Substitution of Mobile ServicesT-109.5410 Technology Management in the

Telecommunications Industry

Juuso Karikoski

Doctoral Student

Aalto University Department of Communications and Networking

8-Nov-11

Outline

• Trends related to mobile (communication) services

• Substitution in:

– Economics

– Marketing

– Strategic management

• Adoption and diffusion

• Case: Smartphone Communication Services

Trends

Mobile market

• Usage and traffic generated by Mobile Internet (MI) services have exploded in the recent years

• Flat-rate pricing schemes also introduced

• Mobile Network Operators (MNOs) forced to make network investments without increasing their revenue substantially

• MNOs business models disrupted by services like Skype and Facebook

• Voice and SMS services still generate most of the operators’ revenues, although ARPU (Average Revenue Per User) is declining

• MNOs suspect that the new MI communication services might substitute their voice and SMS/MMS services - this might affect their marketing strategy decisions, for example

Communication services

Hours spent communicating weekly,

15-25 years old

Source: TeliaSonera, Ovum, various sources (2009)

Substitution

• In economics complements and substitutes are defined in terms of cross elasticity measures– E.g., cross elasticity of demand (ε) between services j and k is

defined as the percentage change in the demand (x) for service j per percentage change in the price (p) of service k:

• Thus, if δxj(p)/δpk > 0 services j and k are substitutes and if δxj(p)/δpk < 0 they are complements. If δxj(p)/δpk

= 0 the services are independent.

𝜖𝑗𝑘 =𝛿𝑥𝑗 (𝑝)/𝛿𝑝𝑘

𝑥𝑗/𝑝𝑘

∆𝑥𝑗

𝑥𝑗= 휀𝑗𝑘

∆𝑝𝑘𝑝𝑘

Substitution: Cross Elasticity

Source: Courcoubetis & Weber (2003)

Substitution: Multiproduct Interaction

Source: Adapted from Bayus, Kim & Shocker (2000)

Substitution: Porter’s five forces

Competitive rivalry

Potential entrants

Buyers

Substitutes

Suppliers

Threat of substitutes

Bargaining

power

Threat of entry

Bargaining

power

Source: Adapted from Porter (1980)

Adoption and diffusion

Techology S-curve and the Technology

adoption life cycle

Source: Kivi PhD (2011), adapted from Rogers (2003)

”Crossing the Chasm”

Source: Moore (1999)

Diffusion of handset features as an

example (N = 4-6.6 Million)

Source: Riikonen (2011)

Case example

Case: Smartphone communication

services• Based on a recent paper:

– Karikoski, J. and Luukkainen, S., 2011. Substitution in Smartphone Communication Services. In: The 3rd International Workshop on Business Models for Mobile Platforms. Berlin, Germany, October 7 2011.

• Motivation:– Critical for the operators to understand the cross-elasticities

between these services

– A very limited amount of research conducted in this area of substitution that is based on empirical behavioral data

– Market level analysis not detailed enough to study substitution –micro (or user) level analysis needed

Methodology

• Handset-based measurements are implemented with

software installed on the participants devices

Source: Karikoski (2011)

Data sets

• Three handset-based data sets collected between 2008

and 2010 from early-adopter Symbian users (N=183) in

Finland

Smartphone communication services

• Mobile Internet (MI) communication services– all Internet-based operator independent mobile communication

services

– further divided to email, Instant Messaging (IM)/Voice over IP (VoIP) and social media services

• Traditional communication services– services offered traditionally by mobile operators

– cellular voice calls, SMSs and MMSs

• Correlation analysis conducted on individual user level with users that have experience in using MI communication services

Descriptive statistics – application class

launches

0 %

5 %

10 %

15 %

20 %

25 %

30 %

35 %

40 %

45 %

50 %

2008

2009

2010

Descriptive statistics - communication

application category launches

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

SMS IM/VoIP Email MMS Social media

2008

2009

2010

Descriptive statistics - usage ratio

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

2008

2009

2010

Correlation analysis

• No significant correlation indicating substitution - also the direction of the

correlation varies among the datasets.

• This implies that the services are independent and cross elasticities are near

to zero.

Discussion

• Our results agree with other results implying that operators should not be afraid of MI communication services cannibalizing their traditional communication services (with these services measured as such)

• Smartphone communication services seem to be independent services used for different purposes

• However, services might evolve to substitutes or complements in the future– Services are converging in the devices phonebook

– Pricing schemes might change in the future

• Network externalities will probably play a major role in the mass adoption of MI communication services

Questions or comments?