a service as more people come to use it).2 Operators thus need to make difficult decisions about which parts of the value chain to compete in—and how—and which parts to avoid.
The m-commerce value chain
There are seven links in the m-commerce value chain. such as server hosting.
Sonera and Cellnet. Companies that can provide such information will form a valuable link. and travel) to new services designed speciﬁcally for mobile consumers (information about where to ﬁnd the nearest coffee shop. which provide information in a category or search facilities to help users ﬁnd their way around the Internet.
. no mouse and a non-QWERTY keypad. and billing details (the number of a credit card or a bank account. avoid throwing up too much information. but mobile operators have the necessary technical skills. as well as brands that potentially position them well for customer-related activities higher up the chain. particularly at the lower end.C O M M E R C E : A N O P E R AT O R ’ S M A N U A L
(Wireless Markup Language). lowresolution screens of wireless devices. address. e-mail. User applications are the sixth link of the value chain. Users will want portals that simplify the search. Possible applications range from those currently available on the wired Internet (including banking. location.M . Providers that wish to offer the best m-commerce services need information such as the user’s name. They also have the billing systems for payments.
Opportunities for operators
Few industries offer the opportunity to compete in every link of a value chain. In addition. for example. One of the main value propositions of m-commerce is its ability to personalize applications for individual users. an HTML subset suitable for the small. Content that isn’t already on the Internet can be formatted directly into a wireless standard. for example. Personalization support is the ﬁfth link of the chain. for example) and even—because the size of the screen affects the kind of information that can be viewed—the type of device used to connect to the service. or the Portals are particularly important automatic notiﬁcation of nearby for m-commerce because mobile friends). their control of the wireless infrastructure and their ability to conﬁgure subscribers’ handsets to make themselves the default Internet access provider give them the power to limit subscribers’ access to competitors’ services —at least initially—and therefore to build their own branded ones. Early indications are that operators will indeed try to use these advantages to capture value in many parts of the chain. book purchasing. and require minimum input. This function is particularly important for m-commerce because mobile telephones have small screens and limited input mechanisms—notably. At the highest point in the telephones have small screens chain are the content aggregators: businesses that design and operate portals. news.
1. But as volumes rise. and NTT DoCoMo supplies basic enabling services. proﬁt margins fall: in the United Kingdom. personalization support. call charges have dropped by about 77 percent in ten years. but in the longer term it is ﬂawed.
As of March 14. according to forecasts. will soon overtake voice traffic as the main source of revenue for mobile operators as a whole. it runs the risk of driving away those dissatisﬁed subscribers.4 But a glance at the Internet also reveals it to be a specialists’ world where ﬁerce competition forces companies to excel. and personalization facilities.168
T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 3
have already launched portals. it fails to maximize demand for data traffic. A glance at recent stock market valuations of the Internet counterparts of the companies supplying these services shows the potential attraction of such businesses: Yahoo! (content aggregator) is valued at $89 billion. and transaction support—and move quickly to capture these opportunities by adopting four strategies. T o withstand the competition.5 In response. or SMS) already contributes 10 percent of the revenues of some wireless operators and. content aggregation. Telenor and Sonera offer transaction facilities. By presetting their subscribers’ telephones to make themselves the default Internet access provider and blocking unauthorized services. Vodafone AirT ouch and Cellnet have application services. This “walled-garden strategy” might provide higher revenues in the short term. 2000. some operators have used their control of the network infrastructure to try to lock in value at stake elsewhere in the chain. Drive traffic growth by offering a wide variety of data services
Data traffic (mostly driven by the simple text-messaging service called the Short Message Service. and Engage Technologies (personalization) at $5 billion. The Internet players will compete with mobile operators. First. who may switch to a competitor to get exactly what they want. operators have the opportunity both to charge application providers for access to their subscriber base and to build their own branded services. Exodus Communications (enabling services) at $25 billion. Amazon (applications) at $21 billion. exploiting the distinct advantages—such as brands and experience— the Internet players have already developed on the World Wide Web. presentation services. Second. mobile operators should concentrate on the four areas in which they have a strong advantage—transport.
. because users may be barred from their favorite on-line services. These Analysys ﬁgures are based on the average monthly bill for a high-usage business customer taking advantage of the cheapest available tariff.
and on-line worlds alike. personalization will be even more important. might be reﬁned by the user’s location and
. It follows that the ﬁrst operator in a region to offer unrestricted access to data services could capture a lucrative portion of the subscribers of other networks. for screens are small. The way to prof ﬁt from transport is Launched in February 1999. The end result is likely to be a more valuable service.
2. . within to increase traffic on the network a year it was offering more than by offering subscribers access to 3. Attract content providers by offering good user information
Customer data are a valuable asset in the off.M . McKinsey research in the Asia-Paciﬁc region. for the more a vendor knows about a customer.” service.000 Internet-like services and had the widest range of data services attracted three million fee-paying subscribers (rising by 10. This can be done only by offering subscribers access to the widest possible range of data services.) In the wireless world. (An example is Amazon.000 a day on average). These techniques range from “cookies” pushed to the user’s computer to ensure that repeat visitors are recognized and appropriate data recalled.C O M M E R C E : A N O P E R AT O R ’ S M A N U A L
Since consumers increasingly choose their wireless providers on the basis of the data services available. to complex collaborative ﬁlters that predict the preferences of customers from their behavior. The best way to go on proﬁting from transport is therefore to increase traffic on the network. an approach that has been validated in the Japanese market by the success of NTT DoCoMo’s iMode service. indicates that half of all subscribers (and up to 70 percent of high-value ones in some countries) would switch operators to get better wireless data services. for example. say. In the wired world.com’s “customers who bought this book also bought . Internet vendors use various techniques to personalize a customer’s visit to their sites. limiting the amount of information that can be shown. this second point is an important one. Average revenue per subscriber also rose by about $120 a year—$30 from ﬂat-rate subscription fees and $90 from increased traffic revenue. which exploits the purchasing patterns of similar customers to suggest books or CDs that users might enjoy. (A search for a restaurant. reckoned both by price charged and by the vendor’s ability to attract and retain customers. the more it can personalize the information or service it provides. and information can be tailored with the help of a few personal details. on the one hand. . on the other.
wouldn’t require users to ﬁll in personal details for each site they visited —an off-putting task on a small keypad. Application providers will probably
be attracted to those networks whose operators can supply the most useful data on customers
Input capabilities too are limited.170
T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 3
spending bracket. wireless portals have a degree of control over what users see on the Internet. which means that users will beneﬁt if input forms can be ﬁlled in automatically on their behalf. A CD vendor. Although the user can modify this. Assume the role of a wireless portal
Like portals in the wired world. (A good one. the way portals use this personal information could turn out to be the main factor distinguishing good from mediocre portals. Given the projected penetration rates of mobile devices and mobile consumers’ increased reliance on portal services. for example. for example. which differ from country to country).) The kind of device that is used will also determine the kind of information that can be sent: a stock quotation service. First.
.6 Operators enjoy some natural advantages in providing portal services. Indeed. and so on in a virtuous circle.
3. could supply shareprice graphs to devices with sufficiently large screens. for example — a valuation based on Goldman’s predictions of the potential revenue sources for a wireless portal. Mobile operators can also use this information to drive traffic growth. doing so requires some effort. The upturn in traffic will attract more application providers. could simply ask customers to verify payment information and a shipping address rather than have them ﬁll out forms from scratch. such as Yahoo! Finance. A larger number of application providers will in turn attract more customers to the network. many observers expect wireless portals to be as highly valued on the stock market as their established Internet equivalents. Mobile operators hold plenty of this kind of personal information on subscribers and are well placed to supply application providers with the data they require (subject to legal restrictions.) But
Goldman Sachs recently valued Vodafone’s Multi-Access Portal at almost $29 billion. the operators’ information about subscribers permits them to tailor the content provided. more customers.7 Second. the operators can control the conﬁguration of telephones for all their new subscribers and thus make their portals the default start screen. for application providers are likely to be attracted to the networks whose operators supply the most useful customer data. so the portal provider can charge service providers and advertisers high fees.
perhaps rebranding the service under their own names. Excite@Home. Sonera makes it possible for subscribers to buy soft drinks from vending machines by dialing a number. operators have so far shown limited skill in selecting. have already launched wireless portals. The latter two options are the safest bet for less advanced operators. which identiﬁed the potential of m-commerce long before others did.
4. Operators have three broad options when considering a portal strategy. Several established companies. They can outsource the provision of the portal to one of the new breed of wireless portals. the portal gets hold of the operator’s customers and information about them. Despite some natural strengths as portal providers. Yahoo!. and customizing content. Provide transaction support with a wide range of payment choices
All operators have systems to bill and charge their subscribers. and the cost is then charged to the subscriber’s mobiletelephone account. In the United Kingdom. The beneﬁts to both parties are clear: the operator gains access to the aggregation skills of the portal. Some operators have already spotted this opportunity. Or they can form a co-branding partnership with an established portal. Freeserve stole a march on competitive portals by offering free Internet access and retains a strong first-mover advantage. Operators must also decide whether to build the portal alone or with a partner. and America Online. And the value at stake at this level of the chain ensures that operators will face stiff competition. Telenor is experimenting with a similar system that permits customers to book cinema tickets. while subscribers to NTT
.C O M M E R C E : A N O P E R AT O R ’ S M A N U A L
Internet experience indicates that operators will have to move quickly to succeed as portal providers. for though they are good on the technical side. they are light on the kind of media and marketing skills that characterize successful Internet portal providers. not least from existing Internet portals with strong brands. a large subscriber base. including Microsoft. They can operate their own portal under their existing brand—the approach taken by operators such as Telia Mobile and NTT DoCoMo. particularly in countries where existing Internet portals will offer strong competition. such as AirFlash or Room33. and plenty of experience.M . The same systems can be used to bill subscribers for goods and services sold by third-party vendors on the network and to levy a per-transaction charge to vendors. aggregating.
One question remains: how broadly should mobile operators compete in the four areas in which they have a competitive advantage? Given the likely competition. Because of the similar skills required in the wireless and wired worlds. smart operators even threatening to bypass operators will probably join with one or more altogether by forming relationships directly with handset vendors. depending on where they have the strongest advantages as
. presentation services. established relationships with service providers. Not surprisingly. smart operators are thus likely to join up with one or more banks or credit card companies. for example. To offer customers a choice of payment methods. their bank account.
Where not to play
In the areas of basic enabling services. The most successful applications. operators should consider placing their big bets in no more than two areas. Presentation services will typically be provided by software companies that convert standard HTML into a form suitable for wireless devices and by Internet design ﬁrms that offer direct conversion services. are jointly developing a system permitting consumers to pay for goods and services using bank information stored in a telephone’s memory. and expertise in making customers’ credit and transactions secure. Sonera recently did precisely this with MasterCard. and their monthly telephone bill. Existing Internet content providers will in any case have a strong lead in user applications.172
T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 3
DoCoMo can add all of their m-commerce transactions to their monthly mobile bills. wireless operators hold no natural advantages and are likely to face strong competition. These credit card companies are To offer customers a choice of payment methods. existing Web-hosting companies and system integrators that already focus narrowly on these businesses will probably dominate basic enabling services. for example. moreover. Visa banks or credit card companies and Nokia. Yet mobile consumers will probably demand a choice of payment mechanisms: their credit card account. tend to be developed by focused entrepreneurs who dedicate themselves to the task. since the providers quickly make existing services available to mobile consumers. this role is being contested by credit card companies that have their own billing systems. and user applications.
It is important to remember that m-commerce is developing fast and that mobile operators need to establish an early lead to capture maximum longterm value.
.M . Focus is one of the surest ways to build on what is already their strong starting position in this market. or the absence of competition.C O M M E R C E : A N O P E R AT O R ’ S M A N U A L
measured by knowledge. skills. they should seek to dilute their level of risk by forming strategic partnerships or joint ventures. Elsewhere.