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

NEXTGENERATION MOBILE OPERATORS by Erik Holthe Eriksen

“There are too many people working in telcos”
-Peter Vesterbacke

Breakdown
• • • • • Understanding the technology Empirical findings Market opportunities and threats Business ideas Business modelling

Building a new Greenfield operator business is a complex and capital-intensive task

What I did…
• Theory
– Business model ontology – Porters 5 forces – System dynamics

• Methods
– Focus group at MIT – Survey (300 respondents worldwide) – Interviews in Helsinki (9)
• • • • • • • • • 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 Yrjö Pylvänäinen - Technology Director for State Security Networks Bill Rogas - IDC advisor within mobile networks.

Evolution
Every 10 years… • GPRS (2,5G): PS, 50 kbit/s • EDGE (2,75G): 200 kbit/s. • W-CDMA (3G): 384 kbit/s. • HSDPA (3,5G), 8-10 Mbps • HSUPA (3,75G), upload 5.76 Mbit/s. • 4G LTE (3.9G) 100 Mbps, OFDMA • WiMAX Competitor to LTE • LTE-advanced (4G) • 5G (2015/16) adaptive cognitive radio Shortcomings: • 1G: Inefficient use of spectrum limits number of users • 2G: Low data transmission speed, high latency, inefficient • 3G: Medium data transmission speed, medium latency • 4G: Coverage

LTE has a potential of disruption

What performance matters?
LTE

3G

Artifacts
1 billion mobile Internet users; 500,000 mobile phone apps 700 million social networkers; “socialytic” apps 630 million laptops in place; 80 million netbooks 1.2 billion mobile phones ship; 220 million smart phones
Source: IDC, 2010

Public Cloud spending of $23 billion, up 35%

50 million servers in place, half virtual 20 million smart meters in US

7 billion communicating devices in place, 5 billion not computers

Market overview
• Mobile broadband will overtake fixed broadband users by 2012.
– penetration still low (13% in developed countries)

• The total market is enormous
– 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.

• While existing providers continue to offer complex voice and data service plans, consumers are demanding simpler, cheaper, data focused connectivity. • Revenue growing slower than data traffic

Survey results
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 care less about the pipe and more about the features, QOS and devices – Demographic and behavior shifts coming: end of voice, adoption of FB and VoIP – High-ARPU opportunity: Age 25-45 willing to pay for data (38% for $100 unlim. data) – Low-cost opportunity: Age <25 prefer lowcost high-speed data plans. – Segments of current market are underserved by existing MBB

Consumer pains:
◦ Complexity ◦ Transparency

◦ Roaming costs
◦ High price and variable ◦ Lock-in ◦ Speed and consumption limits

Market dynamics

LTE plans
4G-LTE is just now being deployed with expected substantial market and profit gain from forecasted 300 million connections by 2015.

Market transformation
• Mobile telecom market itself is transforming
– Voice service (high margin) is merging with data. New services arriving. – Focus will be on connectivity, bandwidth, applications and features

• Incumbent operators are the gate-keepers and control important assets (spectrum, re-usable infrastructure). This is changing!
– Incumbent players have structural challenges addressing market – OTTs are leapfrogging Telcos. Are Telcos ending up as a utility provider burdened by existing infrastructure or will they succeed with their own “app stores”?

• Disruption in the industry will come from the changes in the business model, which the operators are incapable of adopting rather than new technologies, which they control • Inertia of the incumbents. It has happened before: fixed telecom, airline industry

Opportunities
• There are opportunities for greenfield LTE (long term evolution – 4G) operators with no legacy cost – highly profitable business in most markets – transition and period of rationalization presents a great opportunity for a new entrant – Spectrum/license will dictate new opportunities. – LTE offers several key advantages over exiting 3G Large markets highly competitive, but opportunities exist in smaller markets – High entrance barrier and complex ecosystem! – Profitable models exist for low-cost operators in small and emerging markets. Strategic alliances with network equipment providers, VOIP providers, global web 2.0 players, content providers, billing systems, regulators, policy management, marketers and operational support systems are key for gaining differential advantage. Alternative strategies: MVNO model by leasing backhaul, backbone and RAN. The market will most likely experience difficulty with increasing ARPU Revenue sharing opportunities exist, e.g. consumer brands (Redbull), IT and infrastructure sharing, content providers (Facebook) and service providers (Salesforce.com). A new entrant, whom with no legacy investment, is free to choose the best technology and best commodity business model. There is need for transparent, simple and inexpensive value proposition. Incumbents’ value proposition is voice/minutes based complex bundle - the same as ten years ago.

• • •


Key decisions
• • • • • • • • Metro-only coverage, or whole country IP-only or VAS (value-added services) MVNE-only, or also MVNO Support 2G/3G compatibility Charge model: bandwidth or volume? International Roaming? Advertising subsidies Provide devices?

Profitability vs coverage
• Important variables: coverage, population, cell size, network equipment capex, network opex, average revenue per user (ARPU), market share and license cost (unknown). • Targeting high-density urban areas, adopters of mobile broadband, e.g. youth and businesses, and avoiding high-cost roaming users maximize profits while avoiding capital costs • Coverage above 80% is very expensive: Norwegian regulators want 97% coverage!!!
Net revenue (by market share and ARPU) vs. Cost (red)
100 000 000 80 000 000 60 000 000 40 000 000

Assumes medium network cost model
OPEX/CAPEX 5%/60 5%/120 5%/240 10%/60

20 000 000
0 11 % 30 % 52 % 80 % 100 %

Market share/ARPU 10%/120
10%/240

Coverage

Possible value proposition
Providing fast and inexpensive data plans for both voice (VoIP) and data with:


Lean operation: Taking advantage of new IT support systems resulting in less opex
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). Enable on-demand bandwidth priority. Low-cost plans: 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. Differentiating on QOS and providing business-class service: Focused on regional businesses as a means to sell the high-priority connections at higher margins with bandwidth throttling. Provide fast and inexpensive data (cost leadership) 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. Partner with HW and SaaS providers to drive down CAPEX, OPEX and reduce risk Development of a turnkey/franchise ‘LTE in a box’ business. Open innovation: open up for 3rd party service providers (app stores, “skype”, FB)

• • •

• •

Recommended studies
• Understanding of
– key markets where new spectrum will be made available – 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. • Consider the MVNO model that represents a less capital-intensive option where radio networks are leased.

Online articles published
• The interview with Peter Vesterbacka of Rovio/Angry Bird was published in Dagens Næringsliv newspaper, http://www.dagensit.no/article2079580.ece • MIT entrepreneurship review, http://miter.mit.edu/article/angry-birds-will-be-biggermickey-mouse-and-mario-there-success-formula-apps. • Thesis: http://www.scribd.com/doc/53332644/EmergentGreen-Field-Opportunities-and-Innovative-BusinessModels-in-the-Mobile-Ecosystem-Erik-Holthe-Eriksen2011

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