White Paper

Introducing non-voice services to

high growth mobile markets
Omnitele White Paper 12/2006

Introduction

Introducing non-voice services to high growth mobile markets white paper is aimed to operators in
high growth markets considering implementing Value-Added Services. The paper discusses Business
models, Value chains and Pricing models of Value-Added Services as well as findings from the Omnitele
market study from the European and High growth mobile markets. The main lessons learned from
these markets, challenges that operators face and solutions to these challenges are presented.

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Current Situation

Western European and Far East Asian mobile markets have already reached penetration rates close to
one hundred per cent. North American penetration has exceeded 70 per cent this year. These markets
can be said to have reached the mature phase. Markets that have introduced mobile
telecommunication in recent years or the service offering consist of voice services are called high
growth markets. In those markets competition is based on voice call and SMS prices. Growth is rapid
and customer bases expand expeditiously. The growth has clearly transferred to high growth markets
and now it is time to look at the positive things that have been done in mature markets and try to
transfer them also to high growth markets. At the same time it is necessary to revise the challenges
that operators have faced during service launches in mature markets and find ways to make sure that
they would not happen in high growth markets.

High growth markets can be identified as markets where growth is exponential or at least steeply
linear. Mobile penetration is still low but growing in accelerating pace. There are only few operators
or one, normally state-owned, in dominating position. Competition between operators is not very
severe, because there is still room for everyone to grow. Services are limited to voice services because
there has not been demand for other kind of services and the handset base is mainly formed of lower-
end devices which do not enable service use beyond SMS.

In the mature phase the prices tend to find some balance (either with or without a price war). When
this happens, operators have to think new ways to differentiate themselves from competitors. In this
point value-added services enter operators’ field of interest. In the mature phase markets start to be
ready to adopt new services. Companies are eager to seek some way to restore the growth. Markets
have shown the potential that prowl in value-added services. Figures show reasonable growth rates in
data and content service usage. The numbers are predicted to grow significantly in near future.
Internet and its popularity has been major driving force in the mobile value-added service. As the
terminal devices evolve to meet the customer expectations, the user experience starts to be on the
level that really satisfies customers.

High growth markets have a great opportunity to learn from the mature market experiences. Market
evolution seems to follow same kind of S-Curve all over the world. They can start providing value-
added services before the price erosion really begins and avoid the drastic decline of ARPU. This calls
for inquiring customer needs and habits already on the forehand and introducing services already in a
growth phase. Possibilities for operators to affect market evolution in the early phase are much bigger
than in mature phase.

Value-Added Service Business Models

Operators’ have four different ways to provide Value-Added Services that are named here as: Closed-
Portal, Open-Portal, Pipeline and Pipeline-Billing. Different models depict operator’s involvement and
revenue model in Content business.

Closed-Portal means full control by the operator over branding and customer relations. The operator
simply buys content from developers and then markets it to customers under its own brand. The
advantages of the model are that no partnerships are necessary and an overall brand strategy can be
adopted. Operator is also left with substantial portion of revenues and it controls the customer
relations. The disadvantages are that it requires substantial financial resources and cash flow. The
model also discourages content developers because of the small share of the revenues they get.
Content and brand management skills have to be high.

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In the Open-Portal model operator has strong relationships with both the customer and the content
producer. Operator is normally responsible for billing and might use its own brand for content.
Revenues are received directly from the customers and shared with the content providers. The
advantages of the Open-Portal model include satisfactory part of content revenues for the operator
and pretty strong customer relationships. The disadvantages are that it requires strong partnership
skills and content management abilities.

The Pipeline-Billing model does not include any kind of portal solution. It differs from the mere
Pipeline by its more direct relationship with the content provider and increased connection with the
customer. Content providers have agreements with operators that they handle billing. As in the
Pipeline model, the operator’s revenue stream is based on minute, message, or megabyte usage. The
advantages of the model include easy management of the relationship with content providers, direct
contact with customers through billing, and greater profitability than Pipeline due to billing services.
The disadvantages include higher costs and risks than the Pipeline model. Operator is also left out of
the actual content revenue sharing.

In the Pipeline model operator can obtain revenue from the content without making any substantial
investment. It simply provides transport services to carry content without having any involvement in
the marketing and branding. Operators receive revenues based on mere traffic. The Pipeline model has
the advantage of being easy for the operator to manage. The operator, however, is giving up the
control that it would otherwise have over the customer and the content. Disadvantage is that the
content provider earns full amount of the
revenues and the operator is left with
mere data fees.

Models are located in framework by their

relation to share of profits correlated
with the control over a customer. Their
positions are relative. For example Open-
Portal and Closed-Portal do not get the
same share of the profits though they are
positioned side by side. Neither does the
Pipeline-Billing have equal amount of
customer control than Closed-Portal but
the Pipeline-Billings amount of customer
control is relatively big compared to the
share of profits it gains.
Figure 1: Content Service business models.

In mature markets, operators have mainly adapted the Open-Portal model. Almost all the Incumbents
and vast amount of smaller operators and MVNO’s have Open-Portal solutions. Open-Portal enables
that customers have easy access to most popular content and non-restricted customer experience.
Pipeline-Billing is another popular solution. It is good option for operator that does not have the
resources or will to get more involved with Content Services at the moment.

Different Value-Added Service business models generate revenues and expenses differently and best
way to understand these differences is to look at specific Value chain for each model.

Mobile Telecommunication Value Chain

Value chain assigns how the value is added to the product as it flows through the organization. In
every step of product development some value is added and the sum of these values is the value that
a user receives. The Value chain idea can also be applied to cover the whole development path of the

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product, not just the part inside particular company. Value chain demonstrates also how the revenues
are spread. As the value flows towards the customer in the Value chain, the money flow goes to
opposite direction.

Omnitele divides the Value chain into three value flows to indicate how the end-user value is
composed from different sources. It also indicates three different customer interfaces. This Value
Chain is now adapted for different Value-Added Service Business Models presented in previous chapter.

Figure 2: Value chain for the Pipeline model.

The Pipeline model has the simplest Value chain. It contains only tasks to maintain the network
elements. The operator takes care of the network and carries the traffic that Content Services
originate. Operator is not interested in who provides or owns the content. Low level of involvement
reflects directly to revenues. Operator gains only traffic fees and nothing from the content.

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Figure 3: Value chain for the Pipeline-Billing model.

The Pipeline-Billing has already some relevance with the content. It has all the same network
assignments than Pipeline but also billing duty of the content. Operator has made a deal with Content
Provider or Content Aggregator to include the content charge to user’s phone bill. This adds somewhat
more complexity to the operator but not seemingly much because they already have implemented
billing systems. Operator gains the traffic fees and also some compensation for all the billing it does.
Another benefit along side the increased revenues is the access to customer information. Operator can
monitor traffic flows more specifically and find out the customer trends.

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Figure 4: Value chain for the Open-Portal model.

The Open-Portal includes higher involvement with the content provision than the Pipeline-Billing.
Operator has the normal network access assignments and content billing function. On the top of these
operator has its own portal where it has gathered content. So the operator acts as a Content
Aggregator as well. Operator markets the content because it is gathered under its own brand or brand
that it supervises or has close co-operation with. Operator’s costs are a lot bigger than in the Pipeline
or the Pipeline-Billing model. It has to take care of maintaining, collecting and marketing of the
content. Content needs to be renewed from time to time and relationships to Content Owners and
Providers maintained. On the other hand, operator gains the traffic fees and a big share of the content
fees. Users are not restricted to use only operator’s content and they can freely visit any sites they
wish. Operator believes that the easy access to its content will satisfy majority of the customers needs
and they do not feel need to get the same content elsewhere. Operator can use its brand to increase
customers’ confidence in services.

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Figure 5: Value chain for the Closed-Portal model.

The most extensive Value chain is for the Closed-Portal model. In addition to normal network tasks
operator controls most of the content Value chain. Operator has its own portal through which it
provides the content that it aggregates and possibly provides. It may not do all this in-house but has
very close relations to the content providers who are strictly controlled. Operator restricts users that
they can not visit any other than operator’s own sites. Operator controls also which content providers
can have sites in its network. The system is very complicated and adds a lot of functions to the
operator. Operator sells mainly content under its own brand. Operators gain most of the revenues and
the content owners are left only with scrapings. Operators can take up to 90 per cent of all revenues.
Biggest obstacle with the Closed-Portal model is to try to convince customers that they will be
satisfied only with operator content and do not need to visit whatever sites they wish.

Terminal flow assignments can be included to every model by the operator’s decision to have branded
shops or bundled subscriptions. They can be excluded with the same decision also. Operator can
become a retailer by starting to sell handsets from its branded shop or by proving bundled
subscriptions. This adds some cost but also revenues. To become a Terminal Provider mainly means
that operator has exclusive deals with Terminal Manufacturers who produce certain models only for
them. They can have special features or even branded under the operator’s name.

Operators business seems to be more and more Semi Walled or Open Garden based. According to
Vodafone and Orange, in June 2005, 70 percent of the content that customers consumed through their
networks was not bought through operator portals. This means that customers were going out to other
sites and to third party service providers to buy content and then download it to their mobile phones.
On the other hand operators seem to be very successfully launching exclusive portals to maintain their
customers. Ofcom figures from 2004 expressed that 62 per cent of all content was bought through

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operator portals which is somewhat contradictory to Vodafone’s and Orange’s statistics. Actually these
both statements back the idea of Open-Portal. Operator needs to have a portal where customer has
easy access to most popular content but on the other hand portal must not restrict customer
behaviour by generating artificial walls. European operators seem to have understood this because
almost all the Incumbents and vast amount smaller operators and MVNO’s have Open-Portal solutions.

Operators in high growth markets should take findings from mature markets into notice and also focus
on open solutions. Closed-Portal solutions will not work anymore and there is empirical evidence from
US and Finnish markets for example. It is tempting to restrict customer usage only to operator’s own
services, but in the era of Internet this will not work. Customers have used to access any services they
wish and if they are restricted, they will stop using also the restricted services.

Offering customers a freedom to choose preferred service provider does not mean that their choices
could not be influenced. Operator’s portal can be freely exited but good service offering and easy
usability can after all get the customer to use operator’s services. Main issue is that customer is
provided the freedom to choose. Revenue share can still be maintained by offering usability and
reliable service providing. By opening the portal, operator can motivate service providers to develop
the whole industry. This again increases the revenues and benefits all. Smaller share from big pie can
after all be much bigger than big share from small pie.

Operator size seems to affect operator’s service pricing habits as well. Next chapter presents Pricing
models that are vastly used in European markets.

Pricing Models

Based on the data collected from European markets, we have formulated pricing models for different
kind of operators. Models are based on alternating pricing habits of different kind of operators. The
division to different classes is based on operator’s size and network ownership. Size means the
proportional number of subscriptions and network ownership whether operator operates in its own
network or is MVNO. To Figure 6 are gathered the different models. They were valid in most European
markets in the time of research; 2006.

Operator pricing habits don’t strictly follow the models categories in real markets, but mainly
operators price their services according to this model. There might be some variations and pricing in
some categories might go to the side of neighbouring pricing model. After all, when looked the whole
pricing strategy of the operator, it fits the certain category very well.

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Private Content Access

Communication Services Services

Monthly Content
Subscription Content Service
Fee SMS MMS
Service Data Charge Business
Charge Charge
Charge Model

Dominant Moderate Moderate Closed-

High High High
Market maturity/ Market liberalization

Player or High or High Portal

Incumbent Moderate Moderate Low or Open-

Moderate Moderate
or High or High Moderate Portal

Open-Portal
Medium Size Low or Low or Low or Low or Pipeline-
Operator Moderate Billing or
Moderate Moderate Moderate Moderate
Pipeline

MVNO or Pipeline-
Small Low or Moderate
Low Low Low Billing or
Operator Free or High
Pipeline

Figure 6: Operator pricing models.

Operator pricing model also reflects the maturity of covered market. Market has not entered the high
growth phase if it is captained by Dominant Player which is merely focusing on existing coverage and
services. The growth is minimal. Market is in growing phase if there is only one Dominant Player or
only few Incumbents. Growth is rapid and the regulator has to start taking more active role. Market
starts to scatter when Medium Size Operators and MVNOs appear. Incumbents begin to lose their
market share and prices tend to decline. Active regulation is needed and the growth of penetration is
starting to stall. Operators need to focus more on other than voice services to differentiate and secure
growth.

Other Lessons Learned From Mature Markets

Beside the findings presented above, Omnitele research has identified some main issues that are
related to success in Value-Added Service markets.

• Bundling of terminal works for the benefit of service-enabling handset penetration.

• SMS is a must service independent of market situation.
• Interconnectivity accelerates the evolution.

Bundling has made the vast penetration of service-enabling handsets possible. This has accelerated the
service absorption. Bundling also helps operators to sell high-end handsets to consumers. Operators in
high growth markets should further the penetration of handset with features if the growth seems only
to focus to low-end. Bundling, as mentioned, is good way to increase adoption. Another way is to co-
operate with handset manufacturers to make exclusive, cheaper phones that still have features to
enable some services.

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One common success factor in all these European markets has been SMS. It has acted like a step stone
towards more complex services. SMS is easy to adopt and use and most people do not even consider it
as an extra service anymore. SMS introduction is definitely one of the first steps high growth market
operators should do on a path to offering Value-Added Services.

Almost all European markets are focused on GSM and UMTS technologies. There has not been
exhausting standard wars that would have stalled the evolution and worn resources. Mutual standards
also enable people to use some service while roaming. Interconnection needs also to be agreed
between operators and regulators have had big role in carrying out interconnectivity in Europe. High
growth markets should also focus only on one standard and agreeing on interconnectivity with other
operators. This steers evolution forward and doesn’t force customers to choose which technology
offers them most advantages.

Challenges that Operators in high growth markets Face

Operators face many challenges in launching Value-Added Services. Here are gathered some with high
importance. They are divided into Internal and External challenges.

Internal challenges:

• Lack of time
• New experience
• Co-operation
• Mutual understanding of targets

"To facilitate growth, we were very technology driven. This is a legacy for most operators in growth
mode. Omnitele really assisted us to get better focus on VAS commercial issues and marketing
strategy."
CTO in the Caribbean region operator

"It was a giant leap for us to start thinking to co-operate globally instead only locally. And this is
actually needed for an operator to get value added services launched"
Marketing director for a major African operator

It is common that operators in high growth markets do not have a separate service development
organization. Such an organization is not absolutely necessary in the market expansion phase, when
the customer base is exploding and the biggest challenge for the operator is how to support the
booming voice traffic. Therefore, non-voice service development projects might be assigned to e.g.
the marketing department to take care of on top of their current duties. This leads to work overload
and lack of time to finish all the tasks in time, and usually it is the non-voice service
development that suffers.

Value-Added Services differ somewhat from voice; the biggest challenge is that the end users perceive
the phone as a device for talk and not more. For an operator in high growth market, it is a new
experience to start developing and marketing non-voice. Billing is different, content needs to be
purchased from partners, pricing needs to be planned and customer care needs to address new
problems from the end users etc. It takes time and effort to learn and master the new tricks of the
trade. In order to smoothen the learning process, outside help in the first few non-voice service
launches is often recommended. Some operators have chosen to outsource the non-voice service
development and management function altogether.

The business experts (marketing, sales etc.) and the technical experts of a mobile operator
traditionally have very little in common. The former has been seen as a marketer and seller of the

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technical solutions provided by the latter. In the current market situation there is infinite number of
services to be provided to the end users and the business function needs to steer the offering
development. This might cause friction between the departments - engineers might see their power
being diminished and business experts might feel uncomfortable in their new role.

Business and technical experts usually have the same mother tongue but do they talk the same
language? We concluded earlier that the business function needs to steer the management of non-
voice services. In other words, they need to set demands and requirements to the production
machine, the technology function. Business experts need to have a clear view of the services they
want to launch before the requirements can be explained to the engineers. The engineers can adjust
their systems only after they understand these requirements. On the other hand, the engineers need
to make sure they understand the requirements thoroughly before starting to implement them and
also that they explain in detail the lead times and costs of the requirements. As the other party talks
about service selection, customer experience and pricing and the other about megabits per second,
megabytes and Erlangs, it is no surprise that misunderstandings occur. In most cases it helps if there is
an outside interpreter between the two parties.

External challenges:

• Low level of voice and SMS prices makes it harder to market premium-price services.
• Service creators tend to promise too much for customers compared to real user experience.
• Content Service killer application is hard to find and the vast offering should not complicate
customer’s decision making.

Customers get used to low prices quickly and the introduction of new services with higher prices
becomes hard. Users are not willing to pay considerable sums for something that they can in many
cases do freely on the Internet, for example send pictures or play games.

Service providers have some occasions promised too much for end users, which has led to high
expectations and eventually disappointments. This particularly withered WAP.

Content Services need leading service that would customize users to premium prices and constant
service usage. As mentioned earlier, the problem with SMS is that it customizes users to low prices and
does not encourage them to use higher price services. This is problem which has no universal solution
because Content Services are highly uncertain. Different services succeed in different markets so the
remedy is to try out all kind of services and hope that the killer application is found.

Solutions

So how could high growth market operators overcome the challenges presented above?

Solutions for Internal Challenges

It is wise for the operators in high growth markets to thoroughly understand the challenges and
potential pitfalls that lie in new service development, implementation and launching. Challenges
presented in previous chapter arise from the internal issues of adjusting present functions to meet the
new requirements as well as the old ones. These issues can be overcome by focusing on the needs of
new processes and interaction between different parts of the organisation.

One might think internal challenges are easier to conquer than external ones because they are not
affected by external factors and are mainly related to phases before service launch. However, internal
problems are difficult to notice and to admit because they lie in the organisation’s own infrastructure

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and functions. One solution for operator in high growth market is to consider experienced and
professional outside expertise for finding and solving these issues.

Solutions for External Challenges

High growth market operators should react for price erosion early enough. In Europe, MVNO’s are
normally the ones that drive prices downwards. Operators should react by acquisitions or
differentiation and improved service offering. Acquisitions may be possibility only for Incumbents so
differentiation and improved services could be the main actions. Operators can for example create
exclusive portals with exclusive material that attracts customers. Handset manufacturers are doing
their part by developing better quality terminals.

High growth market operators do not face the problem of vague promises as bad as it was in Europe
because technology has evolved and customers can be offered reasonable user experiences nowadays.
Still the technology is not at the level where e.g. mobile browsing could equal to normal Internet
browsing. This is important when customer expectations and images are created. Too optimistic and
vague promises can lead to very negative results in the end.

Operators in high growth markets can further the search of market specific killer applications by
providing vast selection of services. However the services should be launched during longer period of
time so that the customers are aware of all new services and have time to get acquainted with them.
The extensive offering should not complicate the customer’s decision making. Positive thing about
high uncertainty is that it also enables higher profits in case of success.

Figure 7: From only voice services to voice and non-voice services transition

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How Can Omnitele assist

Omnitele provides a four-step solution for operators about to launch Value-Added Services. These
steps can be performed individually or as one larger project. The steps are:

• Situation assessment
• Solution & content procurement
• Service implementation
• Product portfolio optimisation support

Figure 8: Omnitele solution for high growth market operators.

In the Situation assessment the operator is provided a structured analysis of the current state of
operations. The operator’s commercial and technical abilities to introduce services are assessed. The
methodology of the work is to gather and analyze the existing commercial and technical
documentation, interview the key experts of the operator and use the experience and material from
Omnitele’s former similar projects. The work will be carried out by following the Service Development
Manual, a document developed for this purpose by Omnitele. The deliverable of this step is a detailed
status report of the operator’s current situation and ability to introduce new services. This includes a
list of actions that are divided into launch-critical, important and necessary, as well as a technology
upgrade plan and a Value-Added Service roadmap where a suitable launch plan is generated.

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Typically any new service requires a service platform and/or servers with appropriate software to
manage the service logic, features and functions. In Solution & content procurement Omnitele assist
the operator in defining the technical and commercial requirements to fulfil the needs of the service
roadmap. The requirements are then documented in the form of a Request for Proposal (RFP), which is
sent to prominent suppliers. Finally, Omnitele will evaluate the responses and recommend the best
supplier. It is worth to note that an RFP could and should also be sent to the potential content
providers and their offers be evaluated in similar manner, which Omnitele also can take care of. The
deliverables of this step are the RFP for service platform and / or content providers and a Power Point
report on the relative feasibility of the offers.

In Service Implementation the actual implementation of services is managed on-site. An Omnitele

project manager will form a project team of the customer’s personnel and be responsible for the work
of the team towards the service launch. Project Manager shall also manage the operator’s partners
connected to the project. The operator is provided service documentation and internal as well as
external project management. The deliverables of this step are live services on the market.

Omnitele can also provide for the operator a Product Portfolio optimisation support. It is a product
based approach for optimizing operator performance and profitability. The service is designed to give
the company’s management an overall view on the company’s product portfolio in order to be able to
make decisions needed to prepare for growing competition and/or to increase efficiency of the
company and thus gain better margins. The analysis provides information on the current products and
recommendations on their optimization. It also indicates which type of value added services would
best support the existing portfolio.

Our motto: At Omnitele, we talk marketing as well as technology.

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OMNITELE LTD.

Omnitele Ltd. is an internationally operating telecommunications Consultancy Company established in

1988 and owned by Finnish telecom operator group Finnet. Omnitele provides strategic advisory
services to business and technology players within the wireless industry by assisting in issues ranging
from network planning and procurement to operator service portfolio planning.

Currently Omnitele has two ongoing projects with African and Caribbean region operators concerning
non-voice service implementation and launch.

Publications details

Publications date: December 2006

Author: Tapio Haantie, Consultant

Firstname.lastname@omnitele.fi

For more information, please contact:

contact@omnitele.fi
Omnitele Ltd., Tallberginkatu 2A, 00180 Helsinki, Finland
Tel: +358 9 695991
Fax: +358 9 177182

For further information on Omnitele, please visit our website www.omnitele.fi

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