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  • DESIGNING MOBILE SERVICES: CONDITIONS FOR THE FUTURE DEVELOPMENT OF MOBILE SERVICES IN LATIN AMERICA Jean Carlo Sandy Jean Carlo Sandy, Delft University of Technology, Faculty of Technology, Policy and Management, Dirección: Av. Gualberto Villarroel 1132, Teléfono: +591 70720000, Cochabamba - Bolivia, jcsandy@yahoo.com Harry Bouwman, Delft University of Technology, Faculty of Technology, Policy and Management, Information and Communication Technology, PO BOX 5015, 2600 GA Delft, The Netherlands, (31) 15 278 8069, w.a.g.a.bouwman@tbm.tudelft.nl Abstract In this paper we discuss the conditions under which innovative mobile (data) services have to be developed in Latin American Countries. The next generation mobile services depends on the availability of shared mobile standards, Internet availability, proper regulatory conditions and favorable market conditions. It is expected that mobile data services will be more attractive in comparison to Internet applications, mainly due to the broader availability of mobile networks and the diffusion of mobile handsets. INTRODUCTION In this paper we will discuss the regulatory, technological and market conditions under which the design and development of mobile services have to take place. Whereas in the US, Asia and Europe the conditions for the development of mobile services are extensively studied [1, 6, 14], the conditions for Latin America Countries (LAC) have received, as far as we can assess, far less attention. Furthermore there is extensive literature on developing mobile services [22] and on mobile business models [2, 8, 15], but this body of knowledge is more specific for western industrialized countries. Hardware, software, middleware and network providers have to work together in delivering advanced 3G+ services. The value networks that are supporting these services appear to be well established and are becoming more institutionalized in walled garden concepts as for instance I-mode, that are dominated by mobile network providers. In Europe we see that content providers are starting to debate the walled garden approach. However the conditions in LAC are less favorable. Mobile technology is lagging behind, Internet penetration is limited and although the population in LAC is relatively young, education levels lag behind. The main research questions we would
  • like to address in this paper is: What are the regulatory, technological and market conditions that drive or enable the business models for mobile services in Latin American Countries? To answer this question we will analyze the general telecommunications policy, and for instance more specific polices with regard to the mobile market. One can think about spectrum allocation and regulation with regard to the wireless Internet access market (WiFi, WiMax, WiBro). With regard to technology we will both offer an overview, based on available data, of actual penetration of mobile (and wireless) in the LAC, the choice for specific standards like GSM, GPRS and EDGE, or the PCS standards. With regard to the markets we will discuss both the supply side, i.e. network operators offering mobile services, content providers position in the market for advanced services, as well as the demand side, i.e. penetration rates of mobile communication, as well as the type of devices and services used. Although we would like to draw an as complete picture as possible we are well aware that detailed and recent data on the LAC are not always available. MOBILE SERVICE DEVELOPMENT Designing mobile services and the supporting business models doesn’t have a long tradition or a well established body of literature. In contrast, product design has a long tradition. The services literature is mainly directed towards post-hoc quality assessment [12, 18]. There are a limited number of studies that discuss service design [7, 11, 21]. These authors all agree that service design methodology has not yet been fully developed. Services are been recognized since the 1970’s and 1980’s [11] as fundamentally different from products in a number of ways (most notably the fact that production and consumption of services generally take place at the same time, which is rarely the case with goods). Due to lack of formal approaches, we see that in practice services are often poorly designed. The most methodical and design- oriented (as well as the most frequently cited) approach to service design is called service blueprinting [20], while at a broader, organizational level, a method called ‘service system planning’ can be used [17], while system engineering [19] is more focused on the technical aspects of information systems. None of these approaches take the services, the professional user or consumer’s needs and requirements, as well as the technical, organizational and financial issues in account. User needs, technical, financial, and organizational issues have to be balanced. For instance, what makes sense from a technical point of view (better specs of positioning technology) may not make sense from a financial (higher costs) and user perspective (privacy concerns). Little attention has been paid to conceptualizing the linkages between variables of the different domains, i.e. services, technologies, organizational or financial, or on cross-company collaboration in complex value networks, as is the case in offering mobile services. The challenging aspect of analyzing and designing mobile services and their underlying business models is that it requires managers, service designers and business developers to connect and balance design choices in different domains, in the face of technical, market, and legal developments, the ultimate aim being to create sufficient value for the customer and the network of collaborating actors. In other papers (for instance [8]) we have developed a model for mobile services and business model design and focused on the elements that support the mobile services. In this paper we will focus on the question how technical, market and legal conditions influence the opportunities to develop business models for mobile services in Latin America countries (see figure 1).
  • MA RKE T OPP OR TUNI TIES e.g. Cost reduction, enhancing quality of service BUSINESS MODEL SERVICE DOMAI N Value proposition Ma rket segment NE TWORK VA LUE TE CHN OLOGIC AL ADVAN CE MEN TS e.g. Reven ues e.g. Ambient awareness TE CHN OLOGY FINA NCIA L DOMAI N DOMAI N Functionality Cost structure required Profit potential CUS TOMER VA LUE e.g. Ease of use, costs, experience OR GANI ZA TION DOMAI N Structure of value networ k CHAN GES IN LEGIS LA TION e.g. Antitrust and privac y legislation Figure 1 Framework for analysis of conditions for designing mobile services and underlying business model Technology is the most important driver and enabler for the development of new business models. The emergence of new mobile, wireless, and data networks enable increased reach of businesses while at the same time middleware and multimedia applications offer new opportunities for enriched, customized, and secure communication. However, we do not expect technology developments alone to drive changes. In general we see correlations between technology developments, market response, and regulatory regimes. Both market developments and regulation can also trigger, or limit, opportunities for the development of new services. Changes in market conditions or regulation enable or hinder new service definitions as well as underlying business models. In this paper we will analyze the conditions under which mobile services in Latin America Countries have to be developed. TECHNOLOGICAL CONDITIONS For the role out of next generation mobile services, two domains need closer analysis, i.e. the mobile and the Internet domain. Mobile In the mobile domain American standards like TDMA and CDMA used to dominate the Latin American market. However, recently the shift to the GSM standard is apparent (see Table 1). The significance and potential power of standards is in LAC poorly understood. Foreign investments by American or European Mobile Network Operators in many cases drive the choice for a specific technology, instead of the search for the best technical solution, that will drive innovation. This is illustrated by the choice for mobile standards. In 2002 TDMA was
  • still the most common standard, covering 60% of the LAC market ([4], p. 33). Initially, only few players opted for the more advanced European GSM standard. At that time Latin America accounted for the smallest share of the global GSM market (6% in 2002, [4], p. 33), but is now rapidly catching up by 151% in one year (http://www.mindbranch.com/products/R170-0564.html). GSM overtook CDMA in mid-2004. CDMA continues to increase, albeit at a much slower rate than GSM. GSM initially operated in the 900 MHz frequency band, enabling voice and low speed data transfer used for instance for SMS 2G services are being rolled out. Most countries, amongst other Brazil and Chile, have allocated spectrum in the 800 MHz and 1.9 GHz bands, for the US TDMA and CDMA enabled PCS services, although EDGE might be a more attractive alternative to W-CDMA. Venezuela is planning to introduce 3G services, while bypassing 2.5 G standards. Brazil, which allocated spectrum in the 1800 MHz band in the hope to capture the benefits from 3G+ developments in Europe, clearly aligns their policy with European standards, i.e. GSM. 55% of the customers in the Brazil market make us of GSM. Chile opted for both the PCS (mainly driven by Bell South) as for the GSM based next generation services. In 2005 GPRS/EDGE was introduced in Argentina, Brazil, Chile, Columbia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela. Basically this strategy is to show that operators position themselves as innovators in the technology domain. The shift in technology can also be explained by the more trivial fact that American Operators pulled out of the LAC-market, and that the European telecom operators like Telefonica, Portugal Telecom as well as Telecom Italy reinforced their market position. WiFi and WiMax entered the LAC-market in 2004. The first WiMax network was introduced in Argentina by Millicom. Chili uses the telecommunications development funds to roll out WiFi and WiMAX, in order to make wireless Internet access available, although regulatory restrictions limit roll out. Internet Access Although internet in Latin America seems to be the fastest growing region in the world, there are several obstacles to its development in Latin America. Poverty means that many people lack access to a telephone, and a computer is beyond the means of many families. Computer literacy is low, and lags far behind levels in other parts of the world, and internet access is still quite expensive, in spite of telephone service competition.
  • Table 1: Overview of countries, operators, standards and subscribers Operators Standard Subscribers Growth Inhabitants rate (Mobile 2005 penetration, [10]) Argentina Movistar (Telefonica Moviles) GSM 1900, CDMA 8.3 mln (2005) 61% 38 mln (2005) CTI (America Movil) GSM 950, GSM 6.6 mln (2005) (57 %) Telecom Personal (Telecom Argentina) 1900, GSM 1900 6.3 mln (2005) Nextel Argentina CDMA .5 mln (2005) Bolivia Tigo (Millicom) .6 mln (2005) 34.5% Entel Movil (Telecom Italia) Telecel .3 mln (2005) (26%) Brazil Vivo Brasilcel ((Telefonica/Portugal Telecom) CDMA mln (2006) 31.4% Tim Brazil: Tele Celular Sud, Tele Nordeste, TDMA/GSM 21.0 mln (2006) TIM Maxitel, TIM 18.7 mln (2006) (46%)) Telecom Americas (Claro) PCS 10.3 mln (2006) Celular (Telecom Italia, OI)TNL PCS 4.6 mln (2006) Telemig Celular 2.2 mln (2006) Brasil Telecom Chile Entel GSM-1900 3.8 mln (2005) 18.3% 16 mln (2005) Movistar (Telefonica Movil) TDMA/CDMA/GS 5.2 mln (2005) Smartcom M 1900 (68%) America Movil 1.8 mln (2005) CDMA 2000 Columbia Comcel (Communicacion Celular, America 13.7 mln (2005) 110.1% Movil) 6.1 mln (2005) Movistar (Telefonica Moviles) 1.9 mln (2005) (47%) Colombia Movil (Ola) Ecuador, Movistar (Telefonica Moviles) 1.9 mln (2005) 76.3% (47%)
  • Mexico, Telcel (America Moviles) 35.9 mln (2006) 22.1% Movistar (Telefonica Movil) 6.4 mln (2005) Iusacell 1.8 mln (2005) (44%) Unefon 1.4 mln (2005) Nextel 1.1 mln (2005) Paraguay Telefonica CPT (Telecel) 38.4% 6 mln (2005) Nucleo SA (Telecom Argentina) America Movil (30%) Hola Paraquay Compania Privada de Communicaciones AMX Papaquay Porthable Vox (Millicom) Peru Movistar (Telefonica Moviles) 3.4 mln (2005) 38.1% 28 mln (2005) Cellular 2000 (20%) Uruguay Abiatar .4 (2005) 93.1% Ancel AM wireless Uruguay (18%) Movistar (Telefonica Moviles) Venezuel TelCel (Telefonica Movistar) 6.2 mln (2005) 50.2% a CANTV 5.7 mln (2005) Digitel (Cisneros Media. Acquired from 1.8 mln (2005) (47%) Telecom Italia) 0.1 mln (2005) Digicel 0.1 mln (2005) Infonet Multiple sources: [10, 13], The Mobile World briefings
  • Table 2: Overview of countries, operators, standards and subscribers Advanced Connected # of org. ISP’s Hosts (2004) Internet Internet subscribers Research To Internet 2 associated (2001) Hosts/10.000 % of population Network inhabitants (2004) (20041) Argentina Retina Yes 52 231 926.667 242.42 16.1 Bolivia Bolnet no 20 9 8.346 9.30 3.9 Brazil RNP Yes 369 1.081 3.485.773 192.95 12.2 Chile REUNA Yes 19 1343 219.250 142.27 27.9 Columbia CETCOL no 75 69 192.761 42.53 8.9 Ecuador FUNDACYT 38 13 8.800 6.67 4.7 Mexico 256 1.523.277 145.17 13.4 Paraguay ARANDU no 22 4 8.418 13.99 2.5 Peru 52 110.118 39.69 11.6 Uruguay RAU No 47 43 108.188 333.81 20.9 Venezuela REACCIUN yes 73 108 38.025 14.53 8.8 Source: [5, 10]
  • Most Internet users in LAC therefore have Internet access via public terminals, work or school. Only 14 million out of the 33 million users have access at home ([4], p. 30). Use of Internet lags behind about 10 to 15 year, if we compare current user profiles with the initial users of Internet users in the Western Industrialized countries. Users are typically males, married, and working in the computer industry. Internet access costs remain a barrier to both Internet and e-commerce growth in Latin America. Residents of the region still dial in and pay for their telephone calls by the minute. Due to the high costs Internet users ration their online time and a large part of the population is unable to afford connecting at all. Cable modems are the popular medium for broadband access but ADSL has consolidated its leadership. Several companies in Argentina for instance offer triple play services. Brazil lags behind in terms of Internet access. Although all cable operators offer cable modem access, ADSL is the preferred access technology in Brazil. Many of the public access points are funded on basis of contributions to universal access funds. Access to the Internet for most businesses (65%) is through 56kbit dial-up connections in 2002. Broadband connections are still lagging behind ([4], p. 82). Broadband introduction is by and large a question of policy directions and regulatory issues. Flat rate tariffs and polices directed to the roll out of broadband are essential to open markets for Internet and e-Business. Internet traffic is predominantly between Latin America and North America (60%, [4], p. 57), and only 6.7% concerns Latin America content. The share of Spanish-speaking Latin America Internet hosts is rather limited. Major reasons for use of Internet are information services, entertainment, instant messaging and email. E-Commerce and e-Business are lagging behind. There are two elements that have prevented the proliferation of the e-commerce industry: low credit card penetration and poor distribution system. Only 18 percent of Brazilians and 22 percent of Mexicans hold credit cards, limiting business-to-consumer (B2C) e-commerce in Latin America. Moreover, tariffs and unreliable shipping logistics can make intra-Latin American purchases difficult and expensive. For that reason, 87 percent of Latin America's e- commerce activity will come from business-to-business (B2B) transactions, not B2C sales. Customers believe that businesses take advantage of customers at the slightest opportunity, and then they may prefer to see the items they buy before they buy them, which would limit their choices to local stores. Nevertheless, Latin America has been hailed as the next big market for Electronic Commerce. Therefore, there has been an increasing interest in how the Internet and E-Commerce can be used to promote the development of small- and medium- sized enterprise in Latin America. The governments in developing countries however, have not been doing much about the development of the infrastructure to enable the e-commerce industry. As a result, only 5% of the Inter users do ecommerce transactions ([4], p.34), and this transactions are mainly done via foreign websites (59%), instead of via domestic websites (41%). The only exception is Brazil were domestic ecommerce (61%) dominates foreign (39%). The Internet is overwhelmingly filled with English pages (75 percent of pages are in English), putting Latin American users at a disadvantage. Nearly 75 percent of Latin America's online buyers shop at US-based Internet sites. Local content is essential to widen Internet use in Latin America. ECLAC suggests that consumers in LAC as also suggested before, are reluctant to use more sophisticated applications mainly due to a lack of trust, as well as the lack of suitable more advanced services. It is estimated that in 2002 approx 1% of GDP accounts for, mainly B2B, ecommerce ([4], p. 61). However, growing rates are high.
  • The good news for the Latin American market is that the region's population is much younger than that of the US, Europe, or Japan. As they mature, Latin American youth will be more likely to seek out the Internet for information, entertainment, and shopping than their parents or grandparents. The proliferation of mobile telephony in Latin America then provides us with a possibility to bypass the need for a robust and widely deployed internet infrastructure; we, therefore, expect: m-commerce to be more viable. REGULATORY CONDITIONS The privatization of the telecommunications industry in Latin America took place in the decade of the 1990s as part of a general privatization effort which turned Latin America into the leader of the developing world in regards to privatization between the years 1990 and 1996 [16]. With differing degrees of effectiveness, different countries jumped on the privatization wagon for reasons specific to their country needs: crunching a governmental debt, modernizing the economy, or hopes to integrate into the global economy [9]. This privatization effort had to be accompanied by the liberalization of market and also in with varying degrees of advance, different countries went through different liberalization processes and some are still wrapping up these processes. Nevertheless, foreign investment attracted by privatization injected provided a boost to the construction of the telecommunications industry and the opening of the markets provided by the introduction of competition, lowered the entry barriers a new communication paradigm: the mobile phone. As a consequence mobile services are growing rapidly in Latin American Countries. Mobile phone users out number those that are connected to a fixed line connection. The growth of the cellular market is made possible by (1) the historic private ownership of telecommunication providers, (2) liberalization of the telecommunications market, with the exception of Uruguay and Costa Rica, and (3) new investments for instance by the more than 60 new mobile cellular companies operating in the Latin American market. Competition between private operators has been an important driver (www.connect-world.com/Articles/6AWireless.html) for opening the mobile markets. At the other hand we also see operators that are aware of network externalities and agree on voluntary interconnection agreements, for instance the agreement between Chilean mobile operators on inter-carrier SMS interconnection. Mobile communication is probably the most competitive market in LAC. The introduction of Calling Party Pays as well as Pre-paid plans, enabled by a change in regulation, helped to open the mobile markets. CPP is a practice whereby the caller is charged for the total cost of making a call. Although this concept seems natural now a days in the United States the cellular subscriber still pays for outgoing and incoming calls. CPP was critical in the adoption of cellular in the region because it lowered the cost of service of mobile telephony and many operators were quick to introduce in order to gain market share. As an example Peru set up CPP in May 1996 and by the end of the year the number of subscribers had incremented by 150% (Blois 2002). Prepaid plans are widely used. The prepaid product was another service or product that was introduced in order to reduce the entry barrier to mobile telephony. This service has been successful in LACs mainly because it reduces the cost of service and because it bypasses the need for sophisticated and reliable credit bureaus. It is expected that mobile communications can enhance universal access. Achieving widespread coverage, having mobile operators contribute to universal access service or funds, and mandating the installation of a certain number of fixed telephone lines are important
  • objectives for universal access policies in LAC. It is important to stipulate minimum coverage requirements especially for less dense populated regions. Contributions to universal access funds are achieved via access charges paid to fixed-line operators, or via parts of license fees or annual spectrum payments. Another way is to require operators to set up public payphones. Advanced mobile services are hindered by the lack of relevant Internet content. With regard to electronic transactions, security of transactions, electronic contracts and certification, as well as consumer protection have to be addressed, specifically if trans-national transactions will be enabled. Internet trade legislation is important, but lacking in Latin American Countries. MARKET CONDITIONS Latin America is sensitive and vulnerable to worldwide economic trends. LAC are considered to be high risk markets, and subject to sharp economical cycles. The most recent downturn in worldwide economics had a negative effect on Latin America, and on investments in telecommunication both by Venture Capital and Foreign Investors, resulting in sharp decrease in investments in telecom carrier investment in 2001-2002. Foreign direct investment plays an important role in funding construction, maintenance and expansion of the basic telecommunications infrastructure. This investment has been dwindling behind. However, investments in mobile cellular networks in Latin American Countries don’t lag behind in a degree as investment in fixed telecommunications do. It is assumed that contrary to western industrialized countries, the use of wireless telephony and applications is not used as a complementary gadget, but rather as a substitute for traditional telephony. In 1996 the number of mobile subscribers was 6.34 million in all the Latin America Countries, increasing to 118.33 million in 2003, and to 171.11 million in 2005 (Mobile World Briefing, April 10th, 2006). The two dominant markets are Brazil (86 million mobile customers) and Mexico (47 million). Brazil cel dominates the Brazilian market and Telcel dominates the Mexican market. American Moviles is the biggest player owning three of the five largest networks in LAC. However American Moviles (market share 36%) is challenged by Telefonica and its local subsidiaries. Telefonica’s position was strength due to the take over off Bell South business late 2004. Telefonica has a market share of 32 % (Mobile World briefing, April 10th, 2006) Important investor in the mobile network have been the US based BellSouth, Spanish Telefonica, Telecom Italia, and the Luxembourg based international cellular company Millicom. Recently BellSouth did sell all of their Latin American mobile operations to Telefonica. In his analysis of the Latin American telecommunications market Robert Blois see three types of foreign investment in Latin America: (1) overseas operators, such as Milicom that concentrate on relatively small, low and middle income markets; (2) operators form LAC, such as Telecom de Argentina, and Mexican America Movil, and (3) multi-national carriers such as Bell South, Japanese company DDI or Vodafone, who are strategic partners in consortia that are entering the new digital and cellular mobile market. Investments of foreign operators follow the logic of home markets. Due to the take over of AT&T wireless by Bell South was forced to sell its acquisitions to Telefonica CTC. In this context it is worthwhile to note that due to regulatory restrictions the limit of foreign participation in Brazil is 49%. After the initial downturn in the start of this century, the LAC economies did grow by 5.5% in 2004. All Latin American countries recorded positive growth rates. The region six largest
  • economies, Argentina, Brazil, Chile, Colombia, Mexico and Venezuela have growth over 3% (http://www.mindbranch.com/products/R170-0555.html). There is strong optimism that the new mobile and Internet technologies, in combination with the liberalization of the telecommunications market will help to boost economy. The region has one of the world fastest growing rates of internet connectivity. Nevertheless there are some structural and cultural characteristics that might hinder further development of mobile services. These characteristics are according to Davis [3], relatively weak technological and educational infrastructure, highly skewed distribution of income within national populations, and a business culture that doesn’t value responsiveness and customer satisfaction [3]. The skewed income position leads to digital divides within LAC. It is estimated that almost 20 of the richest 15% of the Latin American population already had Internet access by 2000. This results for instance in a connectivity rate of 82% by 2004 in the top income group in Brazil ([4], p. 24). For Argentina this is 69% and for Mexico 57%. A positive encouraging notation is that the population in LAC is young: more than the half of the population is under 25 years of age. Young people are more prone to adapt to modern ICT, however they have less purchasing power. Next to financial capital, human capital and education are important for both the supply side as well as the demand side. An important issue is the level of illiteracy that might hinder further development of Internet use. Mobile applications, making use of pictograms might be an attractive alternative, but also speech interfaces text-to-voice and voice-tot-text software might be useful. Nevertheless, skilled human resources are necessary to respond to the needs arising from the emerging information society ([4],p. 46). More emphasis should be put on curricula that are tailored to specific social, cultural, and linguistic contexts and on the use of ICT in education and the skills that are required in terms of problem analysis and solving related to dealing with information. CONCLUSIONS AND LIMITATIONS After having explored thoughts on the reasons why the mobile industry grew in Latin America, we can see that they all converge on two main reasons in the following order of importance: economic conditions and the liberalization of the markets. Privatization and competition most importantly has both: lowered the cost of service and built an infrastructure that has provided these nations with access terminals to communication and also with access to future services and products. Developments that are in the area of m-commerce have been sporadic but have followed European trends with the provision of SMS based content/applications and lately GPRS/EDGE based content/applications. This is a clear indication that the availability of mobile phones, the young population, unavailability of PCs, etc. provides an opportunity to establish a framework for the deployment of m-commerce in developing countries in Latin America. Such a framework will need to account for the cultural aspects of a given country, will have to add vale to the users, should be affordable, and, more importantly, should be easy to use. Should this undertaking be effective, it should: • Create a new business for merchants that does not currently exist thereby increase prosperity and perhaps additional jobs when creating this new m-commerce framework.
  • • Generate an additional stream of revenue for the mobile network operator that decides to support such a framework. • Open market opportunities, improve business efficiency, strengthen customer service, and reduce costs. • Provide users with an added convenience through the deployment of services that will make their lives easy. It is clear that many developments in the technical, regulatory and market domain are affecting the opportunities to develop new mobile (data) services or m-commerce. In this paper we have tried to answer the question: what are the regulatory, technological and market conditions that drive or enable the business models for mobile services in Latin American Countries? To answer this question we can conclude that regulation allows for a highly competitive mobile market, but that regulation with regard to e-commerce lags behind. Also with regard to technology we have to conclude that LAC can be labeled as lagging behind. Although mobile services are catching up quickly, Internet penetration is lagging behind: This offers both opportunities for mobile data services as it can be considered to be a threat in terms of limited support from Internet channels and portals. Finally we can conclude that LAC has a very promising young market with the capability to adapt quickly to new (mobile) developments. REFERENCES