Mobile Internet Business in Japan

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Regulatory Framework and Industry
Clockspeed Lessons from the Finnish Mobile
Services Industry ITS 16th Biennial Conference
Jarkko Vesa, Research Fellow Helsinki School of
Economics, Information Systems Science jarkko.vesa
_at_hkkk.fi
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Background of the paper

• The Finnish mobile market has traditionally been
  considered one of the leaders in the wide-spread
  adoption of mobile phones and the use of mobile
  telephony both by business users and consumers.
• However, the emerging non-voice mobile services
  (a.k.a mobile Internet services) have not taken
  off as expected.
• This paper argues that one reason for this
  development has been the regulatory framework
  that prohibits Finnish network and service
  operators to adopt business models that have
  proven to be more successful as the industry is
  transforming from a person-to-person paradigm
  towards an increasing use of person-to-content
  type services.

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Definition of mobile services
transfer fees E.g., GPRS, 3G, ?
Person-to-Person E.g., SMS, MMS, mobile
chat human centric
Person-to-Content E.g., ordering
ringtones machine centric
Vesa (2004)
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The role of regulation in the mobile industry

• Mobile services are transforming from a simple,
  highly standardized product to a complex good.
• Economic theories argue that the level of
  standardization of products and services has
  direct implications on the optimal way of
  producing them, i.e. whether to integrate
  vertically or to use the markets.
• Earlier analyses of the success of non-voice
  mobile services in Japan have indicated that an
  integrated business model appreas to be more
  successful as the industry moves from
  voice-centric to data-centric services.
• However, sometimes regulatory environment
  prevents operators from adopting a business model
  that would be optimal for the new and more
  complex industry - as the case of Finland will
  show later.

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Proposition 1 Regulatory environment
Regulatory environment that has been optimized
for traditional mobile voice services is not
always optimal for the more more complex mobile
services of the future.
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The transformation of the mobile industry

• According to the theory of industry evolution,
  all industries are constantly changing.
• These changes are related both to the boundaries
  of industries as well as the industry itself.
• An industry may experience an environmental
  shock (Mitchell and Singh, 1996), which can be
  described as sudden and substantial changes in
  technology or market segmentation e.g., the
  introduction of 3G networks and the 3G licence
  auctions.
• This development is sometimes called also as
  paradigm shifts or disruptive changes.
• It has been suggested that mobile phones are
  changing their DNA (Novari, 2003).

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Proposition 2 Industry transformation
The mobile industry is going through a major
transformation within the industry, and also the
boundaries of the industry itself are currently
being re-drawn
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The concept of industry clockspeed

• One way of describing the rate of change of an
  industry is the notion of industry clockspeed
  (Fine, 1996).
• There are several ways to measure industry
  clockspeed
• process technology clockspeed (i.e., capital
  equipment obsolescence rate)
• product technology clockspeed (i.e., the rates
  of new product introduction or intervals between
  new product generations)
• organizational clockspeed (i.e., rates of
  change in organizational structures).
• In addition to the internal metrics, the rate of
  change in the industrys external environment
  (i.e., developments in technology, consumer
  preferences, and market conditions) differs from
  industry to industry.
• Several of the these factors are clearly visible
  in the mobile industry.

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Proposition 3 Industry clockspeed
The mobile industry can be best described as a
high-clockspeed industry where technology,
organizational structure and market conditions
are constantly changing.
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Mobile services industry in Finland

• Traditional person-to-person mobile services
  (i.e., voice calls and sms) have been very
  successful in Finland
• high penetration rate of mobile phones (appr.
  90)
• tariffs of mobile phone calls are among the
  lowest in the world.
• Since the number portability of mobile
  subscriptions was introduced in 2003, there has
  been the highest rate of ported mobile phone
  numbers in the EU countries.
• The main criteria when selecting a mobile
  operator appear to be the pricing of calls and
  short messages, the amount of free airtime, and
  the value of giveaways offered by mobile
  operators.
• Operators are not allowed to bundle subscription
  and handset
• The ongoing price war will drive several smaller
  operators out of business (Tolonen 2004).

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The structure of the Finnish mobile market
horizontal/modular
Figure 1.
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Interplay between regulation and clockspeed - the
winners curse

• The Finnish mobile services market structure is
  very different from the mainstream of market
  structures for instance in the EU.
• It is argued here that the reason for the current
  situation is the regulatory environment - and not
  the intentional strategic choice by the
  operators.
• During the analog NMT mobile networks, the
  business model in Finland vertically integrated
  the Finnish PTT TELE controlled the whole value
  chain, i.e. the network, handset business and
  services (voice calls).
• Along with the digital GSM networks and
  deregulation, the mobile industry transformed
  from a vertical/integrated structure to a more
  horizontal and open market (see Figure 2).
• It was in fact the SIM card that physically
  separeted the subscription from the handset in
  Finland (as SIM-lock is prohibited there).
• The regulatory framework created in the 1990s
  was very successful.

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Transformation of the Finnish mobile voice
services markets
Horizontal
Industry structure
Vertical
Integrated
Modular
Product architecture
Figure 2.
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Too much competition is bad for the future mobile
services

• As a result of the horizontal/modular
  mix-and-match market structure, the competition
  in the Finnish mobile services has been
  intensifying at an increasing rate.
• The number of service operators has increased
  dramatically Today there are about fifteen
  virtual network operators in a market of five
  million people and approximately 90 penetration
  rate.
• The competition is focusing mainly on price due
  to commodization of mobile phone calls and high
  quality of all three mobile networks (difficult
  to differentiate service offering).
• However, it is justified to ask whether the
  current model is optimal for the future mobile
  services.
• This paper argues that a regulatory framework,
  which was originally optimized for traditional
  voice services, is not necessarily optimal for
  the new and more complex mobile services of the
  future.

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Analysis of KPIs of Finnish mobile operators

• As simplistic way of testing the propositions
  and arguments presented in this paper is to take
  a closer look at the key performance indicators
  (KPIs) of the Finnish mobile operators
• The share of non-voice mobile data services of
  the average revenue per use (ARPU) is about 12.
• However, if the highly popular use of SMS (which
  is mainly used for messaging) is excluded, the
  percentage of non-SMS mobile data services
  (P2C)is estimated to be around 1.
• While the trend in other European countries is
  towards an increase in the share of non-voice
  services (e.g. the use of Vodafone Live! service
  increases steadily every quarter), in the Finnish
  market the new services (including even MMS) are
  not gaining a bigger share of ARPU.
• As other European markets have moved towards a
  operator-driven and more vertical/integrated
  structure, the Finnish market remains the same.

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The Finnish mobile market has been left behind in
the transformation
Figure 3.
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Why does the Finnish market look so different
from the rest of the Europe?

• It is argued here that altough non-voice mobile
  services have been more successful in markets
  where mobile operators take a leading role as the
  orchestrator of mobile services development and
  delivery (Vesa 2003, 2004) in order to offer a
  true end-to-end mobile service, this business
  model has not been a true option in Finland -
  due to restrictions in the existing laws and
  regulations.
• As a result, the Finnish mobile industry does not
  have the opportunity to redesign their business
  models towards a more integrated model, even
  though the theories of industry evolution and the
  real-life experiences would recommend this
  approach
• The Finnish mobile operators are not allowed to
  bundle subscription and handsets, which appears
  to be a key element in creating more
  user-friendly mobile services.

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The implications of the current regulatory
environment in Finland

• The Finnish operators have big problems in moving
  their existing customer base towards more
  data-centric - and higher value - mobile services
  (providing that they are even interested in doing
  that, because the current voice-only GSM and SMS
  is a true cashcow for the leading players).
• Furthermore, none of the big players of the
  mobile world are present in Finland Altough the
  limited size of the market and the funny language
  may be bigger obstacles for them to enter the
  Finnish market, even a bigger hinder is propably
  the fact that the vodafones and t-mobiles of the
  world would have to change their business model
  to comply with the Finnish regulatory environment
  - hardly an attractive alternative.
• Even the investment banks have expressed their
  concern regarding the over-zealous regulatory in
  Finland (Vepsäläinen 2004).

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Discussion and conclusion

• The objective of this paper was to demonstrate
  how the regulatory environment of a market
  defines the feasible business models for mobile
  operators.
• By using the Finnish mobile services market as an
  example, the paper showed how the laws and
  regulations have in fact halted the natural
  evolution of the industry by preventing mobile
  operators from adopting business models that have
  proven successful in other markets.
• This has led to a situation where the speed of
  change in the industry, the clockspeed, has
  slowed down - turning the previously advanced
  mobile market of Finland into a mediocracy in
  international comparisons.
• For national regulator authorities (NRAs) the
  findings of this paper should act as an example
  of how regulatory environment has to evolve as
  the industry it regulates goes through major
  transformation ...as they have recently started
  to do - but thats another story!