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

I would request all the readers to please visit my new blog ( 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”