Research Notes

A Hard Part Of Growing Up Is Learning The Ability To Share With Others

– Being Long past Their Childhood Will Mobile Phone Vendors And Dealers Ever Learn Revenue Sharing?

We have all experienced it when growing up. In the middle of a really good game with a couple of friends, some of the other kids on the street suddenly want to join in. But it is not that simple. The toys also have to be shared amongst the newcomers and the new kids want to change the rules! If all goes well, instead of playing the children are now negotiating about the toys and new rules – but in the worst-case scenario the game has been replaced by shouting, screaming and pushing. Allowing some new kids to join the game is one thing, but having to change the rules is a whole different ball game. Who wants to start a new game, where because the rules have been changed you were now in a worse position than you were before?

This happens amongst kids and it happens amongst grown-ups. It happens when rules need to be changed when playing on the street and it happens when business models need to be changed in the mobile value chain.

In the mobile industry, the mobile manufacturers, operators and dealers have for a number of years been playing quite well together on the street with the current game rules. But those rules need to be changed now – especially because there are some new kids in the street that also want to join in the mobile game. “The new kids on the block” are e.g. a number of handset manufacturers that did not have any a special market position just three or four years ago, but have quickly expanded to major players. Also the mobile value chain is experiencing a surge of new small mobile providers that want to join the game. Here it is especially at the many No Frills mobile services providers that are springing up and with small effective and innovative organisations are making money on relatively modest customer bases.

There are two very good reasons why there is now a significant trend towards demands for new business models/game rules in the mobile industry. For a start especially the mobile operators are being pressured by the tough competition from the many small mobile telephony providers, which is affecting their earnings. The No Frills providers are competing on both price and quality at the same time, as they can both reduce prices on traditional mobile services and that the same time create new and innovative mobile services. In this way the mobile operators are being pressured to reduce their costs and redefine the way they do business.

Secondly the operators have in reality for years needed to start adjusting some of their existing business models that they are using in their cooperation with both the mobile handset manufacturers and mobile dealers. Some of the business models in the value chain have been designed so that the players are actually obstructing each other in their efforts to generate revenue.

In other words there are some very basic business models that result in that the business that is positive for the handset manufacturers and dealers revenue, has a negative effect on the mobile operators revenue. The mobile operators primary focus is on maximising ARPU (by increasing voice and data traffic) and reducing costs (by decreasing acquisition costs and churn). The problem with the business models in the current value chain is simply that the handset manufacturers and dealers have currently completely opposite interests to the mobile operators. They will only generate turnover when mobile customers churn and in that connection most often purchase a new mobile handset that has been subsidised by the mobile operator – a subsidy that benefits manufacturer and dealer. At the same time the handset manufacturers and dealers have no interest in using resources on maximising customers mobile usage, as their revenue is most often independent from the customers actual mobile usage. In other words the players have opposite interests in their efforts on creating a financial return.

For the same reason we will see a trend towards mobile operators trying to use their significant influence to change the business models they are using in their cooperation with both the handset manufacturers and mobile dealers. The handset manufacturers and mobile dealers can therefore expect that the future business models with the mobile operators will be based on a principle that the mobile operators have already successfully used in their cooperation with the content providers – and that principle is called revenue sharing!

Today handset manufacturers and dealers are paid by the mobile operator based on the number of sold mobile handsets. In the future we will increasingly see payment based on revenue sharing models, where handset manufacturers and dealers are paid based on the customers mobile consumption. Thereby the handset manufacturers will be rewarded if they develop handsets that generate high voice and data traffic and dealers will be interested in each individual customer having the highest possible mobile usage.

For both the handset manufacturers and mobile dealers, this trend will revolutionise the way they do business and how they develop, manufacture and distribute mobile handsets, as they will be forced to redefine their business models and roles in the value chain.

Strand Consult has identified 10 Mega-trends, that each is analysed in depth in a new report “Mega trends in the mobile industry – a question of life and death” (300+ pages). Due to these Mega-trends, the mobile telephony market is in the middle of an upheaval of the whole value chain, which will lead to the implementation of new business procedures and revenue sharing models. The report analyses the effect that the 10 Mega-trends will have on the handset manufacturers, content providers, mobile operators and dealers respectively and the report puts forward suggestions on which considerations and measures the individual market players should take to prepare for the effect of the 10 Mega-trends.

One thing is certain. It will be exciting to monitor whether the coming changes in the mobile value chain will be characterised by mature negotiations about new rules and sharing toys – or whether there will be shouting, screaming and pushing. There is no doubt that the negotiations will not be easy, but at the end of the day everybody is naturally most interested in starting to play again – rather than fighting so much that the parents suddenly start interfering…

Mega trends in the mobile industry – a question of life and death

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