Competition and the_evolution_of_mobile_markets


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Competition and the_evolution_of_mobile_markets

  2. 2. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Table of ContentsTable of Contents ............................................................................................................................ 2Introduction .................................................................................................................................... 3Competition – the lifeblood of the industry ................................................................................... 4The Rule of Three............................................................................................................................ 6 The Rule of Three in Mobile.........................................................................................................7The HHI3 Index .............................................................................................................................. 8Completing the big picture ............................................................................................................10Analyzing global telecom markets ................................................................................................. 12 Market power and HHI3 ............................................................................................................ 14Impact of competition ................................................................................................................... 15 Does competition equate to consumer value? ...........................................................................18Operator competitive market equilibrium ................................................................................... 20 Regulatorly model – Japan ....................................................................................................... 22 Regulatory model – US ............................................................................................................. 23The national competitiveness dimension ..................................................................................... 23Comparing mobile markets .......................................................................................................... 24 Developed postpaid markets ..................................................................................................... 26 Developed prepaid markets ...................................................................................................... 27 Developing nations - BRIC ........................................................................................................ 28Analyzing the US market ............................................................................................................... 31Engineering perfectly competitive mobile markets ...................................................................... 33Regulations and the role of regulators.......................................................................................... 34Globalization and competition ..................................................................................................... 35Competition from outside, Changing ecosystems ........................................................................ 36Possibilities of new market structures .......................................................................................... 37Implications for players in the ecosystem .................................................................................... 37The next 25 years .......................................................................................................................... 39Summary and Conclusions ........................................................................................................... 40Acknowledgements ....................................................................................................................... 43About Chetan Sharma Consulting ................................................................................................ 44About the Author .......................................................................................................................... 45 2 Table of Contents | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  3. 3. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011IntroductionOver the course of the last decade, mobile communications has become an essential part of theglobal fabric of evolution. With almost 70% global subscription penetration as of 2010, mobilityis being embedded into almost every facet of our lives. Mobility is also spreading across verticalswhether it is m-pesa in Kenya or SMS based counterfeit medicine detection in Ghana or payingfor your coffee using your NFC enabled mobile phone in a Tokyo café or watching the cricketworld cup broadcast while hiking the Yangtze river near Tibet. Consumers expect access toinformation everywhere they are and the ecosystem is responding with continued innovation,which has become extremely critical in managing the competitiveness of nations.It is also apparent that some of the innovation and market dynamics has been evidenced by thecompetitiveness of these markets at different levels – network, devices, and services. While themarket entry conditions into the devices and software services markets have gone throughsignificant overhaul this last decade, the competitiveness framework of the mobile networks hasbeen more structured and controlled in many instances.Given the importance of the mobile network infrastructure to every nation’s competitiveness,security, and productivity, it is useful to understand how the “competitive mobile markets” areformed. In theory, the perfectly competitive markets are in the best interest of the consumers asthey provide the best value given the competitive dynamics and the equilibrium provides goodchecks and balances for the ecosystem.The global mobile networks have shown a remarkable adherence to the “Rule of Three” whichstates that in any mature industry, 3 top players dominate the market. Sometimes it has beendictated by the regulators and in other instances by the markets. Some markets like in Europehave settled into a state of equilibrium while other hyper growth markets like India are shufflingto find the right balance.The elements of globalization are also shaping how mobile network operators grow. Theregulators and the political class are increasingly looking at mobile networks as national assetsand any foreign ownership generally goes through tremendous scrutiny.Having worked in major mobile markets around the world, we have been intrigued by theframework for a competitive market and this is the theme we explore in this working paper.Having the front row seat in an industry that is growing stupendously has given us some uniqueperspective on the competitive forces at work in the mobile space. We studied the competitivelandscape in 40 top mobile markets around the globe.This paper presents the analysis and an in-depth analytical framework to study the competitivelandscape in the global mobile markets. 3 Introduction | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  4. 4. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Competition – the lifeblood of the industrySince time immemorial, competition has been the lifeblood of industries and markets. In theearly Roman era, legislators controlled price fluctuations and unfair trade practices. In JuliusCaesar’s time around 50 BC, these principles were codified in Lex Julia de Annona to protect thecorn trade and heavy fines were imposed on anyone directly, deliberately and insidiouslystopping supply ships.1 Through the middle ages into the modern global economy, industriesand nations have been governed by written and unsaid rules of competition.Competition is the central tenant of economics and in turn fairness to everyday consumers.Competition also drives innovation and accelerates the advent of new and nimble players todisrupt the waters and moves the ecosystem forward.In theory, there are two extremes of a competitive environment - perfect competition whereseveral players compete and have similar market shares and a monopolistic environmentwherein a single player dictates the terms of the market.In a perfectly competitive environment, price is equal to the marginal cost and the average costand profits of the companies involved tends to zero. Perfect competition delivers bothproductive efficiency and allocative efficiency.2 In a perfectly competitive environment,economic profits for efficient firms tends towards zero and so inefficient firms must lose moneyand gradually exit the market. Price Price Marginal Cost Curve Marginal Cost Curve a Pm Average Cost Curve b Pc d Pc c Qc Quantity Qm Qc QuantityFigure 1. Price demand curve for a) Perfect Competition b) MonopolyOn the other hand, in a perfectly monopolistic environment, the monopolist will sell less thanwould be sold under perfect competition, and the price will be higher. This means that thepricing and output decisions of a monopolist fail to maximize consumer value and social welfareand thus allow scope for a regulator to improve matters.1 Competition Law Toolkit, Asian Development Bank, 4 Competition – the lifeblood of the industry | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  5. 5. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Figure 1 shows the price-demand curves for the two extremes. The demand curve shows thequantity demanded of a good at various prices, assuming that the non-price determinants ofdemand, such as consumer’s income, don’t change.3Figure 2. Price-demand curves for a) voice - US b) voice - UK c) voice - Indiawireless market d) voice - China e) data - Sweden and f) data - US4In reality, the markets lie somewhere in between and it is the degree of competitiveness thatvaries from industry to industry and from nation to nation. In the mobile markets, competitionin the markets can be quite intense like in India, US, or UK and the market forces have animpact on the price-demand curves for services. Figure 2 shows the price-demand curves for3 For a more detailed treatment of the subject, any basic economics book will suffice. E.g. Economics, WalterWessels, Barron’s, 20064 US has the highest Minutes of Use (MOU) of all nations. Sweden and US were the top two nations in dataconsumption at the end of 2010 5 Competition – the lifeblood of the industry | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  6. 6. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011mobile markets (voice and data) in the US, UK, India, China, and Sweden. In the US, over aperiod of the last 18 years, voice revenue per minute dropped as usage grew. Similarly, as thedata usage has grown to over 350 MB/mo in 2010, the revenue/MB has gone down.5Competition is a central idea in economics; its idealization as perfect competition underliesmuch of the traditional analysis.6 In an ideal world, “perfect competition” will have enoughparticipants in the ecosystem so that no player is large enough to exert its market power to setthe price of a homogeneous product. However, in reality, markets are imperfect and there arehardly any perfectly competitive industries or market places. However, the regulators and themarket forces seek a perfect equilibrium that lets the buyers and sellers engage in fruitfultransactions.Sometimes regulators forget that the most important job they have is to keep the markets theyregulate – competitive. Competition protects consumers, works towards the general welfare ofthe mass markets, keeps the big boys from behaving badly, and in general is important to keepthe equilibrium for innovation and progress of the industry. In some instances, the regulatorshaven’t done a good job and left the markets drift away. Adding competition at a later dategenerally doesn’t change the industry structure by very much.As the mobile device has gone from being a luxury item to everyday necessity, the supply-demand curves of mobile voice and data usage have undergone significant transition in marketsaround the world. The devices continue to be shaped by consumer behavior that continues tochange with the introduction of new devices, networks, and services.The Rule of ThreeIn his 1976 paper, Bruce Henderson, the founder of Boston Consulting Group surmised, “Astable competitive market never has more than three significant competitors, the largest ofwhich has no more than four times the market share of the smallest.”7Picking up on the theme, in their influential book, “The Rule of Three: Surviving and Thriving inCompetitive Markets,”8 the two co-authors – Jagdish Sheth and Rajendra Sisodia furtherobserved that in most of the industries, the top 3 players control 70-90% of the market.While many markets start from zero or a single player dominating, any mature market generallytrends towards the top 3 players eventually controlling the market. The remaining playersgenerally focus on the niches and can create a healthy margin business but the top 3 serve themajority of the market. Take any industry and we see the Rule of 3 at work.5 Managing growth and profits in the Yottabyte era, Chetan Sharma Consulting, 2010-11; US Wireless Data MarketUpdate 2010, Chetan Sharma Consulting, 20116 Perfect Competition and the Creativity of the Market, Louis Makowski and Joseph Ostroy, Journal of EconomicLiterature, 20117 The Rule of Three or Four, Bruce Henderson, 19768 The Rule of Three, Surviving and Thriving In Competitive Markets, Jagdish Sheth and Rajendra Sisodia, Free Press,2002 6 The Rule of Three | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  7. 7. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011The Rule of Three in MobileIn the case of mobile operators in a given country, the Rule of 3 is followed with remarkableconsistency. Of the 40 major markets we studied, on average the top 3 mobile operatorscontrolled 93% of their respective markets. In fact, 36 of the 40 markets had the top 3 playerscontrol 85% or more of the market. Other hyper-competitive markets like the UK and the US,which had more than 4-5 large players are moving towards the consolidation phase wherein thetop 3 control more than 80% of the market. Of all the large major markets, only India proves tobe an exception and it is due to the hyper-growth phase of the market and due to somewhatunique nature of the market. We will discuss India’s market in more detail a bit later. Figure 3shows the market share of the top 3 operators in the 12 major mobile markets in the world.Except for India, the top 3 operators have generally controlled more than approximately 80% ofthe market during the last 11 years. The US market has also gradually consolidated over theperiod of 18 years. We will discuss the evolution of the US market in more detail later in thepaper.Figure 3. Market share of Top 3 Operators in leading global marketsThe Rule of Three phenomenon is evident in other parts of the mobile ecosystem like in mobiledevices where top 3 control 53% of the unit share; Mobile OS, where top 3 control 90% of themarket share; Smartphones where 55% of the market share, and areas such as mobile searchwhere top 3 account for almost 100% of the market.99 As of Q4 2010, Source: US Wireless Market Updates, 2010, Chetan Sharma Consulting 7 The Rule of Three | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  8. 8. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011For the purposes of this paper, we will primarily focus on the mobile operators in variousmarkets. It should be noted that the Rule of Three is applicable to mature and open marketswhere competitive forces are at play. In the upcoming, fast-paced, or controlled market, thestructure might look different. However, in emerging markets which are open, the marketstructure will tend to settle towards the top 3 players. The perfect examples are China and India.Both markets are in hyper-growth mode right now. While India is more open, the competitiveconcentration is limited (relative to other mature markets) but within the next 12-24 months, wecan expect the Rule of Three to take effect. China, on the contrary, hasn’t been deregulatedenough to be shaped by the market forces and the three mobile operators are a byproduct of theregulatory design.The HHI3 IndexThe Herfindahl-Hirschman Index or HHI is a commonly used index referenced by theeconomists and the regulators to gauge the competitiveness and concentration of any givenindustry.10 It is calculated by squaring the market share of each firm competing in the marketand then summing the resulting numbers. Mathematically, the scale goes from 0 to 10,000. Thehigher the number, the less competitive the markets are. Normalizing to 1, on the scale of 0 to 1,1 represents a perfect monopoly and 0 a perfectly fragmented oligopolistic market. TheDepartment of Justice considers a value of .18 to be a balanced market and it studies how theHHI index will change if any major M&A is to be approved.11As we illustrated in the previous section, the mobile network space follows the Rule of 3 withremarkable consistency. We combined the two concepts to study the competitiveness andmarket share of the top 3 mobile operators in the major mobile markets. Hence, we will befocusing on analyzing just HHI3 or the Herfindahl-Hirschman Index for top 3 operators in agiven country.Mathematically,HHI3 = (Mobile Operator Market Share)i2 where I = 1..312To study the market concentration, we look at both the subscription concentration and therevenue concentration. Generally, the market share and revenue share are strongly correlatedbut in some segments of the mobile markets, there are some exceptions for example, in 2010, inthe device market, Apple and Nokia have widely varying market share and revenue sharefigures. While Apple controls a relatively small percentage of the units shipped, its share of theindustry profits is disproportionally higher. On the other hand, Nokia’s unit market thougheroding over the last few years is still quite high, but, its profit share is disproportionally lowerdue to much lower margins. However, the mobile services business is less dependent oninnovation and IP and more on market share. Hence, the more customers you have, the morelikely you are going to have higher a revenue share. As we will show later, in some of the10 FCC’s Commercial Mobile Radio Services Competition Reports provide a good discussion of HHI trends in the USmarket. For most nations, the ratio of HHI3/HHI will be close to 1 as the top 3 control bulk of the market. In markets likeIndia, however, the ratio will be much lower due to the fragmentation in market share 8 The HHI3 Index | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  9. 9. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011markets, the dominant operators have higher proportion of the profits because of their marketdominance.Figure 4. HHI3 Competitive Index of various industries and segments in the US13Generally, higher revenue share also translates into higher margins but not always. In saturatedmarkets, the additional cost of securing a new customer is high which impacts the margins.Higher competition also has a dilutive impact on the ARPU (average revenue per user) and themargins. This may not be good for the player and its shareholders but is good for the consumersand the ecosystem.If we look at the concentration in different industries (Figure 4), it can vary significantly,depending on a number of factors such as its evolution cycle, barriers to entry, etc. For example,in the case of commercial jets, only Boeing and Airbus control the global market whereas theairline industry is more competitive due to regional, national, and international players thoughthe industry has gone through several consolidation phases in the last three decades. In themobile space, except for some of the new emerging areas, the established segments generallysettle down with top 3 taking the lion share of both the revenues as well as the profits.13 Sources: Chetan Sharma Consulting, StatCounter, Bureau of Transportation Statistics, US Business Reporter 9 Completing the big picture | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  10. 10. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Completing the big pictureLooking at just the HHI values doesn’t provide a complete picture of the competitive landscapein a given country or in relation to other nations. It has to be understood holistically. Forexample, factors such as the Size of the Market, Mobile Spending as a percentage of the GDP,Subscriber Penetration, % Postpaid, ARPU (Average Revenue Per User), Mobile Dataavailability and penetration, Decline in Revenue Per Minute, Service Maturity, and TotalRevenues in the market are important dimensions that should be studied while looking at thecompetitiveness and concentration of the mobile markets. We will do a detailed comparison ofthe 12 major mobile markets using these metrics a bit later in the paper. Infrastructure New Devices Direct Competition New Services New Ecosystems Investment Barriers to Entry/Exit Prepaid/Postpaid Size of the Market Subscriber Penetration Market Concentration Operators Mobile Data Spend Competition Market/Rev Share ARPU/AMPU Lifetime Value Regulators Create Competitive Env Spectrum Regulatory Measures Drives Lower Prices Competition Indirect Competition % GDP Spend Rev/Min New Services New Devices Consumer Feedback Price to ConsumersFigure 5. Mobile Industry Structural FrameworkAs shown in the figure 5, the investment and the regulators drive the mobile markets in anygiven country. To enable the services and the applications that have become common place, themarkets won’t evolve without the underlying infrastructure and the allocation of the valuablespectrum. The significant investment required to build a nationwide network raises the barriersto entry (and exit for that matter). Given the spectrum constraints, regulators also shape themarket by granting the spectrum in a more deliberate manner. In some countries like Japan,Korea, China, Mexico, Italy, and the like, regulators have controlled the access to spectrum byproviding it to a limited number of players while the markets like the US, UK, and India havehad a more open approach.In some instances, the regulators control the number of operators as well as the market share ofthe operators while in others the market forces define how the market gets structured over time.In a market force driven market, more variables are at play compared to a regulator drivenmarket. An open market can take unexpected turns depending on how efficiently the market andits participants are performing. The competition further defines the market concentration of theoperators and as such the pricing for the consumers for their mobile voice and data services.Consumers speak by opening up their purses and in some instances their voice which goes backinto the feedback loop of the mobile industry structural framework. 10 Completing the big picture | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  11. 11. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Markets are inherently different. They are influenced by several forces, and hence evolvedifferently over time. While some markets might display affinity across 2-3 variables, only bystudying the complete multi-dimensional picture can one assess the overall competitivelandscape of one country in relation to others. We will be evaluating these factors for some ofthe major markets in more details later in the paper. 11 Completing the big picture | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  12. 12. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Analyzing global telecom marketsTo understand the competitive landscape in the mobile markets around the world, we looked atthe top 40 markets by size and importance. Figure 6 shows the HHI3 by revenue share andsubscription market share . One of the things that jumps out right away is that the two hyper-growth markets of China and India are at the opposite spectrum of the Competitive Index. Howcan that be? A closer observation of the market shows that while China Mobile controlled 68% ofthe Chinese Mobile Market in 2010, in India, the top 5 operators controlled less than 50% of themarket. While the market power is highly concentrated in China, it is very evenly distributed inIndia putting them on the opposite ends of the Competitive Index (CI) scale.The regulatory history of the two markets shows us how global mobile markets generally tend toevolve. In some markets notably European, Japanese, Chinese, Korean, the regulators take anactive role in shaping the market by granting the spectrum to a limited number of players. Theygenerally start with 1 or 2 top wireline operators having the licenses to operate and gradually the3rd and 4th operators get into the market. However, depending on the timing, it might take yearsbefore the introduction of the additional players makes any difference to the competitive indexof the given market due to high concentration of the market share in the top 1 or 2 players.Figure 7 shows the HHI3 distribution and the groupings of similar nations by HHI3 value. Oneextreme is India with the HHI3 value of 0.10 with hyper-competition and on the other extremeare China and Mexico with > 0.50 HHI3 value. The average HHI3 value of the sample group is0.33.In China, China Mobile had 75% of the market in 2005, China Unicom played second fiddle toChina Mobile for a long time and in 2008, the government empowered China Telecom tobecome the third player but as of 2010, the overall market structure hasn’t changed much. In theearly days, the regulators focused on price regulation rather than competition to keep the pricesdown but it wasn’t very effective.14In India, the market structure has been more open. While the mobile market started late, theregulators granted licenses to too many operators at the same time. Also, the licenses weregranted regionally (known as circles) and nationally. This resulted in intense competition. ARPUhas dropped from $45 to merely $5 in a matter of 5 years. Operators compete more on theability to lower cost vs. ability to generate revenues to keep healthy margins that keeps them inthe game.UK provides a perfect case study of changing competitive landscape. The market has beenhypercompetitive from the start. High competition drove the prices lower for the consumers aswell as the margins for the number 3 and 4 players which as expected merged to form the topplayer in the market (Everything Everywhere ). The HHI3 inched up from 0.19 to 0.20 and thetop 3 market share went from 70% to 80%.14 Telecom Price Regulation in China, Sun Yu, Zhang Shasha, 2007 12 Analyzing global telecom markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  13. 13. Figure 6. Competitive Index of Global Wireless Markets (Subscriber and Revenue Concentration)
  14. 14. Figure 7. Distribution by HHI3 valueThe US is another interesting competitive market. If you notice the HHI3 groupings, US isshown in an unlikely pairing with the three emerging markets of Pakistan, Russia, and Brazil.The primary reason is that the top 2 (Verizon Wireless and AT&T) control 60% and the top 3about 78% of the market and they are approaching the 80-100% band like other major markets.While we were researching the paper, the inevitable T-Mobile USA acquisition news broke. Howwill that transaction shape the US mobile market? We will deal with this question later in thepaper.Market power and HHI3HHI gives an indication of the market concentration. Given the dominance of China Mobile andTelcel in China and Mexico respectively, the HHI3 values are the highest in the world. To furtherunderstand the structure of the market, one can calculate the Dominance Index15 of the top twooperators, which can indicate if the market is a monopoly, duopoly or if it is more evenlydistributed amongst the top players. In the economic literature, 40% market share is a generallyaccepted threshold for what is termed a “dominant firm”.16 It should be noted that being amonopoly or a duopoly because of better products and prices is not against the law. As shown infigure 4, there are a number of industry segments companies have been able to chalk out a15 We calculated the Kwoka’s dominance index for the top 2 operators which is calculated bas the sum of the 2squared differences between each firm’s share and the next largest share in a market. D = ∑ (s i - si+1) where i = 1..316 An Empirical Examination of the “Rule of Three”: Strategy Implications for Top Management, Marketers, andInvestors, Can Uslay, Z. Ayca Altintig, & Robert D. Winsor, American Marketing Association, 2010
  15. 15. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011substantial portion of the market for themselves. It is when these players create their marketpower by unreasonably excluding other companies or by impairing other companies’ ability tocompete against them, is when they get into trouble.17Figure 8. Monopoly and Duopoly in global mobile marketsFigure 8 shows how the various markets score on the monopoly/duopoly scale. Most marketsare near the competitive equilibrium point, however the outliers like China, Mexico,Switzerland, and New Zealand show a clear monopoly or duopoly market structures.Impact of competitionThe underlying assumption of all regulatory frameworks is that the competition is better for theconsumers. More competition leads to innovation which in combination of the desire to win themarket share, leads to lower pricing and more choice for the consumer. If a market has “perfectcompetition” the profits of the player will go to zero and the value to the consumer will increaseto maximum.17 Competition Counts, FTC, Not all nations havegood anticompetitive laws on the books or they are not applied in the same manner so the how “competition” isviewed by the regulators will vary from region to region and country to country. 15 Impact of competition | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  16. 16. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011To study the impact of competition on consumer pricing we looked at the HHI3 MobileOperator Index of various nations and the revenue per minute (RPM) decline over the last 5years. The RPM can decline for many reasons such as from the use of better technology thathelps deliver the same performance at a better cost structure and the savings are passed on tothe customer. Price can also be driven down due to the operational efficiencies such that anoperator is able to run its network and operations more cost-effectively. This is proven from thefact that many of the operators in the developing world have similar or better margins than theirwestern counterparts.One of the main influencers of driving the cost down is competition. Given that the productslook and feel similar to the consumers, operators routinely engage in price wars and inrepackaging of the value proposition to win the customer pocket share.For the purposes of this exercise we focus primarily on Revenue Per Minute (RPM) decline inrelation to the Operator Concentration in a given country. Figure 9 plots the Index depicting theimpact of competition on consumer pricing (the bars in red indicate the predominately postpaidmarkets).Figure 9. The impact of Competition on Consumer PricingIt comes as no surprise that India tops the rankings. The market is in hyper-growth modeadding approximately 20M new subscriptions every month in 2010. The HHI3 is the lowestamongst all nations at 0.10 and the price war has been going on for the last 5 years to capturethe market share. It is also a prepaid market are more prone to price war attrition. It is worthnoting that the next 6 markets are also prepaid markets. In fact, only two predominantlypostpaid markets appear in top 20. Austria and US are the top two predominantly postpaidmarkets and have seen the RPM decline by 63% and 43% respectively. However, the markets 16 Impact of competition | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  17. 17. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011differ significantly as US is several times the size of Austria and its HHI3 value is significantlylower.Other markets where postpaid is dominant like Finland, Japan, Korea, and Canada have seenless price decline over the last 5 years. The prepaid nations with higher operator concentrationhave also seen less price decline. There are a few exceptions such as Mexico and China the toptwo least competitive nations as measured by HHI3 where RPM declined by 75% and 67%respectively indicating the pricing is not always influenced by competition.18 The technologyevolution in these markets is also quite different than others as Mexico and China arepredominantly 2G markets vs. the western markets which have much higher 3G penetration andas such the traffic and cost structures are quite different.Figure 10. Correlation of Market share and operating margins for top mobileoperatorsSeveral economic studies have shown the relationship between market share andprofitability/operating margins.19 Figure 10 shows the relationship of market share with marginsfor the top 65 global operators. In most cases, the more market share the operator has, theeconomies of scale get better, and the cost of adding new subscribers or offering the servicedeclines thus maximizing the margins.18 In China, the government instituted price regulations in the early phase of the industry development whichdidn’t work well as prices stayed high and the quality of service suffered.19 The relation between market share and profitability, Birger Wernerfelt, The Journal of Business Strategy 17 Impact of competition | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  18. 18. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011However, the margin difference between the two is not entirely consistent across markets. Thereis a stronger correlation of the market share and margins for the developing markets vs. thedeveloped markets. In the developed markets, the average margin difference between the toptwo players was 6% while as in the developing markets over 14%. In mobile markets such asMexico and China which are monopolistic, the margin difference was over 50%. This indicates,in mature markets, the top two operators operate at similar operational efficiencies and as suchthe cost and revenue structure per new customer look the same, that is, they are not spendinginordinate amounts on acquiring a new customer relative to their competitors and their ARPUlevels are similar. In developing nations, which are still going through the growth phase, thebigger players are able to exert pricing pressure and the cost of acquisition for smaller playerbecomes relatively higher.While market share is a good indicator of an operator’s market power, without doing a moregranular analysis, it might yield misleading results. For example, if one does market-by-marketanalysis in the US, in some of the markets, the tier-2/3 operators like MetroPCS, Leap Wireless,and US Cellular have higher market share than some of their tier-1 compatriots. However,market share in specific markets is not directly proportional to market power. One has to alsolook at the other financial metrics such as revenue share and profit share in those markets aswell holistically understand the competitive dynamics. MetroPCS or Leap Wireless don’t havethe same buying power as Verizon Wireless and while it might be behind in market share in bigmarkets such as New York, Los Angeles, and Miami,20 the revenue share and the profit share forVerizon in those markets is relatively higher. As such, while doing a market-by-market or circle-by-circle (e.g. in India), one has to look at multiple variables to assess the competitive forces atwork.Does competition equate to consumer value?Intuitively, competition in a free and fair market should increase consumer value. But how doyou go about measuring it? The price equation only gives a partial answer. Mexico and China arethe two least competitive markets yet their revenue per minute decline in the last 5 years isamongst the highest.Consumer value depends on a number of factors in any given market: a) Price - how are the prices to the consumers changing over time (for the same set of services)? b) Affordability - how affordable are the mobile services in relation to other goods? c) Innovation - are new technology, services, and applications being introduced in the market? d) Investment - how much is being reinvested back into the ecosystem? e) Growth Trajectory - where is the market in its evolution cycle?The cost structures are quite different for the growth phase of the market vs. the maturationphase. Both developed and the developing nations see this effect albeit on different scales.20 FCC 10-81 14th CMRS Competition Report, 2010 18 Impact of competition | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  19. 19. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Figure 11. Affordability and investment index of various mobile marketsFigure 11 plots the Affordability and Investment Index of various mobile markets. The x-axisshows the consumer mobile spend as a percentage of GDP which indicates the affordability ofthe mobile services in the market.21 The y-axis plots investment by the operators as a percentageof the service revenues. Both are impacted by the growth trajectory of the market and they mightalso vary on the type of growth, for example, India is growing rapidly on pure subscription front-- most of the new users are voice-only users and while the overall revenue is growing, the datasegment is relatively slow in breaking out. The next 12-24 months will see the consolidationphase in the market.The US and some of the western European nations exhibit a different growth curve wherein thevoice component of the network is saturated relative to the explosive growth on the mobile dataside. The data usage growth in the US is somewhat similar to the voice growth in the Indianmarket.Innovation is a key component of “consumer value.” The Japanese and Korean markets scoredmuch higher on the innovation front over the last 11-12 years because they were executingseveral new service concepts that were many years ahead of other markets. Such innovationdirectly impacted consumers in their everyday lives in profound ways. The areas of commerce,instant access, telematics, advertising are still much better developed in these two markets andthus greatly enhanced “consumer value.”21 However, the level of mobile services available in a given market can vary. 19 Impact of competition | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  20. 20. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Higher degree of competition forces players to innovate and bring new ideas to the market placeat a faster pace with affordable rates. However, as some markets have shown, in absence ofsignificant competition, industry and government collaboration can also infuse appropriatecapital and incentives to keep the innovation levels high.Operator competitive market equilibriumWhile the perfectly competitive markets are hard to engineer, can market or regulatory forcesdrive a mobile market towards an equilibrium point? We analyzed the market shares of the topthree operators in 40 top markets over the past decade. The average ratio of the share betweenthe number one and two operator was 1.6 and remarkably, the same held true for the ratio of theshare between number two and three. This translates into a 50%:30%:20% market shareamongst the top three operators.If we leave room for the niche operators, the average collective market share of such operators isaround 7% which translates to the top three market share as 46%:29%:18% respectively.If we assume this is the equilibrium point, the variance from this equilibrium point is plotted infigure 12. The closest to this equilibrium point are Japan and Korea and the furthest is Mexicofollowed by China, Switzerland, and New Zealand. The darker oval represents the firstequilibrium sphere and both developed and developing markets are in this sphere. Same is truefor the outer sphere which represents more variance from the equilibrium.While the absolute market shares are difficult to engineer, the above shows that to achieve somesemblance of equilibrium in the market the top operator shouldn’t have more than 50% of themarket share and the number three player shouldn’t have less than 20%. This helps createenough balance in the market to derive maximum value for the consumer. 20 Operator competitive market equilibrium | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  21. 21. Figure 12. Top three Operator Competitive Equilibrium in Various Mobile Markets
  22. 22. Regulatorly model – JapanThe success of the Japanese mobile market in the 2000s seems to indicate that the regulatorymodel that Japan pursued yielded the maximum benefit to its citizens. Since the advent of i-Mode in February 1999, for almost 10 years, Japan has been ahead of the rest of the world inmobile broadband deployment (figure 13), high-end handsets (though these were primarilyfeaturephones), new services, technology breakthroughs and implementations, and in the paceof innovation in general.22 Korea followed a similar path and the market structure was quitesimilar. The governments in both countries collaborated closely with the mobile industry.The Japanese industrial policy, formulated by the Ministry of International Trade and Industry(MITI), has had much the upper hand over the Fair Trade Commission (FTC) - the UScompetition watchdog. One of MITI’s main objectives was to ensure a high rate of profitabilityand investment in Japanese industry. MITI was therefore always concerned with questions of“ruinous competition” leading to reduced profits and a lower propensity to invest. The Ministrythus officially sponsored a wide variety of cartels, sequenced investment by firms and intervenedin the exit and entry decisions of firms, all of which contributed to the high concentration ratiosobserved in the Japanese economy.23Figure 13. 3G subscriber growth during the last decade22 For a historical reference, see Wireless Data Services, Technology, Business Models, and Global Markets, ChetanSharma and Yasuhisa Nakamura, Cambridge University Press, 200223 Competition and Competition Policy in Emerging Markets: International and Developmental Dimensions, AjitSingh, G-24 Discussion Paper No. 18
  23. 23. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011This policy of both competition and cooperation permitted the Japanese mobile industry to stayahead of its rival nation for almost the entire decade. NTT DoCoMo took a lead role investingand creating new markets in mobile commerce, entertainment, payments, and much more. InKorea, SK Telecom took the lead in investing in cutting-edge technology and the consumersbenefited immensely from R&D focused operators. The Korean OEMs benefited from focusingon CDMA and that helped open the global markets for them over the last 15 years. NowSamsung is poised to become the number one device provider in the future.Regulatory model – USThe regulatory environment in the US has been more contentious with the industry playersmarked by frequent legal skirmishes. While national competitiveness is a stated objective of theNational Broadband Plan that was unveiled in 2010,24 there has been little substantive progresson the policy front.The market took the path of a free market natural evolution and is coming full circle since the 1Gdays of the eighties. Over the period of 18 years, the market structure has consolidated andstarting to resemble that of other major global markets. While the US was behind in mobileinnovation compared to Japan and Korea for the better part of 2000s, by 2010, it startedcatching up and even overtaking its Asian counterparts across a number of competitivedimensions. By the sheer force of its market size, US overtook Japan in data revenues in 2007,Verizon overtook NTT DoCoMo in terms of data revenue in 2010.25 In the 4G broadbanddeployment and usage, US has again taken the lead. On the handset side, Apple and Google aredictating the terms of innovation, growth and profits and the Japanese players are dulyfollowing them. However, Japan has still the lead in service innovation.The national competitiveness dimensionTelecommunications has become the core infrastructure of a nation’s competitive and securityapparatus. As such regulators have been eager to play a role in shepherding its future for theircountry. In free and open markets, the power of regulators is generally limited to spectrumallocation. Typically, in such markets the regulators are not able to act until a “true” monopolyor a duopoly is formed. Other times, regulators are just behind the curve and by the time theyget caught up, it is too late. In more controlled markets like Japan or China, regulators workclosely with the specific industries for their national advantage.That the Japanese regulatory model worked so well for its mobile industry is no accident. TheJapanese government has a more competitive attitude and is eager to protect the interests of itsplayers and maximize the benefits for its citizen. After years of economic stagnation, Koreangovernment too adopted the Japanese model of industry collaboration and actively protectedand enhanced the competitiveness of Korean players. The Chinese regulatory bodies have takenthe same approach a step further and one could see the national competitiveness battles beingfought at the geo-political levels. In a global economy, nations are looking to preserve theindustry profits and strength of its leading players for the local markets while attacking theglobal markets.24 US Wireless Data Updates, 2007-2010, Chetan Sharma Consulting 23 The national competitiveness dimension | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  24. 24. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Ubiquitous mobile broadband has become the stated goal of governments worldwide. Researchhas shown the positive impact of broadband availability on productivity and growth26. Somenations will achieve this through direct collaboration of regulators and the industry playerswhile others will leave it to the industry players to find their way and meet the stated nationalregulatory goals. In some cases, the political system will work hand-in-hand to keep the nationcompetitive while in others the political class will have a hard time grasping the basics ofcompetitive mobile markets.The current decade will see emergence of new players and new powerhouses. The regulatorypolicies and actions will go a long way in determining the market structures and competitivelandscape of the global mobile markets and ecosystems.Comparing mobile marketsIn studying the competitive landscape, there is always a temptation to compare markets. Playersin the ecosystem also use statistics from the global markets to justify some decisions, strategiesand proposals. As we proposed earlier, market dynamics should be understood holistically. Forexample, US and UK might look similar from the market concentration perspective but differvastly on the metrics of ARPU, Subscribers, Postpaid penetration, and Data ARPU.China and India are the two fastest growing markets on the planet but exhibit vastly differentcompetitive dynamics. While China is the second least competitive market in the world asmeasured by HHI3, India is the most competitive. Their scale look similar in terms of thenumber of subscribers but the revenue and ARPU metrics vary. Neighbors US and Canada havemuch in common in terms of mobile spend as a % GDP and the postpaid penetration but theinternal dynamics are quite different. While there is appearance of healthy competition inCanada with HHI3 at 0.31, the competition hasn’t really driven the prices lower for theconsumers to the extent they have in the US. We compare select developed and developingmarkets to illustrate the markets variations and similarities in a multi-dimensional analysis.We analyze the developing and the developed markets27 separately as the variance in variables issignificant. The values of variables are normalized for their respective groups. The developedmarket grouping was further split into developed - postpaid markets (Japan, US, Canada) anddeveloped - prepaid markets (Spain, UK, France, Italy, Germany. The developing segmentanalysis is focused on the BRIC (Brazil, Russia, India, China) nations.26 Wireless Broadband, Conflict and Convergence, Vern Fotheringham and Chetan Sharma, IEEE/John Wiley, 200927 The dichotomy between the developed and developing nations is a very simplified concept that has been aroundfor about 50 years. It is clear that a transformation in the distribution of wealth worldwide will change the picturein the next 10 years. Countries that are considered developing in today’s definition will become economicsuperpowers in 10 years specifically China and India and more dominant than some of the developed nations, evenif they have not caught up then with some in terms of GDP per capita. Many observers today assume that themiddle class of India and China together in 10 years will represent about the same group size that the middle classof other “rich” countries. However, for purely the purposes of comparison and illustration, we will use the existingdefinitions to discuss the shift in the mobile ecosystems. 24 Comparing mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  25. 25. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011We analyze the following variables: 1. Market Size This determines how big is the market in terms of the number of subscriptions. The top three markets by size are China, India, and US. China and India are more than twice the size of the US market in terms of the number of subscriptions. The market size indicates the scale of opportunities in a given country. 2. Subscriber Penetration This relates to the maturity of the market and how widely is mobile being used in the country. In the prepaid markets this figure can get artificially inflated as consumers tend to carry multiple SIMs, 30% of which are generally inactive.28 3. Postpaid Penetration Postpaid penetration defines the level of revenues in a given market. Higher postpaid markets like Japan, Canada, and the US have higher ARPUs and longer Lifetime Value numbers. Prepaid users are more fickle but are more free to move around operators compared to the postpaid subscribers who get locked in 2-3 year contracts (though by the choice and because of the lure of subsidized devices) 4. Mobile Spend as a % of GDP This metric reflects how affordable mobile services are in a given country. It doesn’t paint the complete picture for comparison purposes as the service levels can be different in different countries. However, the metric does provide a measurement of how much the consumers spend on mobile services relative to their income. 5. ARPU This is the most basic metric that illustrates what consumers are paying for their mobile services on a monthly basis. Generally, the emerging and prepaid markets have lower ARPU and postpaid markets have higher relative to others. 6. Mobile Data % It is no news that mobile data revenues are slowly eroding mobile voice’s dominance on revenues. In Japan, mobile data is already contributing more than 50% of the overall revenues. This metric indicates the prominence of mobile data in a given market. 7. Operator Concentration This is basically represented in the HHI3 index and shows how the industry is concentrated amongst the top operators. Even with 3 operators, the market share can differ quite a bit which impacts the HHI3 Index.28 This is generally true in both the developed and developing prepaid markets 25 Comparing mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  26. 26. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011 8. Revenue Per Minute Drop One measure of how the market is performing competitively is how the prices for the consumers are going down over time. Looking at the drop in the voice revenue per minute gives us one such measure. 9. Overall Revenue Overall service revenues in a given market indicate the market power of the country. In 2010, the US generated almost $165 billion in overall service revenues which was more than China and Japan (the number 2 and 3 nations) combined.29 While India’s market size if measured in subscriptions is almost twice that of all the countries in Western Europe, its overall service revenue just exceeds France a country with 1/10th of its subscriptions. 10. Service Maturity The Service Maturity index reflects the maturity of the networks, devices, and services in a given market. They can vary by market for example, while the US is leading 4G deployment, Japan has almost 100% 3G penetration. Similarly, while Japan has been introducing cutting edge mobile services in the market in the last decade, the US market has been ahead in introducing smartphones and connected devices. In the sections and the figures below, we compare the 8 developed markets and the 4 emerging markets across the 10 different variables.Developed postpaid marketsAs we mentioned before, the predominantly postpaid markets are high ARPU and high Revenuemarkets. Due to yearly contracts, the churn is lower relative to the prepaid markets. There areonly 6 global markets which have more than 70% postpaid penetration with US, Canada, andJapan being the most prominent ones.30 The operator concentration is the highest in Japan andCanada. The US market has been gradually consolidating over the years and is likely to resemblethe other industrialized nations.After leading in mobile data for almost the entire decade, Japan ceded the leadership to the USin 2010 (in data revenues) though it became the first major country to exceed 50% in mobiledata revenues in 2011. In Canada, while the HHI3 index indicates a good competitive structure,the costs to the consumers have declined the least amongst all the major markets. The operatorshaven’t really competed on price and have remained content with dominating their geographicalturfs. The regulators have tried to introduce competition but it has done little to change thedomination of the top 3. Figure 14 shows how US, Canada, and Japan compare across the 10variables discussed above.29 US Wireless Data Market Update 2010, Chetan Sharma Consulting, 201130 The other three are Korea, Finland, and Austria. Of the western European nations, only France has the postpaidpenetration above 60% 26 Comparing mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  27. 27. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Figure 14. Competitive landscape comparison for developed postpaid marketsDeveloped prepaid marketsThe big 5 western European nations of UK, Spain, Italy, Germany, and France average 128%subscription penetration. However, the high penetration rates in prepaid markets aremisleading as consumers typically have multiple SIMs and at any given time approximately 30%of the accounts are inactive. The market structure is very similar with the top 3 controlling over92% of the market on average. 27 Comparing mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  28. 28. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Figure 15. Competitive landscape comparison for developed prepaid marketsThe fierce prepaid competition and fickle customer loyalty forces operators to engage in pricewars and as such the revenue per minute has declined on average by 44% over the last 5 yearswhich is similar to the US decline but higher than the Developed Postpaid Markets we discussedin the last section by 15 percentage points. The Western European operators such as Vodafone,Telefonica, T-Mobile, and Orange have scale by operating in multiple countries. After leading inmuch of the 2G expansion, Europe fell behind in 3G. Some of the operators were also burnt bythe expensive spectrum auction in the early 2000s. Figure 15 compares the 10 variables for thewestern European nations.Developing nations - BRICThe developing markets of India, China, Brazil, and Russia have almost 2 billion subscriptionswith India and China growing at a fierce pace in the last 5 years. India is likely to edge out Chinain reaching a billion subscriptions by 2012.31 These markets are characterized by high prepaidpenetration, low ARPU, SMS dominating mobile data, and higher % GDP contribution. Thedecline in revenue per minute on average has been similar to the developed prepaid markets at44%. However, the market structures amongst these countries vary. India is the mostcompetitive market in the world with 6 operators with more than 10% market share leading to31 While China is ahead of India in terms of total subscriptions as of Q1 2011, the gap has narrowed downtremendously over the last two years thanks to some astonishing numbers produced by the Indian market. Weexpect that the Indian market will overtake the Chinese market in terms of the total number of subscriptions bythe end of 2011. 28 Comparing mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  29. 29. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011the lowest HHI3 value of 0.10 amongst all major nations. Russia and Brazil are also quitecompetitive with HHI3 value of .21 and .22 respectively. China represents the other extremewith China Mobile dominating the Chinese landscape with almost 70% market share and theHHI3 index of .51. Only Mexico is less competitive than China. India’s market structureresembles that of the US a 10-15 years ago and is all set to hit a wave of consolidation as variousplayers struggle to keep the margins up in a very price sensitive and hyper competitivemarketplace. Figure 16 compares the 10 variables for the BRIC nations.Figure 16. Competitive landscape comparison for BRIC nations 29 Comparing mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  30. 30. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Figure 17. Competitive landscape comparison amongst different types of marketsFigure 17 shows the all the market segments discussed above normalized on the same scale. Thisclearly shows how the three different types of markets vary in characteristics, for example,subscriber penetration and operator concentration is highest in developed - prepaid markets,revenue, ARPU, mobile data revenue is highest in developed - postpaid markets, and the marketsize is the biggest in the developing - BRIC nations. The RPM decline is highest for both thedeveloped - prepaid and developing - BRIC nations which are also heavily prepaid.By comparing the markets across multiple dimensions, one can get a better picture of thedynamic environment as well as the competitive landscape in a given market or the type ofmarket. 30 | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  31. 31. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Analyzing the US marketThe US mobile market presents a great study of free market competitive forces at work over thepast two decades. Unlike some of the other western European and Asian markets, regulatorsallowed multiple players to compete. McKinsey, infamously miscalculated the advent of themobile revolution in the US. In 1980, AT&T commissioned McKinsey to forecast users by 2000.Their prediction was 900K subs32 which was off by a factor of 120 as the actual figure was over109 million. As such AT&T missed the market until 1993 when it acquired McCaw Cellular tobecome the biggest mobile operator in the US.At the time, there were 5 operators with market share between 10-15% making it a veryoligopolistic structure. The HHI was 0.10 and HHI3 was at 0.05. however, the market was in itsinfancy with only 21 million subscribers. Over the course of the next 18 years, the market wouldgrow and consolidate in expected ways.Figure 18. The gradual consolidation of the mobile market in the USThere were big mergers and acquisitions along the way like BellAtlantic/GTE, SBC/Ameritech,Vodafone/Airtouch, Sprint/Nextel, Cingular/AT&T, AT&T/BellSouth, Verizon/Alltelculminating with the proposed AT&T/T-Mobile merger in 2011. As the subscriber base grew1192%, the revenues grew in accordance at 1471% over the 16 year time period. The averagevoice revenue per minute declined 91%. Figure 18 charts the evolution trajectory of the US32 31 Analyzing the US market | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  32. 32. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011market in the last 18 years. For the most part, the consolidations followed an expected trajectoryof a mature mobile market. Figure 19 shows the decline in revenue per revenue segment -messaging, voice, and data.Figure 19. Operator revenue micro trends (US)Incidentally, the news of the AT&T/T-Mobile merger broke while we were researching thispaper.33 We had pondered on the viability of 4 operators in the US market in the past.34 So, thenews wasn’t a surprise as we had expected something to break loose and conform to the naturalmarket evolution. T-Mobile US has been under tremendous pressure for the last 2 years beingunable to expand its postpaid base despite modernizing its network/backhaul and introducing aslew of impressive handsets. It was getting squeezed both from the top (Verizon and AT&T) andfrom the bottom (MetroPCS, etc.) while duking it out with Sprint in the middle. The decisionwindow was closing as Deutsche Telekom had to decide if it wanted to invest in LTE or not (inthe US market). Given that the parent business has been under pressure as well, it decided totake the most attractive available option.US has also become the epicenter of mobile broadband. In 2010, its per capita mobile dataconsumption was second only to Sweden.35 The continuous acceleration in consumption alsomeans stress on the spectrum resources which are increasingly in short-supply. Since it takes a33 US Mobile Market Updates 2009-10, Chetan Sharma Consulting35 For a more detailed analysis mobile data consumption trends, please refer to “Managing Growth and Profits inthe Yottabyte Era,” Chetan Sharma, 2009-2010 32 | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  33. 33. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011significant amount of time in procuring adequate spectrum,36 operators have looked at everyopportunity to acquire more spectrum.The proposed merger will obviously have an impact on the market structure. The market powerwill get concentrated in the top 2. The HHI3 Index will go from .22 to .31 but the HHI3 valuewill be at par with UK, Canada (though the Canadian market is not a good proxy for acompetitive market as the top three operators have behaved like monopolies in sync), and someof the other markets. The biggest task for the US regulators will be to analyze the impact on theconsumer interest and service pricing on a market-by-market basis.Putting things into perspective, this move is not unusual for a developed market. On average,the top 3 operators in the developed markets around the world control 94% of the market. Theproposed merger roughly resembles the merger that took place in UK last year when T-Mobileand Orange, the number 3 and 4 player (each having approximately 19% of the share)respectively in the market merged to form Everything Everywhere and become the number 1player in the market with 38% market share.However, if we look at the history of competitiveness in the US mobile market, the market andrevenue concentration will be at its highest in the history of the US wireless industry. Such amove is likely to have an impact on the ecosystem depending on the regulatory policies.While some of the other telecom groups seek scale by acquisition outside their boundaries, theUS operators have been content with flexing their muscles within their borders. The proposedmerger will make AT&T (if approved in its current form)37 the biggest mobile operator in theworld by both the overall revenues and the data revenues. Thus the top 2 operators by marketinfluencing and purchasing power will be concentrated in the US making up for 20% of theglobal revenues.38Engineering perfectly competitive mobile marketsIn general, we found that the markets with HHI3 with less than 0.35 value are operating in goodcompetitive harmony, at least relative to each other. Each market is unique and has differentmarket forces at work including regulatory, middle class growth, market size, penetration ofInternet, Consumer Price Index (CPI), and others and as such they operate and behavedifferently.In India, due to the significant competition, the price of the services to the consumer has fallenprecipitously such that the cost of per minute is only 1c. This is to be expected – highercompetition gives better pricing for the consumers. In general, the introduction of the newplayers have helped readjust pricing (of course pricing is impacted by multiple factors such asoperational efficiency, competitive pressures, technology innovation, regulatory rules, etc.) Inthe US, through the pricing ebbs and flows, the ARPU has remained remarkably consistent overthe last 10 years at $50 which is highly unusual. The primary reason is as the cost per unitconsumed went down, the consumption went up to maintain the similar levels of revenue per36 Solutions for the Broadband World, Chetan Sharma, 2009, RCR Wireless37 It is almost certain that in case of approval, AT&T will have to divest several T-Mobile markets/spectrumholdings.38 Source: Chetan Sharma Consulting, 2011 33 Engineering perfectly competitive mobile markets | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  34. 34. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011user over a long period of time. The uptick in data consumption mostly balanced any decline invoice revenue during the last decade.In Japan, the regulators have controlled NTT DoCoMo’s power and have pushed to make the #2and #3 players stronger. Korea has followed a similar model. Regulators in these countries arealso averse to big M&As.In mature markets, if left to market forces, the mobile markets generally find equilibrium in 3players becoming generalized players while leaving the rest of the market for niche operators. Inthe US, the 10% of the market is focused on the lower-tier of the demographic chain and isfiercely competitive. It should be noted that Tracfone has become the biggest prepaid operatorin the US and registered highest net growth in the US last year with a healthy 30% margins. Infact, it is this dynamics of being squeezed from the top (AT&T and Verizon) and the bottom(MetroPCS, etc.) that is forced T-Mobile to consider the sale of the company. T-Mobile despitesome clever marketing of HSPA+ and relentless drive to launch Android smartphones, lostpostpaid subscribers in each of the last 4 quarters in 2010. The market choices for such playerswere pretty straightforward – learn to live with lower margins or seek an effective competitiveproposition – merge. Merging of two large players isn’t easy and it presents its own uniquechallenges but scale does provide significant advantages in industries where cost of entry is veryhigh.Regulations and the role of regulatorsIn a highly capital-intensive and consumer-critical industry like mobile, the role of regulators isvery important. They need to stay ahead of the curve, anticipate issues that will arise in thefuture, manage the competitive balance in the market that maximizes “consumer value” andensure that the powerful players in the ecosystem are behaving nicely with the smaller fishes inthe pond. While it is patently obvious that ex ante regulation is more effective than ex post,regulatory bodies often fall behind the curve as the market moves at breathtaking speed. Thevery definition of “communication” is misunderstood sometimes and the laws on the book don’tadequately reflect the emerging landscape. Regulatory system should focus on close supervisionof the upstream enduring bottleneck elements of the incumbent but allow competitiondownstream.39Some governments have long realized that regulators working with the industry players canactually create “national competitive advantage” over a period of time. At the same time, thepolicies and investments made can have a significant impact on the wellbeing of the consumerand the society as a whole benefits from such actions. Of course, there are risks of being “tooprotectionist” counter to the spirit of the WTO (World Trade Organization) but thecommunications infrastructure is so central to nation’s ebb and flow that there is a sense ofurgency to find a balance.Developing countries face particularly challenging times as they lack effective regulations toaddress anticompetitive practices. The legal safety net is essential but the challenge iscompounded where economic systems have relied on strong state intervention, resulting in39 34 Regulations and the role of regulators | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  35. 35. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011entire sectors and most dominant firms being state owned, controlled by the government orafforded special protection by government policies.40The competitive framework becomes even more necessary in a globalized market place where inplayers from across the borders eye emerging markets for growth opportunities. Without thelegal and regulatory framework, investors will be hesitant in entering the markets.As the technologies are converging, regulatory bodies are also converging to deal with thecontent and services that are delivered over a range of digital distribution networks and devices.FCC in the US, AGCOM in Italy, Ofcom in UK as well as Australia, Canada, Japan, Finland,Slovenia, Israel, Switzerland, South Korea, Malaysia, and South Africa have convergedregulators.41There is also increased cooperation amongst regulators on policies such as spectrummanagement, child online protection, intellectual property, roaming, termination rates, trafficmanagement, net neutrality, etc.Regulators ought to assess the competing interests of filling up the treasury from spectrumauctions in the short-term vs. long-term national competitiveness. Spectrum auctions mightmake the industry less competitive not more by creating further barriers to entry. In someregions, it also promotes hoarding spectrum as financial assets without the commitment ofinvestment. Also, regulators should be crisp, clear, and decisive in their message to the industry.There is nothing worse than the regulatory indecision and uncertainty as it only delays theinvestment cycles. Only by taking a long-view and by working hand-in-hand with the industry,can the regulators effectively pave the path for future mobile growth in a given country.Globalization and competitionThe telecom growth in the developing countries over the past five years has been tremendous. In1998, India and China had less than 1 million and 25 million mobile subscribers respectively. By2010, India was adding 20 million subs a month (compared to the US, where the growth isaround 1.5 million subscribers/month or Japan where the corresponding figure is less than 1million). In fact, the majority of the growth over the next 10 years is going to come from thedeveloping world. In 1998, the developed nations accounted for over 76% of the mobilesubscribers worldwide. In 2010, this number dropped to 22% and by 2020, only 16% of themobile subscribers will come from today’s developed nations.42When local markets become saturated, companies look for revenues in overseas markets.European operators have been more bold and successful than their American and Asiancounterparts in pursuing greener pastures overseas. The likes of Vodafone, Telefonica, FranceTelecom, and Telenor have honed in their foreign operational skills partly by operating invarious European countries which provided enough variability and challenges for them tounderstand the dynamics of operating in foreign markets. However, operating in a relativelysimilar nation in Europe is easier than starting an operation in Asia, Africa, or South America.40 Trends in Telecommunication Reform 2010-11, ITU41 International Communications Market Report 2010, Ofcom, 201042 The Next 10 Years: 15 Trends That Matter, Chetan Sharma, Mobile Future Forward, Futuretext, 2010 35 Globalization and competition | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  36. 36. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011Asian operators such as NTT DoCoMo and SK Telecom have ventured out to other markets overthe last 10 years with limited success, primarily due to poor strategic direction and weakdetermination and understanding of how foreign markets operate. Money alone doesn’t buyefficiency. The new breed of operators such as Bharti and SingTel are seeking global expansionon the back of their operational experience. They are seeking markets where they can apply theiroperational model effectively. In 2010, Bharti acquired Zain to become the number 5 operatorworldwide. On the back of their domestic market growth, operators from the emerging nationsnow occupy 5 of the top 10 spots in the global telecom groups.It is quite likely that some of the top 3 operators in the developed world will start to seedecreased margins and become likely candidates for acquisitions by their Asian counterpartsover the course of this decade. However, buoyed by national interests, government will resistsuch overtures and global consolidation in certain regions.Competition from outside, Changing ecosystemsIndustries can also change by the competition from outside. The telecom industry is a perfectexample. The likes of Google, Facebook, Skype, Microsoft, and Apple are slowly and steadilyeating away the current and future revenues of the operators. It is apparent in the mobileapplications space where the global “offdeck” revenues now exceed (figure 20) the “ondeckrevenues.”43 Many operators (even the large ones) struggled with the appstores and have givenup on gaining more revenues from the apps and downloads. Others are likely to give it up in thenext 2-3 years. The phenomenon is likely to repeat itself across various regions as smartphonepenetration on these markets approach 50%.Figure 20. The shift in application revenues in the global markets4443 Sizing up the global mobile apps market, Chetan Sharma Consulting, 201044 Sizing up the global mobile apps market, Chetan Sharma Consulting, 2010 36 Competition from outside, Changing ecosystems | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  37. 37. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011In such scenarios, to maintain their margins and share value, operators have to seek newsources of revenue and collaborate more with each other to provide a stronger response to thenew threats. The areas of mobile advertising, mobile commerce, mobile payments, enterpriseapplications, mobile health all represent such opportunities and threats for the operators.In some instances, a new type of service model tries to disrupt the market. In the mid 2000s awave of data-focused MVNOs tried to enter the market in the US to no effect. One by one, eachof the MVNOs struggled, failed, and folded. Again, the primary reason was that they misread themarket, didn’t keep their margin equation in check and didn’t have the perseverance it takes tocompete in this highly competitive and capital-intensive industry.Possibilities of new market structuresiPhone launched the software era of the mobile industry. It was not that software services andapplications didn’t exist prior to 2007, but Apple truly changed the game. Since then, Google’sAndroid has proven to be a worthy competitor and both players together with the newecosystem are redefining the wireless industry. The emerging segment of “connected devices” isalso disrupting the waters which when combined with the WiFi availability/usage is creatingnew distribution channels, business models, and ecosystems. Operators, device makers, andsoftware vendors have to figure out how to play in this fluid economics where things changefairly rapidly.We could also see some operators going the vertical route by investing in technology andhandsets to maximize the margins. For e.g. companies like MediaTek could provide brandedoperator handsets at a reduced price to the operators and use their strong distribution retailchannels effectively.We are also likely to see some global alliances that help operators compete wherein consumerscan purchase services in any country for any country without the toll of international operation.Operators will look at the services stack and find areas for collaboration while competing onother layers. The partnership that Orange and T-Mobile formed in the UK got expanded in amore broader Joint Venture between France Telecom and Deutsche Telekom to cover four areasof investment: customer equipment, network equipment, service platforms, and ITinfrastructure.45Implications for players in the ecosystemIt is very clear that the ecosystem dynamics can change like the weather in Seattle, one just can’ttake the competitive and friendly forces for granted. In the past, the silos and segments wereclearly defined with little overlap. However, over the course of last couple of years, players havebeen migrating and surfing in segments across the board - from Apple to Visa, from P&G toAT&T, from Facebook to Time Warner, from Google to Best Buy, every company wants tocapture the mindshare and piece of the consumer’s pocketbook.The fine line between partners and competitors can get obliterated in a quarter. Apple iscompeting with Cisco, Comcast is going after AT&T’s business, Visa and Verizon want to be thepayment channel of choice, Amazon is gunning for Microsoft’s enterprise business, so on and so45 37 Possibilities of new market structures | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  38. 38. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011forth. One product launch, one acquisition, one alliance can change the game in an instant. Andthis is only the beginning.46Globalization is forcing operators, who were once comfortable on their home turfs, to invest inemerging markets to capture value and future growth. From an infrastructure perspective, theinvestment in developing nations is at par in the developed nations as they plan to expandcoverage and bring new subscribers onboard. Finally, there is a strong movement towardsopening up access to the ecosystem so that the developers can offer applications and services onthe mobile platform just like they do online. Such efforts will lead to more innovation and betterservices for the consumer including entertainment, enterprise services, and public safety.Understanding a given mobile market is crucial to all players in the ecosystem from OEMs,infrastructure providers, investors, regulators, startups, software and services providers, etc.furthermore, it is important to understand how the market is likely to shape in relation to itscounterparts. Understanding the timing of critical industry events impacts the opportunity andrevenue trajectory. Ill-timed moves or strategies that are not fully thought through can lead tosignificant consternation and despair. While some competitive forces take years to play out,their impact can be far-reaching. The competitive landscape has the impact on the profitabilityof the domestic industry and consumer value.In the face of continuous uncertainty, product strategists are constantly challenged to decide theoptimal product mix and release time. How does one work on a long-term product roadmapamidst so many variables and a rapidly evolving landscape? The tool of scenario planning hasbeen used for a long time in many industries through development of various scenarios andtheir integration into the decision making process. Similarly, customers need to align productavailability and maturity with their own business roadmap to ensure that the new technologyand products benefit, and not distract, the work force.47However, external scenario assessment without a realistic due diligence of internalcompetencies will provide an incomplete picture for effective product strategy. Both externaland internal scenarios should be designed, analyzed, and used in the same process to give theparticipants a complete view of pros and cons of each approach and each strategic path.One must take a holistic view of the potential future – both by understanding the impact of theexternal factors such as the technology evolution, the competitive movement, and the shifts inconsumer behavior, as well as, keenly assessing the internal dynamics within a company. Byhaving, a firm grasp on both aspects of scenario planning, executives can make much betterdecisions. This becomes particularly important in a rapidly changing industry landscape ascommunication and computing industries continue to collide, and forces of globalization renderthe national boundaries useless.46 The Next 10 Years: 15 Trends That Matter, Chetan Sharma, Mobile Future Forward, Futuretext, 201047 Enterprise mobile product strategy using scenario planning, Sami Muneer - SAP and Chetan Sharma - ChetanSharma Consulting, Enterprise Mobile Strategies, IOS Press, 2008 38 The next 25 years | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  39. 39. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011The next 25 yearsIt is pretty clear that “mobile” will become the platform of “everything.” Anything that can beconnected, will be connected and the information will make us smarter and more efficient, itwill improve our daily lives, enhance our social engagement, and help cultivate new interestsand relationships. This decade will create new players that will be dominate over the manyincumbents who fail to adapt and seize new initiatives. Overall, the future is extremely brightand full of opportunities to make things better whether it is in the enterprise or for theconsumers.But, how will the competitive landscape shape up over the next 25 years. The last 25 years inmobile were about connectivity and subscriber growth. Revenue was something that resultedfrom the two. Almost in every market, the wireless industry grew out of the traditional wirelineindustry. The first mobile operators were the wireline players who expanded in the then “niche”mobile markets. Now that mobile has completely changed the “communications paradigm,” it istime to rethink the evolution over the next 25 years.There is tremendous pressure at the seams where in players and regulators have to deal with notonly the domestic market dynamics but rethink market structures in light of nationalcompetitiveness and globalization. There are forces at work to decouple access with services andhave the ecosystem stack reconfigured every few quarters. Will the regulators and theincumbents be able to shape the markets for the next 25 years or the disruptive forces going todisassemble and reassemble pieces of the value chain? Who is able to extract the most value?Are there going to be alternate ecosystems that threaten the existing landscape or will theemerging companies play in the niches? It is clear that in open, mature, and competitivemarkets, market forces have a way of finding a sustainable equilibrium point. It is the journeythat can be messy and unstructured. There will be billions of dollars at stake with each segmentvying for a good seat at the table.Regulators (and the political class) will need to be nimble and up-to-speed on emerging trends.They will need to think of long-term horizons rather than short-term skirmishes. The regulatorybodies in various countries have rightly placed their countries innovation and job growthprospects at the footsteps of mobile broadband.48 However, they will need to a) think longer-term, b) be proactive rather than reactionary to industry events and c) have a collaborativeapproach with the industry. Their role in managing the spectrum resources and the competitivelandscape will become more important than ever in how the mobile industry and as a result thelarger economy thrives in a given nation.Consumer preferences and behavior will also evolve with new technology and this will havedirect impact on how they spend their money. If we take a look at the spending habits of the USconsumers on “access and communication services” which includes the spending on Telephone,Cable, Internet, and Cell phones, the total “access” spending over the course of the last decadehas been consistently around 4% of the total personal income per capital.However, the share of each of the services has been changing steadily. Telephone used to have65% share of the spending but is going to be below 30% by end of 2010. Others have beenclimbing at the expense of telephone revenues, especially the cell phones which since 200748 America’s Mobile Broadband Future, Julius Genachowski, 2009 39 The next 25 years | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited
  40. 40. COMPETITION AND THE EVOLUTION OF MOBILE MARKETS APRIL 2011command the highest share. So, the overall spending has stayed constant while there has beensignificant reallocation of spending. Similarly, within cell phone services, data has gone frombeing less than 1% of the overall revenues to over 35% in 2010 and is going to be more than 50%of the overall revenue mix by early 2013.49Mobile operators need to figure out how to manage these reallocation undercurrents andmaintain the overall life time value of the customer. It will come from re-architecting of thebusiness and technology practices as well as through the introduction of new services.It should be noted that over the last 10 years there has been a gradual move from on-deck trafficto off-deck traffic with on-deck accounting for very little traffic in most developed markets. So,operators will have to rethink business models that are just based on selling bandwidth. Theyneed to migrate to models that are more based on value to the end customer and the ecosystem.In fact, it will be wise to figure out the business models prior to the technology investments.Summary and ConclusionsTo say that we live in interesting times will be an understatement. The mobile world is goingthrough significant transition and the players are adjusting to the shifting sands of time. Themarkets and competitive landscapes are continuously evolving and as such we will be updatingthis paper as we continue to research the subject of competitiveness in various markets.Some of the conclusions based on the current study are: 1. Mobile broadband is central to nation’s competitiveness The availability of mobile broadband and the new economy that it enables is going to be central to nation’s competitiveness during this decade. It is easier to state this on paper vs. actually define policies and industry framework to implement. 2. The Rule Of Three defines mobile markets The Rule of Three is evident in all major markets. While the percentage market share might vary, on an average, the top 3 control 93% of the market in an given nation. It doesn’t matter if the market is defined by “controlled regulation” like in China, Korea, and Japan or if it is “open market” driven in markets such as the US, UK, and India. Eventually, only top 3 operators control the majority of the market. There are niches that others occupy but they are largely irrelevant to the overall structure and functioning of the mobile market. 3. Markets might look similar but are generally different Mobile markets evolve differently depending on a multidimensional equation. Comparing dissimilar market for competitive analysis can lead to misleading results and policies. While US and Japan are similar in on the Postpaid and ARPU front, the operator concentrations are different due to different regulatory regimes. Similarly, India and China are at the opposite end of the operator concentration spectrum while49 The Next 10 Years: 15 Trends That Matter, Chetan Sharma, Mobile Future Forward, Futuretext, 2010 40 Summary and Conclusions | © Copyright 2011, All Rights Reserved. Copying without permission is strictly prohibited