Wednesday, September 16, 2009

The Enigma called Twitter

Nobody thought that Twitter would be so successful but then nobody had thought the same about SMS as well. The simplicity and non-intrusive nature of SMS made this paging like service popular amongst mobile users. Twitter brings together the conversation of social network and brevity of SMS to provide super fresh real time updates on the web. Success of Twitter confirms my belief that the future of social networking is on mobile.

Twitter is a free social networking and micro-blogging service that enables its users to send and read messages known as tweets. Tweets are text-based posts of up to 140 characters displayed on the author's profile page and delivered to the author's subscribers who are known as followers. One might wonder what can one write in just 140 characters but people have found the knack of communicating in less words and use smaller URLs to share links. It is the cocktail of social networking, live search and link sharing that makes Twitter so popular. There are many third party companies that have made search a live stream of tweets possible (I missed the live stream search in my post on Future of Mobile Search). I do not know if this is an early trend in replacing the hegemony of Google on search as the Google algorithm does not make live search possible.

A hacker in July managed to get internal Twitter projections on revenues and user base which were published on TechCrunch. As per the hacked documents, Twitter is expected to earn revenues for the first time in Q3 of 2009 and aims to cross the user base of 1 billion by 2013. From a modest revenues of $400,000 in Q3’09, it plans to scale it up to $1.54 billion by 2013 with $111 million of net earning. Twitter has far exceeded its target of 25 million users by end 2009 (Refer the figure below that has been sourced from TechCrunch)

twitterfinancials

What is the business model of Twitter that gives them the confidence of not only getting a billion users by 2013 but also becoming a billion dollar company? In this post, I have tried to list a few options in front of Twitter some of which are in active consideration by Twitter.

Possible Business Models for Twitter

Till date, Twitter has raised around $57 million from venture capitalists like Institutional Venture Partners, Benchmark Capital, Union Square Ventures, Digital Garage, Spark Capital, and Bezos Expeditions. With so much riding on Twitter, Twitter fast needs to roll-out its revenue model. Below are a few revenue streams that Twitter can consider:

Advertising: This is the most common business model for any internet venture and certainly is applicable on Twitter as well. Given the high user base of Twitter and the relative high number of tweets, there are ample of opportunities for advertising. Advertisements can be either be on the SMS alert or in the feed.

E-Commerce: I read about an interesting news article on New York Times on the possibility of Twitter offering shopping advice and easy purchasing (Link). The platform is designed in a way that it can offer advice to shoppers and companies do promote their products on Twitter. What is needed is to enable the payment platform and convert Twitter into the biggest e-commerce site in the world.

Monetize Data Mining: Twitter is a gold mine of data and rich information can be taken out of it even without compromising the privacy of the users. This information would benefit the companies a lot in designing and targeting the products to the right consumers. The companies are spending a lot of money on consumer research to be able to get this kind of information and would be happy to get it from Twitter for a fraction of their current cost.

Freenium: Twitter can follow the model that is being followed by LinkedIn or many other internet ventures, which is keep the basic service free for consumers but premium comes with a price. Corporate may be charged for customizing the homepage theme to match their corporate theme or special applications may be developed for the enterprises for a fee. There are reports that Twitter is already thinking in this direction.

SMS Revenue Share with Operators: A lot of SMS are getting generated because of Twitter. Twitter can force the operators for revenue share from the SMS revenues. Though this is a difficult but operators will not be able to block the service due to its popularity.

Revenue Share with Third Party Companies developing Twitter related Applications: A large number of start-up firms have developed applications related to Twitter and are monetizing the services offered by them. Twitter may decide to charge for API sharing when being used for commercial purposes.

Utilize the Twitter Platform to enter into other services: How about Twitter syndicating the newspaper for you with the relevant tweet feeds. This newspaper can be generated on the fly and can be customized to individual needs. Just a couple of days back, Twitter announced its intention to geo-tag the tweets. This could help Twitter to create a customized hyper local newspaper. Other services that Twitter could get into are local search and advertising. A lot of companies promote their products on Twitter an offer discount coupons to their consumers. Twitter, with geo-tags, can make the promotions more targeted bringing down the overall marketing spends for the company.

Valuation: Finally, Twitter can play the valuation game – Get a large number of users for the service and then sell off the business for a large valuation. Twitter is ready to wait for the right price and has already declined the $500 million offer from Facebook

What next for Twitter?

The most critical thing for Twitter would be to keep itself relevant. The trends are set by youngsters on the net and their preferences do change. Social Networking was such a rage till last year but now its growth is in line with growth of internet. Hence, Twitter would need to keep up with the changing taste of users. Twitter currently has over 40 million users but as per Nielsen estimates, the retention rate is just 40% and many people drop the service after a month so the site may potentially reach only about 10% of all Internet users. Another article by Gizmodo points to the fact that only 5% users of Twitter have over 100 followers and just 5% of “loud mouths” are creating 75% of tweets. If Twitter is unable to broad base the usage, it may fail to attract the enterprise customers.

Also Read: Marketing Professionals – Do you have a Social Media Strategy?

Potential of Mobile Social Networking

Mobile Operators & Social Networking

Monday, June 22, 2009

MVNO Demystified


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A mobile virtual network operator (MVNO) is a company that provides mobile phone service but does not have its own licensed frequency allocation of radio spectrum, nor does it necessarily have the entire infrastructure required to provide mobile telephone service. As per the MVNO directory 2009, there are 366 active MVNOs and there are another 89 potential MVNOs. The concept of MVNOs was coined by Sir Richard Branson of Virgin Mobile in UK in 1999 and Virgin is still the largest MVNO with over 4 million subscribers in UK. There are currently over 50 MVNOs in US and Netherlands. However in almost every country, the share of subscriber base with MVNO is less than 10%
There are various forms of MVNOs depending on the value chain activities they cover. The figure below provides an overview of the various activities performed by different entities:
The fourth entity depicted as MVNO in the above diagram is essentially the “Thick MVNO” and is the most prevalent form of MVNO. Key examples of Thick MVNO are Virgin, Lebara, Helio and while that of Mobile Virtual Network Enabler (MVNE) are Ztar, TMNG, Convergys and ASPIDER Solutions.
What does MVNO offer?
MVNOs normally try to leverage on one of the three strategic assets – Brand, Distribution or Existing Customer Base. The existing customer base can be non-mobile customer base that can be cross-leveraged for mobile services. There are MVNOs that try to offer better services for their customers, e.g. Rabo Bank launched its own MVNO to serve its banking customers better. Communities of interest can come together to form a community MVNO, e.g. fans of Manchester United or McLaren can potentially brand an MVNO to display their sporting affinity. Wal Mart can use its distribution reach and loyal customer base to venture into the MVNO space.
The key strategic asset that MVNO brings to the table also defines its positioning in the market place. The broad classification of MVNOs is as follows
Business MVNOs focus on catering to the mobile services needs of business houses, e.g. Abica in UK offers cost savings on business mobile, landline and broadband services
Discount MVNOs provide cheaper services to their customers and price is their key differentiation
Niche MVNOs focus on a specific niche of the market and charge a premium for the brand
Ad Funded MVNOs have a business model that is based on advertisements and offer to provide free mobile services to their customers return for viewership of the advertisements, e.g. Blyk in UK

Ethnic MVNOs targets ethnic communities or other communities of interest by offering significant value to their customers, e.g. Lebara in UK offers reduced tariffs to its ethnic customers for calling their home countries
Convergence MVNOs are set of MVNOs that leverage on convergence, e.g. BT Mobile in UK and Italy. BT Mobile encompasses not only GSM but all wireless telecoms technologies and leads the field in Fixed-Mobile convergence­

Why do carriers (MNOs) find MVNOs attractive?
Operators look at MVNOs as an outsourcing partners to either reduce cost or increase productivity by reaching out to more customers profitably. No market is homogenous and consists of various segments which may not be equal in size. Operators may find it difficult to profitably target all the segments. MVNOs are a medium to implement a more specific marketing mix to suit the needs of the niche segments. MVNOs also help carriers reduce their costs as they take away a significant portion of operator costs like customer service delivery, billing, marketing, etc. MVNOs are able to offer these services at a lower cost by leveraging on their current assets. MVNOs may also help increase the revenues by way of reduced churn and increased ARPU.
Operators are particularly interested in MVNOs to better utilize their excess capacity. They can off load their excess capacity at marginal costing (at a discount to the normal tariffs) and can thus offer discounts to specific segments without having to offer it to its entire base.

Future of MVNOs
Despite the benefits that MVNOs can bring, the current share of subscribers in most of the markets they operate in is less than 10%. I am not sure if any MVNO is really making enough money to cover its expenses. The reason for this is that there is now a new entity in the form of MVNO that is trying to gain a pie of the value chain without increasing the value of the chain. This means that the margin needs to come from the carriers or through operating efficiencies. There is not enough inefficiency in the operator domain and hence the high margin opportunities are limited. The carriers are already under margin pressure and have a threat of getting marginalized and hence feel squeezed with the arrival of MVNOs.
An MVNO is only as strong as its ability to differentiate its services. An MVNO can differentiate itself through niche segments, its distribution depth and loyal customer base.
According to Whitey Bluestein, widely recognized as the creator of the first MVNO when he developed a virtual network operation for pre-WorldCom MCI in the mid 1990s,
There are three key areas that most new entrants simply have not thought out either tactically or strategically: distribution, customer churn and industry technology.
In many cases, the MVNOs do not have a clear technology roadmap and hence are not able to transition from 2G to 3G to 4G. Being asset light (read headcount), most of MVNOs have a limited ability to forecast future trends, pace of technology changes and hence miss out on opportunities. They have limited access to latest handsets in the operator driven markets unless they tie-up with the operators themselves for the handset deals.
Also Read: The future of Data Only MVNOs

Thursday, May 28, 2009

Economics of an Application Store

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Apple Application Store delivered its billionth application to its user on 23rd April. I do not know if Apple is the first front store to clock a billion downloads but certainly, it is the most talked about application store. The hype created by Apple around applications has made the phone much more personalized and useful to the user. Will Apple be able to sustain the hype is yet to be seen but one thing is certain, the competitive landscape would be very different in this space in the years to come.
Operators and a few third party stores have been offering the applications for a long time now. Most of the operators have their own content portal from where the users can download the applications. Vodafone has “Vodafone Live”, NTT DoCoMo has “iAppli” and Airtel has “Airtel Live” as portals from where applications can also be downloaded. However, after the launch of Apple Application Store, many other device vendors like Nokia, Palm, RIM and Operating System owners like Google and Microsoft have announced their own specialized applications store. The strong competition from the new players is forcing the operators to alter their strategies.
There are essentially three types of stores:
Operator Portals, e.g. Vodafone Live – Normally, these type of stores are within the walled garden of the operator and have an inherent advantage of having the direct billing to consumer facility. The developers need to tie-up with the operator and the operator takes over the responsibility of marketing, distribution and billing. However, in most of the cases, barring Japan, the revenue share is highly skewed in favour of the operator. In Japan, close to 90% of revenues are shared with the developer which is a big incentive for the developers to develop quality applications
3rd Party Store Fronts, e.g. GetJar – The users use the open internet to access the 3rd party application stores which supports a large number of platforms and devices. The developer gets a high revenue share but marketing and visibility is a concern in this model. Unlike the operator portal or the device stores, the store does not have direct visibility to the users and hence the users have to search for these stores
Platform Application Stores, e.g. Ovi Store, Android Market – These are the new category of application stores that are being built by the device vendors and the operating system vendors. The biggest advantage is that the stores are embedded into the device and hence the discovery is simple. Moreover, they can target a large user base due to the volumes each device vendor does. This high volume potential is a big draw for the developers. Apple has also started the trend of sharing up to 70% of net revenues with the developers which means the developers are in demand like never before. The platforms can be proprietary (e.g. Apple) or open system (e.g. Symbian, Android). The trend in the recent times is towards a more open ecosystem
It is important to understand the economics of applications to be able to fully appreciate the recent competitive intensity in this space. I will use Apple as an example simply because there are more data points available for Apple. Apple Store has seen downloads of 1 billion applications and if we assume that iPod users would have downloaded 38% of these applications (out of 37 mn Apple devices, 23 mn are phones and 14 mn are iPods), then the iPhone users would have downloaded 620 million applications. Out of these 620 million applications, 75% are free applications (based on a survey by Wireless Media Lab, Mar’09) and paid applications had an ASP of approximately $1.1 (most downloads were at 99 cents price point). This means that the iPhone owners paid $171 million as revenues to the Apple Store since the store was launched in Jul-08. Taking a 30% revenues share for Apple, Apple’s net revenues were $51 million ($68 million annualized). This may not be a big amount but considering the pull these applications have, the actual benefit get reflected in the device sales and lower marketing efforts for Apple. Counting the iPod revenues as well, the total store revenues would be in excess of $80 million for nine months.
According to Strategy Analytics, Apple has currently a 12% market share by volume in the mobile application market. If Apple iPhone sold 620 million applications in 9 months time and taking its market share up to 15% by 2009 end, then the annual applications demand in 2009 is likely to be 5.5 billion which is huge!!! The market ASP on an application is around $1.5 (much higher than Apple as Apple has 75% of its download as free vs. 40% free application downloads for the industry) which means that the total applications market is worth $8 billion. 67% of all the application downloads happen through the operator portal or BREW and the rest by other players. Developers get 70% from the device vendor stores, 60% from 3rd party stores and 50% from the operator portal. This means that the developer’s share of revenues is 53% on average or $4.3 billion out of a total of $8 billion while the operators earn $2.8 billion from revenue share apart from the access charges. The non-operator store owners get the rest of the money i.e. $0.85 billion. The total revenues from applications are expected to double to $16 billion by 2013. Apart from the revenues from the application sales, another stream of revenues is advertisements which could in fact exceed the revenues from application sales in the years to come.
Apart from the revenues that the application stores can drive, there are other indirect benefits of promoting application usage. It is a well established perception that Apple users have a much higher ARPU than the other device users. The Apple users are also likely to be more loyal to their carriers. Now, that is a game changer for operators. Carriers gain the most from the success of the application stores irrespective of who owns the stores. However, the operators still have a fear of getting marginalized and hence are planning to strengthen their own stores and platforms. Vodafone recently announced its intention to open its network from 3rd party developers. Multi-country operators like Vodafone with large customer base can afford to develop their own platforms but the smaller single country carriers would be left with two options – Either “Do Nothing” and still gain from the revenue share and access charges on account of increased downloads. Alternatively, they can form alliances with other operators across the world and have common platforms. Vodafone has an alliance with Verizon and China Mobile, SingTel has an alliance with Telstra, Airtel, Globe and others. These alliances will provide strength to the carriers in future. Alliances can also be formed with 3rd party storefronts as they may not pose a huge threat to the operators.
Amongst the device vendors, there are two categories – One that has a huge focus on application stores like Apple, Nokia, RIM, etc. and others like the Korean vendors who have a “Me Too” strategy for application stores and would not like to antagonize the operators by focusing on application store. Operators may want to tie-up with the second category of vendors but the consumer pull may force them not to ignore the first category of the device vendor. The wireless business models are being redifined and with different ambitions of the entities in the value chain, the power game is now getting interesting.

Sunday, April 26, 2009

Mobile Payments Business Models

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Mobile payment is a part of the mobile transactions and is catching the imagination of a lot of people. This is clear evident from the number of comments I got on my last post “Mobile Payments – Will the Consumers Adopt it”. In the last post, I had discussed the consumer issues. Now I am going to talk about the emerging business models in the mobile payment space and the pros and cons of each of the model.
In any payment mechanism, the key entities of the value chain are
Merchants – accept payments from the consumers by reading the card at the Point of Sale (PoS) machine
Acquirers – hold merchant accounts and manage merchant payments
Payment networks - Connect and switch transactions between merchants & issuing banks
Issuers – manage consumer accounts and also take the associated risk
M-Wallet/Stored Value Account (SVA) – Issue and provisioning of the mobile wallet/SVA (only if case mobile payments)
There are essentially four models in mobile payments:
Carrier Dominance Model – In this model, the carrier is responsible for all the roles across the value chain, i.e. carrier is the acquirer, payment network as well as the issuer. The carrier provides the mobile payment application to the customer. The customer holds a prepaid or a postpaid account with the carrier. When the customer pays through his mobile, the bill is charged to his prepaid or postpaid account. The entire network and interchange is managed by the carriers themselves. The PoS is also provided to the merchants by the carrier. The payment to the merchant can be made using NFC or Peer-to-Peer SMS.
DoCoMo used this model by creating an e-wallet using Sony’s FeliCa technology for its NFC based proximity payments and GCash is another example of operator centric Peer-to-Peer SMS based payments. Mobipay in Spain is based on carrier dominance model as well.
However, it is unlikely for this model will succeed in the long run as the carriers need to behave like a bank here and carriers are not banks!!! The merchant and customer trust is missing in this case or to put it in other words, the level of trust for a carrier is not at the same level as that for a bank. Moreover, the cost of recruiting a merchant is too high and there are no synergies expected from the current carrier operations on this count unlike banks which already have business relationships with the merchants. The carrier carries the maximum risk and reward in this model. The risk appetite of carriers may vary across regions and geographies. It would be a significant change to operator business as operators would need to focus on new areas which are very different from their traditional core.
Bank Dominance Model – In this model, the financial institutions takes the center stage and is similar to current credit card system. The merchant acquiring banks and issuer banks could be different and the payment network could be managed by yet another financial institution like Visa or MasterCard. The only difference here is that instead of the credit card, the phone is waved in front of the PoS. This model leverages the existing card payment system. The mobile wallet is issued and provisioned by the banks just like the credit cards. The payment to the merchant can be made using NFC or Peer-to-Peer SMS. MasterCard Paypass based mobile payments is a prominent example of this model.
I do not think the banks are going to show interest in this model as the incremental commissions may not be large and the operators may not allow the banks to adopt this model. In markets where the handsets are subsidized, the operators may demand a disproportionate revenue share. Moreover, the carriers always have the option of blocking the service and in a way it is the carriers who decide what applications can be loaded on the subsidized handsets
Collaboration Model – This model is about collaboration between the carriers and the banks who can distribute the roles of the value chain amongst themselves. The carriers typically are responsible for providing and provisioning m-wallet on the consumer’s hand phone apart from the providing the POS equipment to the merchants. The roles of acquirer, payment network and issuer remain with the financial institutions; one or more financial institutions may collaborate together in assuming the roles of acquirer, payment network and issuer.
Collaboration Model is seen as most feasible because it allows the stakeholders to focus on their own core competencies, opens the door for new revenue from incremental services, drives customer retention and loyalty, and responds to fundamental demand from customers. All in all, this seems to be a good model. In a survey conducted by Smart Cards Alliance, 86% respondents supported this model as having the greatest potential for long term success. However, there are complicated relationships and hence complexity in negotiating deals amongst players. SK Telecom Moneta is an example of real-world rollout of collaboration model.
Peer-to-Peer Model – This model is has been made popular by new entrants in the payment industry like Paypal, Obopay, mChek, etc. The 3rd party company acts as a conduit between the customers, merchants and the bankers. The 3rd party service provider takes the payment from the customer, deducts its commission and passed on the payment to the merchant. It also pays the payment processing fee to the bank or the payment gateways like Visa/Master. The transaction is done Peer-to-Peer between the customer and the merchant. This model is significantly different from the other three models I have discussed and it threatens to eliminate the existing payment ecosystem as the role of the banks and the payment networks gets diminished. Moreover, the money can be transferred from one person to another in this way. Hence this model impacts the business of money transfer (international and domestic remittances). This model is particularly applicable in the emerging markets where the vast majority of individuals do not own a bank account.
Banks feel threatened by this model and so do the carriers. However, it is beneficial for the merchants as it promises to lower the transaction fee. To the 3rd party players, scale is going to be the critical success criteria and the number of merchants on the network is likely to define the customer acceptance. Paypal and Obopay are good examples of this model but none of them have been able to build the scale required to even threaten existing banks

Factors that would influence the consumer adoption and prevalence of the business model
Regulatory is going to define which business model would be ultimately adopted in most of the emerging markets. The central banks across the world are reluctant to allow outsiders (read non-banks) to run the mobile payment service. The insistence on having a bank as collaboration partner ensures a significant role to the banks.
Standardization in the product and processes could be another factor that would determine the consumer adoption. Major handset vendors are yet to come out with their NFC handsets. Broader alliance between the banks and carriers is required to develop an open platform and a common mobile payment platform. The common platform should develop in a way that the cost of handset should not be a deterrent for consumer adoption

What’s in it for the ecosystem players?
The opportunity is big for all the players and what is needed is collaboration between them so that the opportunity can be profitably exploited. According to Mckinsey in its latest report titled “Making Mobile Payments Pay”, the small transactions (< Euro 20) value in Europe is $ 200 billion per year and for mid size (Euro 20-40) transactions, the value is $2.5 trillion per year. On top of this, the annual international remittance is to the tune of $250 billion. Even 0.5% transaction fee on the above gives a huge potential for the mobile payments.

The need of the hour is to work out a ”Just & Fair” collaboration amongst the different players. This opportunity would not only help reduce the risk of marginalization of carriers but would also help the carriers increase their EBIDTA. The players need to understand that the consumers value simplicity and security which can only be provided if all the players collaborate to arrive at the common platform and build enough trust in the minds of the consumers towards this service.

Tuesday, April 7, 2009

Mobile Payments - Will the Consumers Adopt?

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paymentsHave you ever wished that you need not carry a fat wallet in your pocket? You wallet typically has paper bills, a few coins and loads of cards (credit, debit and loyalty cards). It is a real pain carrying this fat wallet around. For small payments, the credit card still cannot be used as the cost of transaction to the merchant is a minimum of 20 cents and hence the merchants refuse to accept the cards for low value transactions. Mobile payments promises to provide an alternate payment mechanism that would not only lower the cost of transactions but also will be more secure. Also, the adoption is likely to be higher as there are more subscribers of mobile phones than the credit or debit cards especially in emerging economies. I have already predicted in one of my earlier posts that that Mobile Money Transfer would gain traction in 2009/2010 (My Predictions for Telecom Industry in 2009/2010).

mobile-transactionsMobile payments are a subset of broader term “Mobile Transactions”. Mobile transactions could be of various types like the mobile payments, mobile ticketing, mobile banking and mobile loyalty. Mobile payments are remote or in-store payment transactions that are conducted on the mobile phones. There are various methods of making the payment from SMS to contactless Near Field Communications (NFC).

There are many benefits of mobile payments. In the emerging markets, over 75-80% of the transactions are cash based with no accountability for a large part of it. We call this parallel economy. This parallel economy is essentially created to avoid taxes but now there are concerns of terrorists getting money through money laundering which is an off-shoot of the parallel economy. To reduce the size of parallel economy, it is important to maximize payments through credit cards, debit cards and other forms of electronic transactions where there is money trail. Mobile payments are one significant step in that direction. Mobile payments would not only bring small transactions within its scope but also would have a higher reach as more people have mobile phones than other forms of electronic payments. Other benefits of mobile payments are convenience and speed of transactions.

There are three types of mobile payments: Remote payments, proximity payments and peer-to-peer payments (including remittances).

Proximity Payments – The contactless NFC holds significant promise in proximity payments and is particularly appropriate for low value transactions in high volume retail points. Mobile payments are being pushed by Visa and Mastercard as the way to pay for the estimated worldwide total of US$724 billion transactions for less than US$25 (source: MasterCard International). Strategy Analytics estimates 1 in 5 handsets would be NFC enabled in 2012.

NFC has significant advantages in terms of speed of transaction as it is estimated that it is around 8-9 seconds faster than card payments and approximately 20-25 seconds faster than cash payments. This should add to the convenience of the consumer. NFC implementation should result in lower cost for the retailers as the requirement for staff gets reduced significantly not only at the cash counters but also in the purchase area where staff is needed to provide assistance and information. However, the key to success of this technology would be the price of NFC chip in the handset

Remote Payments – The remote payments using mobile phones is similar to that currently being done on the PCs through the web. However, the real benefit of the mobile phones would come from the location. The location information of the consumer can be used by the merchants to further provide value added services to the consumer or would help them cross-sell other products that are location specific

Peer-to-Peer Payments – This is a big opportunity as currently the international remittances is over $250 billion a year and add to this the domestic remittance, the value of such transactions is likely to cross $ 1 trillion. On top of this, think about a situation where your kid has run out of money while trekking in a remote location and you can transfer the money using your mobile. This is a huge opportunity to miss. In case of remittances, the commissions are as high as 15% plus the inconvenience of visiting the agent’s office to send or take money. The mobile remittances promise to remove the inconvenience as well as lower the transaction cost. GSMA (GSM Association) has taken up mobile money transfer as one of its major projects. A few successful examples of Peer-to-Peer transfers are M-Pesa of Safaricom in Kenya and GCash of Globe Telecom in Philippines.

Juniper estimates that for purchases via mobile devices of digital and physical goods, contactless NFC (Near Field Communications) transactions and money transfers will together generate transactions worth over $600bn globally by 2013 with over 1 billion people using mobiles for transactions. Half of the $600 billion is expected from the mobile payments and the other half from money transfers.

All these technologies are still in the pilot phase and their success would depend a lot on the consumer acceptance. Will the consumers accept mobile payments? I would say – CERTAINLY provided the following concerns of consumers are addressed

  1. Security – Consumers would like the most trusted brands within the ecosystem to be associated with mobile payments. They would want surety about the security of their money as the mobile transaction could be a significant portion of their salary for people in the emerging markets. Surety from a banking organization would go a long way in allaying the consumer fears. Also, the players would need to address concerns on lost mobiles
  2. Convenience – By convenience, I mean that the speed at which the transaction is completed should be less than that of the credit card or cash and it should be hassle free. I was reading somewhere that there was a suggestion that the consumers should carry their identity card while using their mobile for payments to establish identity. This is ridiculous!!! Any extra effort needed on part of the consumers would not help the cause of mobile payments. This system should indeed reduce the burden of carrying multiple cards and cash
  3. Easy to use – Many consumers have technology phobia. They would rather use complicated but manual processes rather than technology. Hence it is important to have transactions as easy has sending sms and should be completed with one press of button. Even better if no button needs to be pressed
  4. Acceptability at merchant points – This is a chicken and egg situation. Consumers would adopt if there are enough merchants accepting the payments and merchants would want enough consumer pull. In this situation, having a partner in the form of Visa, Master or Amex would certainly help
  5. Transaction costs – The transaction costs need to be limited in this form of payment to encourage wider acceptance for low value transactions. It should provide a clear monetary benefit over other existing payment and money transfer mechanisms
  6. Redemption points – In case of money transfer or store value accounts, there would be enough physical locations where consumers can cash out
  7. Training & education – The players need to be patient when it comes to the adoption of mobile transactions. Customer training and education is the key. Road shows and awareness programs can be held in malls and other high traffic locations. The success would come only when the rural areas have sufficient adoption. In emerging markets, the players can have rural vans that can be jointly run by service providers, handset vendors and the payment players to educate the customers on mobile transactions and at the same time provide customer care

Mobile payments have a great potential for all the players in the eco-system and it could be one of the ways by which carriers can prevent their marginalization. In the next few posts, I plan to cover other aspects of mobile transactions including ticketing and coupons. Till then do give me your feedback on what the different players in the ecosystem can do to increase mobile payments adoption


Tuesday, March 24, 2009

Impact of Economic Crisis on Telecom Industry



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The financial crisis that engulfed the world last year is now playing out in full proportions. This has spread to each industry and telecom industry is no exception. The impact of the recession in the western world and economic slowdown in the emerging countries is being felt in a big way by all the players in the ecosystem. It can be predicted that 2009-2010 will mark a very difficult and crucial period for the entire industry. This post is to analyze the impact of the crisis on each of the players and what can they do to minimize the impact

Carriers: It was earlier thought that the carriers would be spared from the impact of economic crisis. However, it is increasingly evident that they are indeed getting impacted due to restricted access to capital and consumers limiting their usage. In many emerging markets across Asia and Africa, the operators are small and dependant on the foreign capital to expand. The operators are constrained not only by the capital for investment but also by the lack of working capital. Lack of new investments is having an adverse impact on network coverage expansion. 3G auctions planned in many countries have also been shelved for fear of non participation by large operators. Investments in new technologies like LTE and WiMax are likely to be scaled down and I would not be surprised if many proposed installations of WiMax are permanently permanently after reviewing the business plans in light of current crisis. International long distance carriers are likely to see sharp fall in the traffic, due to lower IT spending and lower cross-country investments, which is unlikely to be compensated by the increase in traffic due to travel restrictions across the companies. The operators may resort to tariff reduction in a bid to increase the minutes of usage (MoU) but this would restrict their ability to offer flat data prices or other innovative data models. I foresee consolidation happening amongst carriers as the weaker ones bow out of the industry.

The operators would do well by concentrating on cost reduction initiatives. They may follow the initiatives of the Indian operators by adopting light-asset operation models, putting greater pressure on equipment vendors to adopt new models like managed service and capacity service. The carriers would do well by actively engaging in all kinds of infrastructure sharing opportunities. The cash rich operators may look for new M&A opportunities and cash strapped carriers will do well by limiting the handset subsidies. It is estimated that the industry spends over $50 billion in handset subsidies alone.

At least in the next three years, the traditional CAPEX will experience a CAGR of -3% to -4%, which forebodes a turning point for industry transformation. When revenue from voice services and traditional CAPEX cannot cover operators’ total cost of ownership (TCO), new services and new investment will become new opportunities and breakthrough points. New information consumption models, mobile broadband, and Internet applications will become the highlights of growth. This is the right time to evolve new business models to increase services consumption. Enhanced service consumption would ultimately benefit the carriers when the things start to improve. Operators can present mobile broadband as a viable alternative to fixed internet

Handset Vendors: Handset vendors were the first ones in the ecosystem to feel the pinch of the economic crisis. The replacement cycles lengthened which resulted in the lower replacement volumes and overall demand for new phones. At the same time, the device vendors witnessed heavy down-trading of devices by consumers leading to lower ASPs. The operators in the developed economies started to reduce the subsidy which also had an adverse impact on the value of the market size. The consumers on their part started to go for lower value contracts when their contracts were up for renewal and that lead to further erosion of device ASPs. Various device vendors and industry analysts have estimated the demand to be lower in 2009 by 5-10% over 2008.

Handset vendors need to focus on the costs and supply chain. Vendors may need to shift their high cost manufacturing units to locations where the cost of production is lower. New cross currency dynamics may also play a part in optimizing costs. They also need to rationalize the number of models to have better utilization of marketing monies. The emerging markets like India, China, Nigeria, etc. have been adding record subscriber additions which to a large extent are compensating the device vendors for loss of replacement volumes. The handset vendors should focus on value for money models and can learn from their experiences in emerging markets. I mean they can launch highly successful models of the developing countries in the developed markets and thereby increasing their market share as well as lower the cost of the model due to economies of scale. The handset vendors may also need to take a relook at their business models, partly due to the fact that carriers across the world are reducing subsidies and partly to emerge as end to end solutions player (e.g. RIM, Apple). The lower margins in the devices can be off-set with some of the services revenues if the solution is easy to use and relevant to consumer needs.

Equipment Vendors: The equipments vendors would be under pressure due to reduced investment by operators. However, if they focus on the managed services, they can get additional recurring revenue streams that would make up for the lower spending on network. The equipment vendors should wear the consulting cap and develop a provocative point of view on critical issues (like mobile broadband) that would entice the customers into spending. The vendors should try to develop new business models based on revenue share rather than fixed costs where the payments are linked to the benefits that the customer gets from the solution.

Content and Application (C&A) Providers: In one of my previous posts, I had predicted that the mobile entertainment would increase in times of recession. I got many responses from the readers both for and against the argument. I still stand by it that if the content is really good and affordable, it could be the cheapest source of information and entertainment in such times. If there are applications that help in job search or skill enhancement, they are bound to find favor amongst consumers. Relevance and pricing would be the key. However, lack of available funding to finance the development of new applications, and faster migration to ad-funded services - would have an impact on revenue growth.

C&A providers need to take a hard look at their business models and need to incorporate new ways of reducing cost of ownership for the consumers. C&A providers can look at sachet model to offer content at affordable pricepoints or they can offer unlimited access to content for a fixed fee. With the launch of new application stores by Nokia, Samsung, Microsoft, etc. the content providers should focus on the new application stores to compensate for any loss on the operator portal. The economic downturn will push operators to release their grasp on the mobile content industry and open-up mobile Internet. This would be a great opportunity for the content providers to increase their revenue share and offer content at affordable price.

In summary, it is clear from the above discussion that each of the players of the ecosystem would need to take a relook at their business models. The winners would be decided on the basis of the innovation that they can bring to their business models. The survival of organizations would not depend on how fit they are but how responsive are they to change.

Wednesday, March 18, 2009

Impact of Economic Crisis on Telecom Industry

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The financial crisis that engulfed the world last year is now playing out in full proportions. This has spread to each industry and telecom industry is no exception. The impact of the recession in the western world and economic slowdown in the emerging countries is being felt in a big way by all the players in the ecosystem. It can be predicted that 2009-2010 will mark a very difficult and crucial period for the entire industry. This post is to analyze the impact of the crisis on each of the players and what can they do to minimize the impact

Carriers: It was earlier thought that the carriers would be spared from the impact of economic crisis. However, it is increasingly evident that they are indeed getting impacted due to restricted access to capital and consumers limiting their usage. In many emerging markets across Asia and Africa, the operators are small and dependant on the foreign capital to expand. The operators are constrained not only by the capital for investment but also by the lack of working capital. Lack of new investments is having an adverse impact on network coverage expansion. 3G auctions planned in many countries have also been shelved for fear of non participation by large operators. Investments in new technologies like LTE and WiMax are likely to be scaled down and I would not be surprised if many proposed installations of WiMax are permanently permanently after reviewing the business plans in light of current crisis. International long distance carriers are likely to see sharp fall in the traffic, due to lower IT spending and lower cross-country investments, which is unlikely to be compensated by the increase in traffic due to travel restrictions across the companies. The operators may resort to tariff reduction in a bid to increase the minutes of usage (MoU) but this would restrict their ability to offer flat data prices or other innovative data models. I foresee consolidation happening amongst carriers as the weaker ones bow out of the industry.

The operators would do well by concentrating on cost reduction initiatives. They may follow the initiatives of the Indian operators by adopting light-asset operation models, putting greater pressure on equipment vendors to adopt new models like managed service and capacity service. The carriers would do well by actively engaging in all kinds of infrastructure sharing opportunities. The cash rich operators may look for new M&A opportunities and cash strapped carriers will do well by limiting the handset subsidies. It is estimated that the industry spends over $50 billion in handset subsidies alone.

At least in the next three years, the traditional CAPEX will experience a CAGR of -3% to -4%, which forebodes a turning point for industry transformation. When revenue from voice services and traditional CAPEX cannot cover operators’ total cost of ownership (TCO), new services and new investment will become new opportunities and breakthrough points. New information consumption models, mobile broadband, and Internet applications will become the highlights of growth. This is the right time to evolve new business models to increase services consumption. Enhanced service consumption would ultimately benefit the carriers when the things start to improve. Operators can present mobile broadband as a viable alternative to fixed internet

Handset Vendors: Handset vendors were the first ones in the ecosystem to feel the pinch of the economic crisis. The replacement cycles lengthened which resulted in the lower replacement volumes and overall demand for new phones. At the same time, the device vendors witnessed heavy down-trading of devices by consumers leading to lower ASPs. The operators in the developed economies started to reduce the subsidy which also had an adverse impact on the value of the market size. The consumers on their part started to go for lower value contracts when their contracts were up for renewal and that lead to further erosion of device ASPs. Various device vendors and industry analysts have estimated the demand to be lower in 2009 by 5-10% over 2008.

Handset vendors need to focus on the costs and supply chain. Vendors may need to shift their high cost manufacturing units to locations where the cost of production is lower. New cross currency dynamics may also play a part in optimizing costs. They also need to rationalize the number of models to have better utilization of marketing monies. The emerging markets like India, China, Nigeria, etc. have been adding record subscriber additions which to a large extent are compensating the device vendors for loss of replacement volumes. The handset vendors should focus on value for money models and can learn from their experiences in emerging markets. I mean they can launch highly successful models of the developing countries in the developed markets and thereby increasing their market share as well as lower the cost of the model due to economies of scale. The handset vendors may also need to take a relook at their business models, partly due to the fact that carriers across the world are reducing subsidies and partly to emerge as end to end solutions player (e.g. RIM, Apple). The lower margins in the devices can be off-set with some of the services revenues if the solution is easy to use and relevant to consumer needs.

Equipment Vendors: The equipments vendors would be under pressure due to reduced investment by operators. However, if they focus on the managed services, they can get additional recurring revenue streams that would make up for the lower spending on network. The equipment vendors should wear the consulting cap and develop a provocative point of view on critical issues (like mobile broadband) that would entice the customers into spending. The vendors should try to develop new business models based on revenue share rather than fixed costs where the payments are linked to the benefits that the customer gets from the solution.

Content and Application (C&A) Providers: In one of my previous posts, I had predicted that the mobile entertainment would increase in times of recession. I got many responses from the readers both for and against the argument. I still stand by it that if the content is really good and affordable, it could be the cheapest source of information and entertainment in such times. If there are applications that help in job search or skill enhancement, they are bound to find favor amongst consumers. Relevance and pricing would be the key. However, lack of available funding to finance the development of new applications, and faster migration to ad-funded services - would have an impact on revenue growth.

C&A providers need to take a hard look at their business models and need to incorporate new ways of reducing cost of ownership for the consumers. C&A providers can look at sachet model to offer content at affordable pricepoints or they can offer unlimited access to content for a fixed fee. With the launch of new application stores by Nokia, Samsung, Microsoft, etc. the content providers should focus on the new application stores to compensate for any loss on the operator portal. The economic downturn will push operators to release their grasp on the mobile content industry and open-up mobile Internet. This would be a great opportunity for the content providers to increase their revenue share and offer content at affordable price.

In summary, it is clear from the above discussion that each of the players of the ecosystem would need to take a relook at their business models. The winners would be decided on the basis of the innovation that they can bring to their business models. The survival of organizations would not depend on how fit they are but how responsive are they to change.

Monday, March 9, 2009

Blue Ocean in mobile services

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In my last post on the business models in the wireless industry, many readers commented that the consumer is the king and the most successful business model would be one that would keep consumer’s interests in mind. I fully endorse this view. There is not even an iota of doubt in my mind that the consumer adoption is the key to success of any service.
Currently, I am reading a book called – The Blue Ocean Strategy. The book is how to create uncontested market space and make competition irrelevant. In one of the chapters, the writers discuss that for any service or product to be successful, it needs to pass the consumer utility test. The book quoted the examples of Philips CD-i (video machine, music system, game player and teaching tool all wrapped into one) and Motorola’s Iridium which failed despite being the technology marvels. The reason for their failure was lack of consumer adoption. Consumers did not find the products simple enough to use. The authors give a simple framework that if applied can help identify the consumer pain points. In this framework, the key consumer attributes like ease of use, fun, image, risk, productivity etc. are plotted against the entire lifecycle of a product or service viz., Discovery, Purchase, Delivery, Use, Portability and Disposal. If we analyze each of the resultant cells, we will be able to remove most of the impediments to consumer adoption. I realized how appropriate this framework is for mobile value added services (I will call mobile VAS as “Mobile Services” in the rest of the article as I believe that many value added services are now as important as voice).
When I applied this framework for mobile services adoption, I realized that there are roadblocks in each and every cell. Let me elaborate the point with “Ease of Use” as one of the parameters and plot it across the service lifestage
Discovery – Try to find any mobile application and you would realize how difficult it is to find what you need. I would rate lack of good discovery mechanism as the biggest impediment to adoption of services. How can I buy something that either I do not know about or do not know how to find it
Purchase – Are there sufficient payment mechanisms available for me to make the payment? Consumers struggle to make payments for services they utilize outside the carrier walled garden as the carriers do not have sufficient revenue sharing agreements with the content and application owners. The carriers want a lion’s share of the revenue which has forced many content owners to directly reach the consumers through the web and credit card payment. This has resulted in a few good services providing end to end solution. Barring Apple’s iPhone/itune, RIM’s mail service and Ring Back Tones, I find it hard to think about end to end services
Delivery – The delivery of the service could be either through SMS, GPRS, USSD or IVR but rarely the experience is the same across all these delivery platforms. On top of this, the mobile internet experience is sub standard and erratic at best
Use – Is there sufficient help available to the consumers? Do they know who to get in touch with in case of difficulty? Are there sufficient physical locations where the consumer can go to get a demonstration? I have come across many applications on which even basic help is not available. Even the services provided by the big carriers and handset vendors assume that the consumers are technology savvy. If the consumer is not on flat fee, then he is afraid to use the services for fear of high bill. Carriers around the world need to do a lot more to make the internet charges more transparent and affordable
Portability – The application that one buys on one handset can rarely be ported on to the new handset when the consumer replaces it. This creates a big dissonance amongst consumers. As the applications would become more popular, the consumer would face the dilemma of either spending again to buy the new licenses of the applications or postpone replacement of the handset. The handset vendors would be badly hurt if the consumers start to postpone replacement
Disposal – So many times, I come across consumers who do not know how to unsubscribe a particular service. There are sometimes different codes for activation and deactivation of service and if the consumer does not remember the short code, it could be a difficult proposition for him to deactivate the service
As evident from the above simple exercise, there are impediments to adoption in each and every step. Simplicity is the key and in our endeavor to beat the competition, we keep making the service more complex by adding features to it. Have the consumers adopted even the basic service without enhanced features? Nobody is ready to answer this question and what is the point in making the service more technologically advanced it the basic features themselves are beyond the understanding of the consumers. This simple framework can help address a lot of woes in the industry. We can similarly map the consumer pain points across other parameters like risk (especially impotant in case of mobile payments), productivity, fun and image and other key attributes. Once we ensure that the above consumer utility/acceptance framework is in shape, we can move to other issue of price. We need to think of the price of service/application in a strategic manner. The cost plus pricing would not work as the consumers would be ready to pay only for what they value. In their mind, the service should either be fantastic that they feel the need to pay for it or it should be free. Looking at cost to price the service would mean that we would kill the service even before it is launched. Hence we should decide the strategic price first and then work backwards to decide what should be cost to get the desired profitability. The service providers would do well to provide differential pricing for different markets depending on purchasing power of the market.
Once the cost of service is arrived at, the service provider should look for ways to reduce the cost to the desired level. They have the option of bundling the service with bandwidth or they can become service MVNOs or they can look at alternate business models. If it fails to get the costing at the strategic level, it would be forced to look at alternate business models and hence even more innovation is likely to set in the industry. To illustrate, in the gaming industry, if the cost of the game could not be brought down to the pricing levels demanded by consumers, then the vendors should look at in-game advertising as alternate revenue stream or pay per use mechanism or even micro transactions (basic game is for a nominal fee and with every level of advancement, the consumer would need to pay additional money).
If the service providers are not able to address the consumer utility framework or are not able to bring the cost down to the desired level, they would be well advised to abandon the initiative and launch it only when they are able to do so. Half baked measures would not help – take a hard decision!!!

Wednesday, March 4, 2009

Business Models in Wireless Industry

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Continuing with my previous article on the “Marginalization of Carriers”, in this post, I would discuss the current and emerging business models in the wireless industry.

The key activities in the value chain of the business model are Service Creation, Identity Management, Service Provisioning and Billing. The key players in the ecosystem are the carriers, handset vendors, platform owners (e.g. Symbian, Android), application providers and the content partners. In different business models, different ecosystem players try to control most of the activities. There are broadly 4 business models that exist today in some form or the other.
Carrier Dominance Model: In this model, the users visit the portal screen of the carrier and download/use services from the portal (also called the walled garden). The walled garden directs the user’s navigation within particular areas, to allow access to a selection of material, or prevent access to other material. Traditionally, the carriers have followed the walled garden business model and controlled all the entities of the value chain of the business model. This model got prominence when the wireless industry was in infancy. The carriers took upon themselves to offer end to end solutions to the users. In this model, the content providers need to tie-up with the carriers for their presence on the carrier portal. The carrier is responsible for marketing of the service to the users and also for billing and collection. In return, the carriers charge a huge revenue share (as high as over 50-60%) plus the user access charge. Common examples of this model have been Vodafone Live, NTT Docomo’s i-mode, Airtel Live. AOL followed the most successful walled garden on the web and at one point of time, as per Economist magazine, 40% of the time Americans spent on web was within the confines of the AOL walled garden
Device Dominance Model: In this model, the device vendor is controls the device, platform and the content & application partners. Service provider tie-up with the device vendor who puts the service either on its application store or on its own portal. In this case, the device vendor controls the key activities of service creation, identity management, service provisioning and billing. Carriers get the access revenues and have a shared responsibility for identity management. This results in the highest differentiation for device vendors but the least for the carriers. In this situation, the data adoption and usage is normally high and the revenue share is better for the content partners. However, the content partners are expected to take some load of marketing, billing and care in return for higher revenue share. Also, the development cost of services is likely to be high as separate development is required for each device vendor. Common examples of this approach are Apple and RIM. Both Apple and RIM have complete control over the value chain and they decide on which services to offer
Platform Dominance Model: In this model, the mobile OS platform takes the dominant position. The platform is available across many device vendors and hence the development effort on part of the content and application partners is lower. There are limited service differentiation opportunities for the carriers or the device vendors. The content players need to partner with the platform owner. The carrier gets the user access revenue and the service revenue is shared between the platform owner and content partner. In this model, the platform replaces the device vendor in the device dominance model. The content partners get better revenue share (up to 70%) in return for billing, care and marketing. Symbian and Android are examples of this kind of approach
Application Dominance Model: This model is very much similar to the web model. The application is accessed using the carrier as pipe. The carrier gets the user access charges but entire service revenue goes to the content and application owner. The activities of service creation, identity management, service provisioning and billing are all done by the application owner. The marketing and care responsibilities also lie with the application owner. The role of the device and platform owner does not change in this case. Due to multiplicity of the devices and platforms, the service/application development cost is very high. Facebook, Linkedin, Google gmail client could be examples of this approach. However there are not many examples of paid applications in this model

There are many changes taking place simultaneously in the wireless space. The platforms are changing from proprietary in-house operating system (OS) to proprietary industry OS to collaborative open industry OS. Carriers are lowering the walls of the walled garden due to demands of the users as well as pressures from the content and application vendors. New opportunities are evolving which enable the content providers to completely by-pass of the carrier. All these changes require a change in the business model in the wireless industry

The emergence of the optimal business model needs to ensure that the consumer interests are taken care of and the consumer interests are the weakest if the entire or most of the value chain is controlled by one single large player. In that respect, the platform dominance model probably is best suited to the consumer needs. Due to higher base, the development costs are likely to be lower and all the ecosystem players are likely to have an equal say in the platform dominance model. However, the outcome of the success of any business model would depend on the outcome of the power play between the different entities of the ecosystem

Friday, February 27, 2009

Thursday, February 26, 2009

Navigation – In search of the right business model

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In the last few years, many industries have been impacted by mobile phones. Nokia is now the largest producer of digital cameras since the time cameras have been embedded into mobile phones. Another industry that is facing the heat is the Personal Navigation Devices (PND) industry. Now many new handset models are GPS enabled and maps are available from a host of companies like Navteq (Nokia), Google, etc. Despite a strong ecosystem building in this space and the high decibel noise navigation has managed to create, the adoption of this service is abysmal. Most of the industry players blame the developing content and low availability of digital maps for the low adoption. However, I would blame the wrong business model.

A look at the comscore, which provides the data on internet usage, reveals that on an average people use maps just two times in a month. Even in the US market, the number of visits is just over two. This means that people do not need the navigation/ map services very often as they normally go to places that they are aware of. Over 80% of the travel for most of the people is between home and office. People need navigation only when they are on vacation or on weekend trips or when they going to a completely unfamiliar area. However, such occasions are few and hence the subscription model for navigation deters high adoption. The high annual subscription charge of $75-$150 prevents people from committing themselves for this service. In many markets, this is substantially higher that the ARPU (e.g. in India, the annual revenue per user is $72) which means that it is way beyond what most people could afford or are ready to pay for.

Which business model is likely to succeed? I have no answers to this question but the industry players need to try out different models before hitting the sweet spot. It is clear that the subscription model at the current pricing will not cut ice. There are various other mechanisms to monetize the navigation service. On the methods could be monetizing through advertisements in which the advertisements are displayed on the map. The advertisers can entice the users by pushing promotions and deals which the consumer can utilize for instant gratification or information. The opportunities for advertisement are enormous as the screen keeps changing as the users navigate from one location to another. However, the difficulty here is that the usual advertisements cannot be charged based on CPM, CPC or CPA model. The advertising models for navigation are still in the nascent stage. Another model is transaction based in which the user pays only when he uses it. If the cost per usage is as low as that of an SMS, users would use this service more often. Instead of sending business cards or address details, people would send location tags to one another which could be used for navigate to the other person’s location. Yet another way of monetizing could be using the location for applications like traffic and for applications aiding security. The developers should be encouraged to develop applications that use location as an input so that the consumers find utility in the GPS and navigation. I am happy to hear announcements at Mobile World Congress by various handset vendors and OS players on setting up application stores. The competition amongst application stores would encourage developers for innovation. Even the higher revenue share for developer is good news. Higher adoption of location based services would also result in economies of scale resulting in higher profitability at lower price.

The future of navigation is not on PC but on mobile and that has been understood well by Google which is trying to emulate the maps experience on mobile phones. Once the maps are available on phone and the consumers start to use navigation and other location based services, the usage on mobile would jump from twice a month to at least ten times a month. Can we see a day when the navigation services are free and money is bade from advertisements and other applications based on location?

How can carriers make 40% EBIDTA margin at 2 cents/min tariff?









The mobile tariffs vary a lot across the globe and in some countries it could be as high as 35 cents/min. However, Indian carriers have consistently delivered over 40% EBIDTA margins at a tariff less than 2 cents/min. This article presents a case study on how Indian operators manage high returns at such low prices.
Situation: India has the second highest subscriber base after China at 350 million. The telecom sector was thrown open to private players in 1995 with the launch of mobile services. At the time of launch, the tariffs were very high at 50 cents/min for outgoing as well as incoming calls which meant that only 2-3% top income individuals could afford the service. Gradually competition was introduced in the Indian market and soon it was clear that volumes only could bring profitability to carriers. The number of players in each telecom circle went up from two to four to seven in 7-8 year’s time. At the same time, CPP (Calling Party Pays) and IUC (Interconnect) regimes were introduced in the country resulting in free incoming calls. As competition grew, the focus shifted to mass market and the tariffs started to come down. Indians responded well to the tariff drops and soon India emerged as the fastest growing market. The chart (fig 1) below shows the how the fall in tariff led to high growth.



Indian carriers were clear that they need to reduce tariff to stay ahead of the competition and the mobile services cannot remain a niche service. They followed the following seven steps to attain their aim:
Paradigm shift from ARPU to revenue per min – Indian carriers stopped looking at the ARPU as one of the performance measures. They started considering themselves as the producers and sellers of minutes. Hence the new metrics emerged like the revenue per min and the cost per min. This meant that they needed 40% margin on every minute they sold to achieve the objective of 40% EBIDTA margin. Once they defined the tariff per minute that they could realize from subscribers, they got the target for cost per minute. I would rate this single change in the mindset as the biggest game changer
Outsourcing non-core activities like IT, network – The Indian carriers created many firsts on their journey of cost reduction. Network was considered as a core function of any operator but in the quest of reducing the cost, the Indian carriers outsourced their networks in the year 2003 to the companies that best know how to manage the networks. They roped in companies like Ericsson, Nokia Siemens to manage their networks. Multi-year managed network deals were struck that guaranteed continued business to the network companies at a low cost. It was a win-win situation for both the entities. The carriers managed to change the cost type from fixed cost to usage based costing (based on erlangs per min) and more importantly, they managed to scale up their networks faster on consumer demands. The managed service companies charge on the basis of peak capacity (in erlangs) and the carriers are free to utilize it as they wish. This has resulted in creative tariff plans like night calling to make the traffic pattern more uniform and reduce the peak load. As with any outsourcing deals, the cost came down significantly with enhanced efficiency. Later the carriers emulated this strategy in the area of IT and call centers. Companies like IBM are entrusted with the responsibility of scaling up the IT infrastructure as per the changing needs of the carrier. The deals managed to make the IT cost a variable cost normally at ~2% of the gross revenues. These deals gave the carriers a chance to fight against the best of the world. After the outsourcing of the call centers, the next likely target function for outsourcing could be customer activation and service provisioning. In the end, the carriers would have the responsibility of just managing and owning consumers. Who knows, even that could be outsourced to MVNOs!!!
Focus on Prepaid – The carriers in India have focused on the prepaid market (currently over 99% of new additions are prepaid and over 93% of base is prepaid). Prepaid has a lower cost structure and lower channel commissions which means lower cost to the carriers. Currently, the prepaid card is much more attractive in terms of value than postpaid. Postpaid is currently being subscribed only by corporate connections as a bill is required by corporate. Higher prepaid proportion means lower billing costs, lower bad debt and even lower customer service delivery cost as prepaid customers are much less demanding when it comes to service. The flip side to this is that the churn (3% of base every month) is very high as the loyalty is low amongst prepaid subscribers. The acquisition cost being low, this is not yet pinching the carriers but I believe soon the focus would shift to consumer loyalty
Economies of scale – With falling tariffs, the subscriber net additions started to jump (a mind boggling 15 million subscriber net additions in Jan’09 in India). This ensured that the operators reap the benefit of economies of scale. They started to reduce the tariffs even further filling up the network with minutes. Since the cost increase was in steps due to outsourcing deals, the cost per minute started to fall faster than the revenue per minute and hence the EBIDTA margins stared to increase
Infrastructure sharing – Virgin Mobile may have introduced the concept of site/infrastructure sharing but it is the Indian carriers that followed it with whole heart. Currently, over 40% of the total sites in the country are shared with an average tenancy of over 1.5 per site. This has resulted in huge savings in network running expenses. The operators are now willing to share active infrastructure if the Government so allows. There is strong co-petition in the Indian market
Low cost distribution, e-Charge – carriers developed the low cost distribution model keeping the channel margins low and compensating the channel by way of volumes. They also focused on reducing the transaction costs and India was one of the first few countries in the world to introduce electronic recharge. The electronic recharging eliminated the need of the paper coupons thus reducing the need for multiple stock keeping units at the retail level. This resulted in lower cost to the carrier and low working capital requirement for the channel and on top of this, there were no stock out situations as well. In 2005 itself, electronic recharge was over 85% of the total recharge in the market. The electronic recharge facility helped carriers introduce micro-charge which exploded the market. The recharge could be done with a value as low as 20 cents. This resulted in higher usage leading to further reduction in cost on account of spreading of costs over a larger number of minutes.
Low Acquisition cost (no handset subsidy) – In India, the handset is not sold along with the SIM card. The handsets are distributed and sold separately by the handset vendors. This significantly reduces the requirement of working capital and other inventory carrying costs. The carriers can have a much leaner organization with no handset subsidy burden. In a country like India, where there is no social security number and enforcement agencies are weak, the bad debt should be significant for carriers. Carriers did a smart thing by staying away from the handset subsidy game.
The regulatory framework has been very strong in India and has continuously ensured lower tariffs and consumer interest safeguard. This ensured that the tariffs are transparent (though they are far too many!!!). Regulators also ensured sufficient competition in the market and are in fact planning to introduce mobile number portability soon. They recently awarded licenses to 4-5 new players in each circle taking up the number of players in each circle to 12. This would mean that India would be by far the most competitive market in the world.
All the above initiatives led to tight Opex control by carriers which are reflected in their cost structure (fig below).


Though the cost structure does not throw light on the absolute cost, the cost distribution when compared to other carriers in the world can provide ample pointers to the areas of cost reduction that the carriers in other countries can focus on. Indian operators are on the lookout of acquiring other operators in Africa and Middle-east as they believe that they can replicate the Indian experience there as well. The economies of scale may not be present in smaller markets but does it not call for cross-border consolidation especially in Europe? I am sure that if follow the simple steps of the Indian carriers, the consumers in the other parts of the world may soon enjoy the low tariffs as they are there in India

Monday, February 16, 2009

New Blog

I got a lot of feedback since the time I started to blog and based on the feedback, I decided to move my blog to a better host with a brand new address www.telecomcircle.com

I would request all the readers to please visit my new blog (www.telecomcircle.com) and bookmark the feed to your favourite reader. As always, all comments, suggestions are welcome. I am thankful to all for their feedback which helped me to improve.

MWC- Live from Barcelona

The day when the mobile world congress is celebrating four billion connections, handset vendors and carriers announced a slew of new devices and initiatives. Nokia today took a step forward in implementing its services strategy when it launched its applications store called “Ovi Store”. The Ovi store aims to provide direct access to developers to Nokia’s global application market and promises a huge 70% revenue share to the developers. Given the scale of Nokia, it is likely to become the largest mobile application store in no time. The store will be unveiled in May along with N97 launch. Later in the day, Microsoft also announced its own applications store and it is rumored that Samsung will also announce its application store in the current congress. The developers are certain to be spoilt with choice

Apart from Ovi, Nokia launched new handsets – two new smart phones for business users (E55 & E75) and further updated its navigator 6710. Samsung unveiled a number of new touch screen phones as part of a strategy to implement touch technology across its portfolio. Samsung wants to take on Apple with its new strategy. It launched four new touch handsets - Omnia HD, BeatDJ, BeatDisc and Blue Earth solar powered phone. Sony Ericsson also launched its 12.1 Mega pixel phone code named Idou. Sony Ericsson also unveiled their new strategy that will bring together cell phones with PCs and the TV to share entertainment content. As part of this strategy, the company announced MediaGo, which is an extension of its PlayNow Music service. MediaGo adds a service that lets users download movies onto their PC and then transfer them over to a Sony Ericsson device. The company announced the W995 Walkman phone, which will be able play the feature-length movies. Sony Ericsson is hoping to use links with Sony but it is not clear how far will Sony go in supporting its initiatives. The joint venture between Sony and Ericsson is already under strain due to profitability issues and vastly different focus areas of the two parents. I particularly liked the launch of the green phone (solar powered) by Samsung. This technology, if made available in the entry segment has a great potential in emerging markets like India, Pakistan, African nations, China, etc.

Both Omnia and Idou are on Symbian S60 platforms which further strengthens the market leadership position of Symbian. It was interesting to note that both Samsung and Sony Ericsson have put more faith in Symbian than Windows or Android. HTC caught us flat footed by informing us that it would not be introducing any new Android OS based smart phones at this time. There had been rampant speculation that at least one new HTC built Android device would show itself, but that is not happening.

Though Android could not feature in any high profile launch, Huawei announced a smart phone based on Android platform. China Mobile adopted a more open business model with launch of Android based software platform. It also joined the host of companies launching their application stores. The launch of its own application store could be one of the reasons for China Mobile backing out from launching Apple iphone in China (Apple currently has the largest mobile application store). Not to be left behind, Vodafone announced its own branded consumer GPS phone.

Clearly, three broad themes that have emerged in MWC today are launch of application stores, focus on mobile operating systems and touch phones. It is clear that the next frontier is mobile internet services and all the players in the ecosystem are working hard to get a pie of it. Application stores, navigation and other services are the core of the services strategy of different players with mobile operating systems providing the base and touch devices making input in the phones more user friendly.

Friday, February 6, 2009

My Predictions for Telecom Industry in 2009 & 2010

  1. Greater focus on data services and fewer tariff wars as focus shifts to managing EBIDTA margins
  2. Both the handset manufacturers and operators would focus on the handset OS platform
  3. Smart Phones likely to be the fastest growing category amongst handsets
  4. Handset vendors to aggressively push GPS
  5. Mobile RSS Feeds and Widgets to emerge stronger
  6. Social Networking (esp. IM+eMail) to be the driver of Internet adoption on mobiles
  7. Music, video, gaming and location to adopt the social networking platform which would in turn drive their adoption
  8. Mobile Money Transfer (MMT) to gain traction with Central Banks across the world coming out with regulations in favour of MMT considering the convenience and high penetration of mobiles
  9. Mobile applications to get mainstream
  10. Carrier Walled Gardens would disappear leading to better content development by independent VAS companies
  11. 4G technology debate to be decided in favour of LTE. WiMax would go down fighting but will still manage substantial installations as a support to 3G/LTE
  12. Consolidation amongst carrier and cross-border deals in emerging markets likely to give boost to M&A activities
  13. Mobile entertainment to grow as the cheapest source of entertainment during the tough economic conditions

Tuesday, February 3, 2009

Will WiMax ever become the mainstream?

Which technology has a better future – Wimax or 3G/LTE (Long Term Evolution)? Will the operators adopt WiMax as 4G solution? This has been a hotly debated subject on the internet/blogs and there are die-hard supporters of both the technologies. I would not like to comment on which is a better technology as this debate is very much like CDMA vs. GSM. Though the jury is yet to be out on which is the better technology of the two (CDMA or GSM) but the business issues like ecosystem development, open platforms, etc. have weighed in favor of GSM and this is evident from the world-wide market share of GSM. Similarly, proponents of WiMax may claim that WiMax is a better technology as compared to LTE or at least similar to LTE in terms of performance as both are OFDMA based. Agreed that LTE is completely a new installation over CDMA based 3G networks and the cost of new installation is similar for both WiMax and LTE. However, the fact of the matter is that the success of any technology is dependent on its ecosystem and the players who offer the technology.

WiMax is being supported by equipment manufacturers like Alcatel-Lucent, Cisco and chip manufacturer Intel. WiMax is being propped as an alternative to LTE for high speed data networks by these companies. However, it is unlikely that any major operator across the world would migrate from 2G/3G to WiMax. It is clear that the majority of the operators would opt for the 2G/3G/LTE route as the LTE standards for 4G are much more developed than that of WiMax. Even the spectrum band for WiMax has not standardized and is currently available in 3 spectrum bands in different parts of the world. Moreover, with larger number of installations of the GSM networks, there are many more options for consumers for inter-operator roaming. Role of the open and developed eco-system is cannot be ignored in the success of any standard. None of the current major mobile handset and equipment manufacturers barring Motorola are enthusiastic about WiMax. There is no debate in my mind to the fate of WiMax. I believe WiMax as a technology is here to stay but as a support to the LTE or in the area of fixed broadband. It would be complementary to the LTE. The WiMax deployment could happen in the profitable way for the following applications:

Back-haul: WiMax could be used by 3G operators as back haul from cellular base stations to the radio controller instead of copper wire line T1 connections/microwave links/satellite

Last Mile Connectivity: WiMax could be used for fixed broadband access in residential areas where last mile connectivity is not available. Intel is likely to launch dual chips supporting both WiFi and WiMax which would be embedded in all future laptops. This would be a big push for fixed WiMax. Moreover, there are rumors that Intel is contemplating chips for camera that would allow the users to upload the photos directly from the digital camera using WiMax. All this would push fixed WiMax but the mobile WiMax is still out of the picture. The top mobile device vendors have no/limited handset models with WiMax chip and the landscape is unlikely to change anytime soon

Rural: WiMax is likely to be successful in the rural areas in emerging markets due to the vast geographical coverage each WiMax site can provide thus lower the cost of deployment. Fixed WiMax has its reach up to 30 miles radius from the base station though longer distances may result in drop of bit rates. The broadband connectivity will be a boon for tele-medicine, e-Governance and distance education

Back-end Connectivity: WiMax would provide connectivity to Wi-Fi spots

Complementary to 3G: In a few countries like India were the spectrum is scarce, all the carriers may not get the 3G spectrum. In such instances, the not so fortunate carriers may opt for WiMax. Moreover, it is possible that carriers offer a combination of 3G/WiMax to lower the costs. Urban areas could be on 3G and rural areas on WiMax. If this situation develops in many countries, the handset with dual chip (3G+WiMax) would benefit

To summarize, the winner is likely to be LTE purely due to the business issues of developed standards and eco-system rather than on strength of technology. WiMax may never become the mainstream or predominant technology but it would have its own space as a technology complementary to 3G/LTE. It is likely that in future, WiMax may converge with the LTE-TDD standards as evident from the quote of Alcatel-Lucent’s CEO, Ben Verwaayen – “Alcatel-Lucent intends to lead the long-awaited convergence of WiMax and LTE-TDD standards in the coming years, as we believe the market cannot afford to support two competing 4G technologies”