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

byErik 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.

EvolutionEvery 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 transmissionspeed, medium latency

• 4G: Coverage

LTE has a potential of disruption

What performance matters?

LTE

3G

ArtifactsPublic Cloud spending of $23 billion, up 35%

700 million social networkers; “socialytic” apps

1 billion mobile Internet users; 500,000 mobile phone apps

630 million laptops in place; 80 million netbooks

50 million servers in place, half virtual

20 million smart meters in US

1.2 billion mobile phones ship; 220 million smart phones

7 billion communicating devices in place, 5 billion not computers

Source: IDC, 2010

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 resultsKey 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 low-cost 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 plans4G-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!!!

0

20 000 000

40 000 000

60 000 000

80 000 000

100 000 000

11 % 30 % 52 % 80 % 100 %

OPEX/CAPEX

5%/60

5%/120

5%/240

10%/60

10%/120

10%/240

Coverage

Market share/ARPU

Net revenue (by market share and ARPU) vs. Cost (red)Assumes medium network cost model

Possible value propositionProviding 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-bigger-mickey-mouse-and-mario-there-success-formula-apps.

• Thesis: http://www.scribd.com/doc/53332644/Emergent-Green-Field-Opportunities-and-Innovative-Business-Models-in-the-Mobile-Ecosystem-Erik-Holthe-Eriksen-2011

Thank you!