00000020 VAS Whitepaper v2

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White Paper

Introducing non-voice services to

high growth mobile markets



© OMNITELE LTD. 2006 2

Omnitele White Pa er 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.





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 rapidand 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 callsfor 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.





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 merePipeline 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 thecontent 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 butthe 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





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.





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.





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.





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 itprovides 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 meansthat 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





High

Open-Portal

Low orModerate

ModerateModerateor High

ModerateModerateor High

Open-PortalPipeline-Billing or

Pipeline

ModerateLow or

Moderate

Low or

Moderate

Low or

Moderate

Low or

Moderate

Low or

FreeLow Low

Closed-Portal

Low

HighModerateor High

HighModerateor High

Moderate

or High

Pipeline-Billing orPipeline

Dominant

Player

Incumbent

Medium Size

Operator

MVNO or Small

Operator

Content Service

Business

Model

Data Charge Content Service

Charge

MMS

Charge

SMS

Charge

Monthly Subscription

Fee

Private

Communication

Content

Services

AccessServices

M a r k e t m

a t u r i t y / M a r k e t l i b e r a l i z a t i o n

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 isstarting 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.





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 agreedbetween 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 isactually 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 newexperience 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





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.





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 Pointreport 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 andrecommendations 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.





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

[email protected]

For more information, please contact:[email protected]

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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