THE IMPACT OF INDUSTRY STRUCTURE, PRODUCT ARCHITECTURE, AND ECOSYSTEMS ON THE SUCCESS OF MOBILE DATA SERVICES: A COMPARISON BETWEEN EUROPEAN AND JAPANESE MARKETS
July 3, 2003 Jarkko Vesa , M.Sc (Econ.) LTT Research Ltd., Electronic Commerce Institute Helsinki School of Economics, Finland Pohjoinen Rautatiekatu 21 B, FIN-00100 Helsinki tel. +358-50-511 1944, fax +358-9-408 417 Email:
[email protected]
Keywords:
mobile data services, business ecosystems, mobile industry, i-mode, NTT DoCoMo, dynamic ecosystem model
JEL Codes:
L16, L22, L96
Abstract This paper develops propositions regarding the requirements for analysing dynamic industries such as mobile data services. Based on these propositions, a new conceptual framework called "Dynamic Ecosystem Model" is developed. The model is based on the concept of business ecosystems (Moore 1993) and the "Double Helix" model (Fine 1998). The Dynamic Ecosystem Model is then used to compare the industry structure, product architecture, and the role of business ecosystems between the Japanese and the European mobile data services. The results show that European mobile operators have tried to implement a wrong kind of industry structure and product architecture for mobile data services. The paper discusses potential ways of improving the situation. Implications are drawn for the future research.
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1 INTRODUCTION Mobile data services have been a big disappointment in Europe. However, at the same time in Japan the majority of mobile phone users subscribe also to the mobile internet services and almost twenty percent of mobile operators' revenue is coming from mobile data access fees. With the decreasing average revenue per user, high penetration rates and increasing competition, operators realize the importance of mobile data services for their future. In the 3GSM World Conference in February 2003, operators and vendors alike expressed their concern that although new technologies enable the development and marketing of exciting new mobile data services, there is still a major risk that the industry would destroy the emerging market. The industry is determined to learn from the disastrous WAP experience. The main reason for the European WAP failure has been considered to be "the lack of clear operator guidance" /3/. This statement clearly demonstrates that the lack of success of mobile data services in Europe is more a question of business models than it is about quality of individual services or products. In the closely integrated mobile data business environment, all three elements of the service offering must work seamlessly together: networks, handsets, and content and services. As the CEO of the UK based mobile operator O2, Mr Peter Erskine /5/ pointed out in his presentation in the 3GSM World Congress, "the cooperation between various parties involved becomes even more important as we move towards the mobile data market". In Japan, business models and the cooperation between various parties involved appear to be working well. Researchers and practioners alike have been trying to learn as much as possible about the success of mobile data services in the Japanese market. Due to this overwhelming interest towards the "Japanese model", there is a wide variety of newspaper articles, books, academic papers, and consulting reports available - each of them trying to reveal the success formula of NTT DoCoMo and its local competitors. The European mobile data services market, however, has received less attention from researchers. There is a perfectly logical explanation for this situation: as a representative of a Japanese mobile service company pointed out during the interviews for this paper, Europe is not one single market - it is over twenty different markets. The fragmented nature of the European mobile market has led to fragmented research in this field. Numerous research papers have covered the current status and future trends of the European mobile services market, but there reports
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July 3, 2003 typically focus on individual markets, such as the UK /21/, the Netherlands /17/, Finland /27/ and Sweden /4/. There are, however, limitations in the current research covering the nature of mobile business in Europe vs. in Japan in general, and in particular when it comes to analysing the differences in the usage of mobile data services in these two markets. Majority of the research done so far have focused on the mobile - or cellular - handset market /28, 11, 12/ from a manufacturing perspective, or the focus has been on mobile network and operator business /17/. Furthermore, the nature of the research - especially when documenting the developments in the Japanese market - have been very descriptive by nature. Finally, there is limited amount of research available, which would present a clear and profound analysis of the differences between the European way and the Japanese way of developing and delivering mobile data services. In this paper I will drill deep down into the structure and dynamics of the mobile data services markets in Japan and in Europe. The paper will demonstrate the key differences between the two approaches to creating mobile data services. The objective is to create a better understanding of the current structure of mobile data services and to describe possible future developments in this field. The paper presents a new conceptual framework called the "Dynamic Ecosystem Model", which will be used to analyze the empirical data. By using the "Dynamic Ecosystem Model" concept this paper demonstrates the clear differences of the two systems and highlights the consequences of those differences. The findings indicate that Europe has misunderstood the nature of mobile data services while trying to use a market-driven approach in governing mobile data services (which are too complicated for this kind of modular mechanism). Implications for future research are drawn. The structure of the paper is as follows: in chapter two I will present the theoretical background of the research and develop propositions to guide the development of the conceptual framework and empirical research. In chapter three a new conceptual framework is developed. In chapter four I describe the methodology used in this research. In chapter five I will describe the key characteristics of the Japanese and the European mobile data services markets, and will use the new framework to analyse the structure and dynamics of the two markets. In chapter six I will discuss the findings of my research, and chapter seven will conclude this paper.
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2 THEORETICAL BACKGROUND 2.1 Requirements for analytical models of mobile data services Based on earlier research I will next develop propositions describing requirements for analytic tools for describing the current status and future trends of mobile data services industry.
Complex adaptive systems There is a widespread consensus that the telecommunications industry is experiencing profound changes during the coming years. Researchers have described this process as an evolution of structure and processes over time /9, 17/. This kind of development, where businesses start out simple and become more complicated over time, is an essential part of the emerging field of complexity theory. According to /6/, complex adaptive systems are large, decentralized systems consisting of countless number of parts that undergo spontaneous selforganization. For complex adaptive systems there is no unambiguous equilibrium. Or as economist Alfred Marshall puts it: equilibria are fleeting and never reached /6/. Albeit complexity theory as such is contradictory and probably raises endless objections amongst researchers who prefer more controllable and precise way of thinking about the markets and the environment, there have been attempts to analyse to turbulent mobile services markets by using the mindset of complexity. For instance Kodama /14/ described the i-mode business division within NTT DoCoMo as a "complex, environmentally adaptive system" which consists of both tightly and loose coupled organizational factors. Farrell /6/ criticizes the systems thinking school of thought for seeking rational solutions to phenomena that represent behaviour far too complicated for such models. Most traditional economic models make dangerous and false assumptions about the nature of the prevailing business environment. According to Farrell, these include for instance the notion of the equilibrium position. Many business models assume also that business conditions are independent of time. The observations discussed suggest the following proposition. PROPOSITION 1. Analysing mobile data services industry calls for models that can manage the complexity and adaptive nature of mobile business.
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Firm-level vs. industry-level analysis For years researchers have tried to develop models that would shed light on the complex structures and processes of contemporary business environment. For instance, it would be useful for the purposes of this paper to identify cognitive framework that would "facilitate an understanding of the evolution of the structure of the Telecommunications (Telecoms) Industry" /9/. There has been lively discussion in academic journals about the strengths and weaknesses of various business planning models. It has been widely recognised that the traditional models, such as the value chain analysis /23/ do not function very well in the current business environment. Critics note that value creation does not happen sequently but concurrently - although it must be said in all fairness that Porter did point out that "often firms perform parallel activities, whose order should be chosen to enhance the intuitive clarity of the value chain to managers" /23/. So the question was not about Porter failing to recognize the limitations of the sequential approach, but more about making the value chain model understandable for business people. There have been at least two different approaches to solve the limitations of a firm-level value chain analysis. The value chain concept has been broadened to describe an entire industry. The industry value chain both enables and constrains an individual firm's ability to design business models. Whereas the original focus of value chain analysis was on an individual firm, the industry-level value chain serves as "a model of the industry whereby processes are considered independent of the firms that may or may not engage in them" /17/. Another way of solving the problems related to the chain metaphor has been to develop alternative conceptualizations such as the value star model /21/ and value nets /15/. The need for new models and frameworks for analyzing firm and industry level issues is a result of the recent changes in the business environment. Kothandaraman and Wilson /15/ argue that businesses have moved from competitive to cooperative paradigm, where "the focus has moved beyond individual firms to examining the value-creating network formed by the key firms in the value chain". Koza and Lewin /16/ argued in 1998 that research on strategic alliances had been "challenging the traditional centrality of the firm as a focus for research" already for a decade. PROPOSITION 2. Firm-level analysis represents too narrow focus for mobile data services research: a wider approach is required.
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Static vs. dynamic models A wide variety of tools and methods have been used to analyze the structure and processes of telecommunications industry. These include such models and frameworks as the value chain /4/, industry value chain /17/, cluster analysis /24, 27/, layer model /9/, and service mediary approach /30/. Various types of network analysis, such as value network /15/, have also gained popularity. However, there is one limitation in practically all traditional models: they are static by nature. These models can help to understand the structure of a firm or industry, or the position of a specific company within the network - at a given moment in time. For instance, telecom engineers have long used models such as so-called layer models as a cognitive framework for organizing their knowledge interdepencies /9/. Albeit this kind of static model may be useful in developing an understanding of the evolving industry structure, there are often highly simplified - and therefore dangerous - assumptions behind the models. For instance, as Fransman /9/ points out, in the layered model of telecom industry he presents, it is implicitly assumed that the appropriate modes of coordination are "in place and work effectively without examining how they came to be and how they work". Discontinuous technological change, such as mobile data services, puts even more pressure on researchers. Based on his research on technological change and organizational boundaries, Afuah /1/ points out that "most research in technological change has focused on its impact on focal firms and has paid little attention to the impact of change on their suppliers and customers". According to Afuah, "such focus is incomplete". These observations discussed suggest the following proposition. PROPOSITION 3. An in-depth analysis of mobile data industry calls for flexible analytical tools that can capture the dynamic changes in the structure and processes of individual firms and the industry as a whole.
2.2 Characteristics of mobile data services business In this chapter, another set of propositions will be developed in order to capture the essential elements of the mobile data services business.
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July 3, 2003 Firm and industry boundaries The importance of the scope of a firm's business has been long recognized in the competitive strategy literature. According to Porter /23/, a firm may exploit the benefits of broader scope either internally or it can form coalitions with other companies. Porter defines coalitions as "long-term alliances with other firms that fall short of outright merger, such as joint ventures, licenses, and supply agreements". What is particularly interesting for the purposes of this paper is so called "vertical scope", which Porter describes as "the extent to which activities are performed in-house instead of by independent firms". This definition is based on Coase's theories of the firm, which were later elaborated by Williamson /35,36/ in the transaction economics approach. According to Porter, "vertical integration defines the division of activities between a firm and its suppliers, channels, and buyers". For the analysis of the mobile data services, coalitions represent an interesting intermediary solution between a purely vertically integrated firm and the use of markets. Harrigan /13/ has pointed out that decisions made by companies regarding vertical integration might be adapted over time as industries change. She argues that the old concept of vertical integration as "being 100 percent owned operations that are physically interconnected to supply 100 percent of a firm's need" is outmoded. Instead, the concept of vertical integration should be expanded to comprise a variety of arrangements by which a firm can use outsiders. According to Harrigan, industries evolve in structure as firms make investments in them and customer adopt new products. PROPOSITION 4. Firm and industry boundaries in mobile data industry change form as the industry structure evolves over time.
The role of market uncertainty Another factor affecting vertical strategies is demand uncertainty: Harrigan /13/ argues that in stable demand conditions higher degrees of internal integration might happen more easily. However, in contrast to this general principle, pioneering firms may be forced to undertake many stages of activity in order to create credibility for a radical new industry. Furthermore, in innovation intensive industries firms should be wary about too much vertical integration because they "cut off access to the benefits of outsiders' innovation". PROPOSITION 5. In mobile data services industry, the pioneering firms may be forced to undertake several stages on value creating activity in order to create credibility for the new industry.
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Complexity of the products and services The complexity of the products offered has also an impact on vertical strategies: for complex product (or services) that requires substantial demonstration or explanation and servicing may call for vertical integration of downstream linkages /13/. PROPOSITION 6. As mobile data services represent a complex system product requiring substantial guidance and servicing, service providers may need to integrate vertically downstream.
Discontinuous technological change and industry boundaries Based on transaction cost economics and knowledge-based theory of the firm, Afuah /1/ has been analyzing the relationship between technological change and boundaries of a firm. Based on his study exploring the adoption of RISC technology Afuah found that firms which were vertically integrated into the new technology performed better than those who chose to turn to open markets for their RISC microprocessors. The research showed also that the firms that had been vertically integrated into the old technology performed worse. These findings supported the argument that efficient boundaries of firms are dynamic: "early in the life of some new technologies, a firm may be better off being vertically integrated". Afuah argues also that alliances as governance mechanism play "an important role in the performance of firms facing a technological change. This leads us to propose the following. PROPOSITION 7. As the industry is facing a discontinuous change, the stakeholders of mobile data services industry will be better off being vertically integrated into the major components that drive the discontinuity.
Modularisation of mobile data services There has been a trend towards a modularized view of the telecommunications industry and systems /9/. Especially in Europe and the U.S., some companies would like to see a similar modularized structure in mobile services as what we have seen in the computer industry during the past twenty years. In the modularized system, "specialist in any module need to have knowledge only of the rules for connecting their module to complementary others with little knowledge necessary of what goes on within the other modules" /9/. This observation suggests the following proposition: PROPOSITION 8. Modularized architecture in telecommunications industry reduces the need for vertical integration for mobile data services. 8 (8)
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3 DYNAMIC MOBILE ECOSYSTEM In this chapter, a conceptual framework will be built in order to tackle the requirements defined in the propositions developed in the previous chapter.
3.1 Business ecosystem Traditional business models, such as value chains, networks, and stars, are based on the assumption that business can be planned and built based on rational choices guided for instance by transaction cost economics or resource-based view of the firm. As the first and second propositions developed in the previous chapter indicate, new kinds of frameworks are needed. In this paper I argue that business ecosystems thinking would provide useful mental framework in order to meet the requirements set by the increasingly complex business environment. The concept of business ecosystems was introduced by Moore /19/. According to Moore, business ecosystem is "an economic community supported by a foundation of interacting organizations and individuals - the organisms of the business world". Moore suggested that a company should not be viewed as a member of a single industry but "as part of a business ecosystem that crosses a variety of industries". This approach represents an open natural view of organizations /31/, which emphasizes a company's dependence of its environment. Moore highlights the importance of co-evolving the capabilities amongst the business ecosystem members. According to Moore, there can be - and often is - several competing business ecosystems in any larger business environment. His prediction was that in the future, competition would be among business ecosystems, and not between individual companies. Moore has identified four phases in the development of business ecosystems. The first phase is called "birth". During this stage the focus is on defining what customers want, and finding the best way to deliver it. It pays to cooperate as business partners together "fill out the full package of value for customers". Moore also points out that it is vital to find a leader for the emerging ecosystem in order to initiate a process of rapid, ongoing improvement. Established companies are often better off waiting and watching as a new market sorts itself out. For an ecosystem to succeed, it is important to nurture a full community of partners and suppliers right from the start.
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July 3, 2003 In the second stage, business ecosystems expand to conquer broad new territories. According to Moore, there are two conditions for stage 2 "expansion": a business concept that a large number of customers will value, and the potential to scale up the concept to reach this broad market. During this phase, established companies can exercise enormous power in marketing and sales, literally crushing smaller ecosystems in the process /19/. In stage 3, business ecosystems go through "leadership" struggles that have two prerequisites: the ecosystem must have strong enough growth and profitability to be considered worth fighting over, and the structure of the business ecosystem must have become reasonably stable. An important part of the dynamics of stage 3 is that the stability of the ecosystem diminishes the dependence of the whole ecosystem on the original leader. Companies become preoccupied with standards, interfaces, "the modular organization", and customer-supplier relations. In stage 3, bargaining power comes from having something the ecosystem needs and being the only practical source. Central contributor status is maintained in part by the investments others have made in being followers. Switching to other vendors would be risky and expensive - if possible. Central companies reinforce their roles by making important innovative contributions to the performance of the ecosystem as a whole. For dominant companies, the expansion and leadership stages of an ecosystem can make or break them. Mature business communities are threatened by rising new ecosystems or innovations. An altered environment is often more hospitable to new or formerly marginal business ecosystems. How a dominant company deals with the threat of obsolescence is the ultimate challenge. Leading successive generations of innovation is clearly crucial to an ecosystem's long-term success and ability to renew itself. More recently, a similar ecological approach has been used by Nguyen /20/ in his analysis of business-IT integration.
3.2 The Double Helix model The analysis presented in this paper was greatly inspired by the concept of the Double Helix /7/ which illustrates the evolution of industry structure over time. According to Fine, a given industry oscillates between vertical/integral and horizontal/modular structure. The logic behind the Double Helix concept is that the "business genetics" perspective helps us to understand the mutation and evolution of companies. Fine has developed his model by analysing the development of computer industry during the period of 1975 - 1995. During this time period, computer industry went through a major change in two areas: the industry structure changed from vertically integrated to horizontal structure. At the same time, the 10 (10)
July 3, 2003 product architecture changed from integral to modular. The Double Helix model has traditionally been used mainly for analysing the development in industries dealing with physical products /7,12/ or for analysing supply chains /8/.
3.3 The Dynamic Ecosystem Model (DEM) One of the objectives of this paper is to develop a new analytical framework that tackles the requirements defined by the propositions developed in the previous chapter. The goal with this new framework is to be able to make industry-level analysis of the dynamics of the complex, adaptive mobile data services business. The Dynamic Ecosystem Model (see figure 1) combines evolutionary ideas of the business ecosystems /19/ and the cyclic nature of the development of product architecture and organizational structure /7/. Albeit both models are widely used and well known, there is still room for improvement. Business ecosystem as such is a useful metaphor helping researchers and managers to understand the evolutionary nature of the contemporary business life. However, the concept may be too abstract to be truly useful for analyzing industries and making decisions on a more practical level. The concept of Double Helix captures well the dynamics of the changes in product architecture and industry structure. However, albeit the model is easy to understand intuitively there are some areas where the model could still be improved: one could claim that in the technology and innovation-intensive industries with complex products consisting of both hardware and software the Double Helix does not oscillate between the market and the vertically integrated firm but between a market-driven structure and a business ecosystem structure.
INTEGRAL PRODUCT ARCHITECTURE BUSINESS ECOSYSTEM EXPANSION
BIRTH
MODULAR PRODUCT, THE MARKET LEADERSHIP
SELFRENEWAL
DEATH
NEW ECOSYSTEM
Figure 1. Dynamic Ecosystem Model (DEM)
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4 METHODOLOGY This research represents a multiple-case research design. The research is guided by propositions developed based on literature review. In this paper the unit of analysis is not individual companies; instead, the focus is on the characteristics of two different geographical markets - Japan and Europe. Therefore, findings from individual companies will be aggregated into a comprehensive and generic view of the market. Our original analysis of the Japanese mobile data services was published at fall 2002 /30/. In October 2002 my colleagues and I had a chance spend one week in Japan. During that time we had the opportunity to interview some of the key players of the Japanese mobile data services industry (e.g., NTT DoCoMo, J-Phone, KDDI, Fujitsu, Nokia, and Sony Ericsson). We also presented our i-mode analysis to our Japanese hosts in order to get feedback on our conclusions. Our research team had also the opportunity to use NTT DoCoMo's new third generation mobile services, sold under the brand name "FOMA". Once we returned back from Japan, we wrote a report where we compared the current status and the future trends of mobile data services in Europe, Asian, and the U.S. /26/. This report, however, was mainly a descriptive document aimed at decision makers in telecommunications and service companies. In this paper I have developed a new conceptual framework based on existing theory, literature and our earlier analysis of the Japanese mobile data services. The case data, collected by interviews and from documentation, has been analysed by using the framework.
5 ANALYSIS OF MOBILE DATA SERVICES MARKETS 5.1 The Japanese mobile market During the past few years, the success of Japanese mobile market - and especially that of NTT DoCoMo's i-mode service - has been thoroughly documented /2, 4, 10, 14, 18, 28, 30,32/. The Japanese mobile phone market has been considered to be the clear leader in the field of mobile data services: majority of users (57 million or 80 percent of subscribers by the end of 2002) subscribe also the mobile data services, and around 20 percent of ARPU comes from data access fees.
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In our i-mode case study /30/ we identified the following the success factors of the i-mode service: ??
Operator controls all three elements of the services: the network, the terminal sales, and the content offerings
??
From marketing perspective DoCoMo has been very successful with their i-mode concept in avoiding the pitfalls of too high expectations for the service, not to mention the success in building a strong and trustworthy consumer brand
??
Taking advance of the Japanese culture: strong community effect, the unwillingness to talk into a mobile phone in public places etc.
This paper will next go deeper into the root causes and key attributes of the Japanese mobile data service business model by using the Dynamic Ecosystem Model (see chapter 3.3) as a conceptual framework. The model is based on the concept of business ecosystems /19/ and the Double Helix model /8/, and it has three key components: industry structure, product architecture, and stages of ecosystem's evolution. In Japan, the industry structure is vertically integrated which means that mobile operators control all different levels of value chain - from handsets to content. Carriers act as wireless Internet service providers, access providers, mobile phone providers, retailers and content aggregators /2/. The situation is somewhat similar to that of computer industry in 1975 - 1985 when the three largest companies, IBM, DEC, and HP, were highly vertically integrated /7/. There is, however, one big difference: the Japanese mobile operators do not own all the elements that are being used in their total concept. This is a good example of the current trend towards loosely coupled business networks where the control of critical resources is more important than the ownership /32/. In the Japanese mobile data services business the competition is between business ecosystems, which have been created around the focal company. An excellent example of this development is the NTT DoCoMo case study by Kodama /14/, which describes the initial creation of the business ecosystem around DoCoMo's extremely successful i-mode service. As Moore /19/ emphasizes, a company should be viewed as part of a business ecosystem that crosses a variety of industries. In Japan, the mobile operators are linking together several different ecosystems, such as the music industry (music companies, karaoke companies who have lots of music files that suite well to be used as ringtones, companies providing tools for converting voice files to various formats, loudspeaker manufacturers developing miniaturized loudspeakers for handsets, etc), 13 (13)
July 3, 2003 navigation services industry (companies owning map info, companies building car navigation systems, companies providing positioning information, etc.), and the game industry (game manufacturers, arcade game companies, game console manufacturers, etc.). This "ecosystem economy" seems natural in the light of the Japanese culture where large companies have been interlinked by cross-shareholdings and long-term commercial connections in a system known as "keiretsu". Figure 2 describes the structure of the Japanese mobile industry. The product architecture of mobile data services is highly integrated in Japan. Mobile data service offered by an operator consists of handset, mobile network, and mobile portal that are all closely integrated. Handsets are sold under operators brand and each phone can only be used in that specific operators network. There is no SIM card in the mobile phones sold in Japan, which means that the telephone number is hardcoded into the device - a similar situation as in Finland during the analog NMT network before the SIM card separated the subscription from the handset. Mobile networks are all so different that it requires a lot of work to fit a handset designed for one operator to another operator's network. All three operators have their own mobile portals. Due to the limited screen size of a mobile phone and because of the huge content offering it is extremely important how the links to various services are positioned in the mobile portal. Operators do not buy content from content owners, nor do they create their own content: instead, they control the content business by certification process and billing service /18/.
Handset Mobile network Mobile portal Applications Content
A L L
A L L
A L L
P R O D U C T S
P R O D U C T S
P R O D U T S
Figure 2. Japan: business ecosystems with integral product architecture
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There are also disadvantages in the vertically integrated industry structure and the integrated product architecture. The biggest disadvantage is that operators have to subsidize the price of the handset. The subsidy may be as high as 90 percent of the end-user price. Mobile phone manufacturers are forced to develop and manufacture models that a suitable only for one specific operator's network which increases the R&D and manufacturing costs /2/. A representative of one Japanese mobile operator stated that the handset subsidy is the price the operator has to pay is they wish to orchestrate the ecosystem. Another problem is the lack of compatibility between the mobile data services of different operators, albeit some progress has been made in this area lately. However, thanks to the large population of Japan, there is enough domestic market potential for each operator even though their networks are closed from interoperability's point of view.
5.2 The European market: market-driven & modular The European mobile phone business has not been as widely analyzed as its Japanese counterpart. There are several reasons for this. Although mobile phone penetration has reached the level on 90 percent of the population in some countries, the mobile data services penetration - which makes Japan such an interesting case - is still very low. One could of course argue that the extremely popular SMS usage represents also one type of mobile data services. I argue, however, that SMS cannot be compared with the Japanese mobile data services. Another challenge in doing research on a Pan-European level is the fact that Europe is not a single market but over 20 different markets, based - in addition to geography - on language, cultural, regulatory etc. differences. The structure of mobile data services industry in Europe is almost exactly the opposite of the Japanese ecosystem-driven model. The industry structure in Europe is market-driven: the competition is taking place on the horizontal level, that is, operators are competing against each other, handset manufacturers are competing against each other etc. (see figure 3). According to the European way of thinking, any company complying with the open standards must be able to offer mobile data services to the open market.
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Handset
Mobile network
Nokia TeliaSonera Club Nokia
Mobile portal
Applications Content
Java Games Sony Music
Motorola Vodafone
Samsung Virgin
Vodafone Live! News Client Disney
Siemens Orange AOL Anywhere
Movie CNN
Video Mail Nasdaq
Figure 3. Europe: horizontal industry structure with modular product architecture
The dominant design of European mobile data services is based on modular product structure. Since joining forces to support the creation of GSM standard /32,10,25/, the key players of European mobile industry have opted for an open standard based and modular approach to mobile data services. Clear indication of this was the strong commitment to the open WAP standard in the end of the 1990's.
5.3 Analysis of mobile data services market structure by using the Dynamic Ecosystem Model The principle idea of the Dynamic Ecosystem Model (DEM) - following the logic of Fine's Double Helix model /7/ - is that industries oscillate between ecosystem-based / integrated and market-driven/modular industry structure and product architecture. Once an industry has moved into the ecosystem-based industry structure it will live through different stages (birth, expansion, leadership, and self-renewal/death) as described by Moore /19/. I will next analyze the current status of mobile data services industry in Japan and in Europe by using the Dynamic Ecosystem Model.
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INTEGRAL PRODUCT ARCHITECTURE BUSINESS ECOSYSTEM
EXPANSION
Europe
Japan MODULAR PRODUCT, THE MARKET
BIRTH
LEADERSHIP
SELFRENEWAL
DEATH
NEW ECOSYSTEM
Figure 4. Mobile data services markets in Japan and in Europe.
As figure 4 shows, mobile data services industry in Japan is building on an ecosystem-based industry structure. The evolution of the industry can be tracked back to the end of 1990s' when NTT DoCoMo started their groundbreaking i-mode services. According to Kodama /14/, in 1997 DoCoMo started seven workgroups for various areas of mobile data services, each of which was responsible for building win-win relationships between DoCoMo, their partners and customers. This development led into a "complex, environmentally adaptive system" /14/. I argue that this was the birth of the mobile data services ecosystem in Japan aiming at developing "non-voice communication services over mobile phones targeting general users", as DoCoMo defined the mission of the Gateway Business Department - which later became the i-mode business division. The new mobile data services business soon attracted competition, leading the way to the birth of two other business ecosystems. This is in line with Moore's idea that in any larger environment (a criterion which the Japanese mobile market with the population of 120 million people certainly meets) there often are several competing ecosystems. During the past few years the Japanese mobile data services market has lived through also the second stage of "expansion". The three Japanese mobile data services business ecosystems, built around NTT DoCoMo, J-Phone/Vodafone, and KDDI respectively, have expanded the scope of their ecosystem - both geographically and in the terms of services and content offered. Currently the Japanese mobile data services ecosystems are moving towards stage 3, which is characterized by leadership struggles. According to Moore, during this stage the ecosystem 17 (17)
July 3, 2003 has become reasonably stable which diminishes the dependence of the whole ecosystem on the original leader. Companies start to focus on standards, interfaces and the modular organization. However, in the proprietary world of the Japanese mobile data services, the switching costs are high. What is critical for the success of an ecosystem is that the central companies make "continuous innovative contributions to the performance of the ecosystem as a whole". This trend is clearly visible in the strategic plans of the Japanese mobile operators: for instance NTT DoCoMo has presented plans to create "ubiquitous environment" for mobile services /33/ combining such areas (or ecosystems) as mobile communications, mobile ecommerce, telematics, and multi-device platforms.
In Europe, mobile data services are starting to emerge. As discussed in chapter 5.2., the European model is market-driven with modular product architecture. However, there a signs that the leading European mobile operators would like to move the European mobile data services business model closer to the Japanese one. Next I will discuss the dynamic forces driving these changes.
5.4 Forces challenging the existing structure of mobile data services industry In this chapter I will describe some of the forces driving the change in the product and industry structure of mobile data services industry in Japan and in Europe. First I will look at the forces pushing an ecosystem-based industry structure and product architecture (such as the Japanese mobile data services industry today) toward a market-driven and modular configuration. In his Double Helix model, Fine /7/ proposed three forces that would drive a vertical/integral model towards horizontal/modular architecture. The first force was described as "the relentless entry of niche competitors hoping to pick of discrete industry segments". This development is visible in Japan: although NTT DoCoMo is the clear market leader with almost 60% market share, KDDI and J-Phone / Vodafone are gaining market share. The second force was described as "the challenge of keeping ahead of the competition across the many dimensions of technology and markets required by an integral system". This disruptive force is also seen in the Japanese market: J-Phone is recognized as the leader in multimedia messaging (picture mail, video mail), and KDDI has superior (nearly) 3G network and advanced GPS based services. The third force against the vertically integrated model, according to Fine, is " the bureaucratic and organizational rigidities that often settle upon 18 (18)
July 3, 2003 large, established companies". Critics have claimed that NTT DoCoMo is getting so big that it is becoming too slow and rigid. Albeit this statement represents a well-known fact when it comes to large conglomerates, it is difficult to say if it applies also to business ecosystems: is growth equally painful for ecosystems, or can they tolerate growth better than traditional vertically integrated companies? Next I will describe how the forces of the Double Helix push a market-driven, horizontal industry structure and integrated product architecture (as the European mobile data services industry exists today) toward vertical and integrated configuration. The analysis of computer industry using the Double Helix model has indicated /7/ that the horizontal / modular structure may also turn out to be quite unstable. Horizontal structure typically creates fierce, commodity-like competition within individual niches. Such competition keeps the players highly focused on their survival. But as time goes by, a shakeout typically occurs, and stronger players drive the weaker ones out of business. Fine has identified yet another reason why horizontal structure way turn out to be unstable: "once a firm is large enough to exert some market power in its row, it sees the opportunity to expand vertically as well" /7/. The picture Fine is painting about the nature of competition in an industry or market dominated by horizontal / modular structure describes very accurately the current development in the European mobile industry. In the handset market Nokia is clearly dominating Europe. As Nokia's global market share has kept on increasing and is close to 40 percent (37.8 % as of end 2002), and in some countries like Finland over 90 percent, it is clear that a shakeout will take place also in this layer of the model. According to market research company ARC Group, the top five handset vendors have over 80 percent of the total market share. In stagnant market situation consumers prefer to buy well-known brands /29/. The second type of development Fine described is even more evident: the two most powerful players in the European mobile industry, namely Nokia and Vodafone, are both expanding vertically. Nokia has launched their own mobile portal "Club Nokia" which competes directly with Nokia's customers, i.e. the operators', similar services. Nokia is also actively selling their Series 60 application platform to other handset manufacturers. At the same time Vodafone has started to sell mobile phones under their own brand (Financial Times Oct 25, 2002). Vodafone is also actively promoting their Vodafone Live service as the key marketing concept for mobile data services. In addition to these two mobile industry's traditional players, even Microsoft is determined to enter the market by doing cooperation with mobile operators
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July 3, 2003 in building operator branded smartphones, but also by expanding the MSN portal to cover also mobile services. Based on this analysis we can well accept the logic of the Double Helix model which states that not even the horizontal/modular structure is very stable: as our examples demonstrate, the European mobile operators would very much like to see the same kind of dominating role as what mobile operators have in Japan. Next I will apply the forces driving the industry from horizontal / modular to vertical / integral as described in the Double Helix model to the European mobile industry. The first force Fine /7/ described states that "technical advances in one subsystem can make that the scarce commodity in the chain, giving market power to its owner". In the European mobile data services industry the scarce commodity is surprisingly the Nokia handset: in many countries operators and content providers have been forced to adjust their product launches according to Nokia's release schedules. The second force anticipates that "market power in one subsystem encourages bundling with other subsystems to increase control and add more value". There is clear evidence of such bundling: Nokia and Ericsson have managed to get also network orders by bundling handsets and network systems; Nokia has started to preinstall Club Nokia connection into new handsets; Vodafone is subsidizing handset price and bundling subscription and phone. The third force leads to a situation where "market power in one subsystem encourages engineering integration with other subsystems to develop proprietary integral solutions". This trend was very easy to see in the 3GSM World Conference in February 2003: the battle of the dominance of mobile industry ecosystem has moved away from ready-made handsets to enabling technologies such as chip-sets (Qualcomm), application platforms (Nokia Series 60, Microsoft Smartphone OS), etc.
In this chapter we have analyzed the dynamic forces that try to push the prevailing industry structure and product architecture towards the opposite structure and architecture. This analysis is based on the logic of Charles Fine's Double Helix model, which has been adopted as a key component of the Dynamic Ecosystem Model described in this paper. Next I will compare the findings of this paper with the original propositions presented in the beginning of this paper.
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6 DISCUSSION In this paper I presented propositions regarding the requirements for a conceptual framework for analyzing the structure and dynamics of mobile data services industry. Furthermore, another set of propositions was developed in order to guide the actual mobile data services research. An analytical framework called Dynamic Ecosystem Model (DEM) was developed based on the propositions. The framework was then applied to empirical data collected from the Japanese and European mobile data services industries. Next I will discuss the findings in the light of these propositions and draw conclusions from the research presented in this paper. Based on the first three propositions developed in chapter two, the following requirements can be identified for a model used for analyzing the mobile data services industry: the model should be able to manage the complexity and adaptive nature of mobile data services industry; the model needs to have a broader perspective than just an individual firm; and the model should be able to handle the dynamic nature of the mobile data services industry. I argue that the Dynamic Ecosystem Model described in this paper meets all three requirements. Albeit the model builds heavily on the concept of business ecosystems /19/ and the model of Double Helix /7/, I believe that the model presented in this paper adds value to the research of the turbulent and unpredictable world of mobile data services. The remaining five propositions developed in this paper deal with the substance of mobile data services research. It was proposed that in mobile data industry firm and industry boundaries are not fixed. Our analysis of the Japanese and European mobile data services business supports this proposition: in Japan, the three mobile data services ecosystems have grown steadily to include new firms, industries and geographical markets. High risks and "high clockspeed of change" of the industry have forced the ecosystem members to find more flexible ways of collaborating. For instance NTT DoCoMo has used a wide variety of integration and collaboration strategies while building their non-voice mobile services business. At the same time in Europe the industry is just taking the first steps towards mobile data services. However, the first trials in integrating mobile operators and content providers have turned out to be mistakes. Europe will have to find new ways to collaborate as the industry structure evolves over time. Another proposition argued that in mobile data services industry, the pioneering firms might be forced to undertake several stages of value creating activity in order create credibility for 21 (21)
July 3, 2003 the new industry. The early days of NTT DoCoMo's i-mode service are a living proof of this. As Conway /3/ argued in the 3GSM World conference, the lack of this kind of operator guidance in Europe was one of the reasons why WAP services turned out to be such a disaster. The next proposition indicated that as a complex product requiring substantial guidance and servicing, mobile data services providers might need to integrate vertically downstream. Once again, the success of the integrated product architecture and the ecosystem-driven industry structure clearly demonstrate the benefits of an integrated model. My own experiences of using i-mode services in Japan vs. using MMS or WAP services in Finland support this view: the integrated model offers superior user experience. However, this proposition may also be misleading; the question is not necessarily about whether or not mobile data services providers are vertically integrated or not. What is more critical is that every player in the ecosystem takes responsibility of the total user experience, regardless whether they are part of the same company or members of an ecosystem. The next proposition claimed that when an industry is facing a discontinuous change, as is the case in mobile data services industry, the stakeholders are better of being vertically integrated into the major components that drive the discontinuity. Once again, based on the analysis presented in this paper, even this proposition can be accepted. However, it is important to keep in mind that being vertically integrated does not necessarily refer to doing everything within the focal company - it means that the mobile data services ecosystem as a whole can offer a total solution by relying on each other and develop the services further together referring to what Moore /19/ called "co-evolution". The last proposition stated that the trend towards modularized architecture in telecommunications industry reduces the need for vertical integration also for mobile data services. Albeit this way of thinking may be valid in the computer industry, it has turned out to be extremely dangerous when applied to mobile data services industry. The European way of bringing WAP services to the market represented this modularized architecture view of mobile services. Unfortunately mobile data services are still not standardized enough (whether the question was about handsets, networks, or services) to make this kind of solution feasible. The Japanese and European mobile data services industry structures are practically mirror images of each other: the Japanese operator driven, ecosystem-based industry structure is the only way of doing mobile business in Japan, whereas in Europe the dominant design of industry structure is a horizontal, market-driven one. The same applies also to the product 22 (22)
July 3, 2003 architecture: in Japan product architecture is highly integrated, with operators maintaining tight control over almost all elements of the service. In Europe, the product architecture is open and modular; the industry believes in a market-driven model where the best results are achieved by defining open standards and letting the markets do the rest. As for the future trends, it seems that both markets are in the process of leaving the current status quo, i.e. Japanese mobile industry is being attacked by forces pushing it toward the market-driven/modular structure. There are several reasons for the pressure: Vodafone taking over J-Phone in Japan has brought the winds of change also to Japanese markets; the deployment of 3G networks in Japan will open up the market for global competition (at least in theory, time will tell how "open" the Japanese network will be for international players); and operators will have problems maintaining the high level of subsidy for handsets. However, the change in the Japanese industry structure will be slower than what we are witnessing in Europe. The leading European mobile operators are determined to develop the industry structure towards a more vertical one, in order to gain better control of their business. At the same time the product architecture is becoming more integrated, as the modular approach turned out to be too complicated for mobile data services - as the WAP disaster clearly demonstrated. There will be a fierce battle over the control of the European mobile business ecosystem.
7 CONCLUSION This paper analyzed the differences between the Japanese and European mobile data services industries. The Japanese and the European mobile industries are clearly living a totally different phase of evolution: Japan is an excellent example of the ecosystem-based, vertical and integrated model, whereas Europe is currently in the market-driven, horizontal and modular mode. However, there is clear evidence that both systems are starting the move towards the opposite structure. This finding is in line with Fine's /7/ proposition that neither of these basic structures is permanent nor even long-lived. In this paper I have introduced a new analytical framework called Dynamic Ecosystem Model (DEM). The model is based on the business ecosystem concept /19/ and the Double Helix model /7/. I believe that new dimensions added to the Double Helix model - by replacing the vertical integration with the concept of business ecosystems, and by enhancing the horizontal industry structure with the concept of market - have improved the feasibility of the model 23 (23)
July 3, 2003 within the context of mobile data services. This paper is taking a very challenging approach: to carry out a "macro-level" analysis of a fast moving industry in two very different markets is not a simple exercise. However, thanks to the innovative conceptual framework, the Dynamic Ecosystem Model, I hope I have managed to shed some light on this important issue. The message of this paper is that mobile operators and service providers should identify in what kind of markets or ecosystems they operate. The research shows that in an integrated ecosystem-based industry it is not enough that your own module is working according to the specifications - your company must also bring value to the whole ecosystem. This should have implications on the product and service development strategies. There are naturally limitations in this paper. The aggregated view of the European market represents a dangerous generalization of very different types of markets and business models. However, due to limited space available it was not possible to go into more detailed level of analysis regarding the various market areas in Europe. Another limitation is that this paper does not take the regulatory issues into account. But as there is extensive literature available dealing with the regulatory issues in telecommunications industry, I believe that this limitation can be accepted. Finally, the Japanese culture has idiosyncrasies that would have to be considered in order to truly understand why the Japanese mobile data services ecosystem has developed the way it has. However, it would be impossible to "model" all these historical and cultural factors - one has to draw the line somewhere. For future research, this paper brought out several interesting research issues. First of all, as the mobile data services business is becoming increasingly global, it would be interesting to see how two totally different industry and product structures can co-exist - especially when the importance of geographical markets is diminishing as the result of the new open and global standards. It would also be interesting to analyze more in detail individual companies in the two markets in order to gain a better understanding of what kind of strategic decisions they have made - or will be making - as their current business environment changes. The Dynamic Ecosystem Model would turn out to be useful if it could help us to identify clear "strategic patterns" emerging during the different stages of evolution. From mobile data services ecosystem point of view it would be interesting to analyze how the role of the leading companies in the Japanese mobile ecosystems will evolve as the ecosystems mature: can these ecosystems survive, if the leading company is pushed aside? Will this be the "ultimate test" for the concept ecosystem? The final question for future research would be the following: has Europe made a fatal mistake by trying to implement a market-driven, horizontal industry structure and modular product architecture in the context of mobile data services? Are mobile 24 (24)
July 3, 2003 data services simply too complicated to be coordinated by "the market" - leaving the end-user alone with a complicated mixture of hardware, software and services? Time will tell if Europe can get their act together, but currently it seems that the Japanese mobile data services ecosystem can offer a market-driven integration without the inefficiencies of traditional, firm-level vertical integration. But what is more important is that the ecosystem-based industry structure and integrated product architecture can offer more user-friendly mobile data services. And in the end of the day, this is what makes the difference between success and failure in any service business.
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