New Network Platforms: The Telco and the SIM

The race to establish the future leading platform for provisioning mobile services is ongoing. This leading platform will be the one that extracts maximum value from the network externalities present in the market (a winner-takes-all dynamic typical for platform business models). After looking at a handset-centric service platform (iOS), an aggregator-centric service platform (Android) in the previous post, I will zoom in on the changing operator-centric platforms in what follows.

In any market where network externalities are significant, the benefits of having compatible products are significant too. Producing compatible designs requires interfirm cooperation. In the geographically fragmented telecommunications market this may raise production cost and opportunity cost (which is the cost of reduced time-to-market). At the same time, the traditional activities of telecom operators are being pulled apart by centrifugal forces. More and more they look like a collection of increasingly unrelated businesses: retail, transport, access, services, content, and construction.

Mobile network operators want at all cost to monetize the mobile data networks in which they have invested huge amounts of capital during the past decade. That means:

  • Avoiding commoditization through differentiation in the core asset: the network. This is an incentive for vertical integration.
  • Tiered pricing through first degree price discrimination for individual subscribers. This is pricing as close as possible to each subscriber’s reservation price to capture a maximum of consumer surplus. As described in (Varian 2003), this is particularly important in high capital-outlay industries such as telecom, where operators can exercise market power over consumers. Consumer data analytics enables for price discrimination based on the individual’s behaviour and characteristics.
  • Upstream price discrimination based on throttling/policing network technology[1]. Operators can own their own CDN deployed across their infrastructure to attract content owners who will pay to have their content (e.g. video) distributed at the right QoS across the network. This is controversial, because it runs against the spirit of net neutrality and regulators are likely to be cautious[2].
  • Exposing network APIs to generate lock-in of applications and platforms, to use apps on mobile operators’ application stores as a lever for driving core business. Value is created, not by direct sales revenue, but by increased stickiness of core business and therefore reduced churn. Such network APIs, for messaging, IVR, location and other contextual information retrieval are a unique capability for mobile operators that can’t be met directly by OEM or other app stores.
  • Selling enablers to primarily web service providers in order for them to improve their customer service. Enablers can have their origin in access, in user data, in handset or user services. E.g. location, QoS, SMS, trusted service manager.
  • Enjoying better margins as average selling prices for handsets fall and discount operators loose pricing power. This requires continued competition among handset vendors. Consequently, mobile network operators are worried about market concentration based on Google’s and Apple’s OS, as reported in (Parker, 2011a).
  • Defending the operator’s billing relationship with the consumer, allowing them to take a percentage of the eventually huge transaction volumes through RFID on handsets. This requires competition between OSs and in particular a strategic response to Apple’s soft SIM.
  • Deploying yield management for more efficient value extraction from the sunk investment in the network, to maximum revenue as a function of discount rate (a Laffer curve for telecom service revenue). This is a topic for a future post.

Apple recently applied for a patent for an embedded “soft SIM” pre-loaded with valid credentials for different network operators, where the user would select a network operator through iTunes and those credentials would be presented to the mobile network. Apple’s soft SIM would reduce switching costs for the mobile operator’s retail customers and MVNO customers and increase churn on both sides. Mobile network operators could respond by withholding iPhone subsidies (in fact, subsidize competing OS platforms instead), refuse to offer their tariffs through iTunes, and use network technology to differentiate and increase handset OEM reliance on the network – e.g. with a “turbo” button on the handset to trigger temporary network priority as suggested in (Bienenstock et al. 2010). These responses present a prisoner’s dilemma for network operators, since the single operator that breaks the ranks and cooperates on Apple’s terms gets bigger (and destroys massive wireless service industry value in the process).

Handset subsidy is a two edged sword. It gives mobile operators considerable buying and distribution power over the handset OEM. This comes at the expense of the operator’s profits. Price plans without handset subsidizing reduce the operator’s revenue, but likely increase its profits (as most handsets sales are at negative margin). The handset OEM’s revenue and profits would fall. Again, handset OEMs’ divide-and-conquer tactics to trigger prisoner dilemma defection is the risk. The irony here is that the development of the platform driving the rapid PC-like commoditization of handsets, Android OS, has been funded by mobile operators through the Open Handset Alliance, which was discussed before.

The SIM card is under disruptive attack by various innovations (Apple/Gemalto’s soft SIM, Intel’s ICP, Arm’s Trustzone) that enable downloadable SIM-style applications for security and authentication. A more strategic operator response to these threats would be to create a 3GPP standard soft SIM to retain control over protocols required to switch from one mobile network operator to another, and create a platform for SIM based m-commerce in the process (appropriate business models with payment card companies needed).

Clark S. (2011) Apple patents ‘SIM within’ secure element technology. Near Field Communications World. November 9, 2011

Parker A. (2011) Groups’ alarm at Apple and Google. Financial Times. January 18, 2011

Pignal S., Parker A. (2011) EU to probe online data traffic management. Financial Times. April 17, 2011

Varian H. R. (2003) Economics of Information Technology, Revised from Sorbonne lecture. March 6, 2003

 


[1] Assuming the mobile operator’s network assets and right to spectrum usage are their private property and upstream price discrimination is allowed under net neutrality and other legislation such as the US Robinson-Patman act of 1936.

[2] In April 2011, the European commissioner responsible for the EU digital agenda has asked a committee of EU telecoms regulators to investigate operators’ practices, partly because on May 25, 2011 new transparency rules on traffic management policies came into force (Pignal & Parker, 2011).

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