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

Read my other articles on www.telecomcircle.com

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