UMTS Market Entry in Russia

CONTENT

Abbreviations / Glossary

Figures and tables

1. Introduction
1.1. Subject and objectives of the thesis
1.2. Delimitation of the topic
1.3. Methodology

2. Theoretical frame: Strategic management
2.1. Kurt Aeberhard: market system analysis
2.2. Michael Porter: the value system and strategic analysis of vertical integration

3. The mobile industry
3.1. Worldwide market trends
3.2. Evolution from mobile communications to mobile commerce
3.2.1. M-commerce - the new service possibilities
3.2.2. Changes in the market system
3.2.2.1. System analysis of the European mobile communications market
3.2.2.2. System analysis of the European mobile commerce market
3.2.2.2.1. Market players of the mobile commerce market
3.2.2.2.2. Environmental factors
3.2.3. The value system of the mobile commerce industry

4. The Russian mobile industry
4.1. Current development of the Russian mobile communications market
4.2. System analysis of the Russian mobile commerce market
4.2.1. Possible players of the mobile commerce market
4.2.2. Environmental factors
4.2.3. Market potential for mobile commerce: end user requirements

5. Strategic options for Russian mobile network operators

6. Conclusion

7. Bibliography

8. Annex

ABBREVIATIONS / GLOSSARY

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FIGURES AND TABLES

FIGURES

1/1 The structure of this thesis

2/1 The market as system

2/2 The value system

3/1 Worldwide subscribers – fixed, mobile and internet

3/2 European average ARPU`s for mobile voice and mobile data

3/3 Mobile commerce services

3/4 System analysis of the European mobile communications market

3/5 System analysis of the mobile commerce market

3/6 Traditional and lifestyle segmentation

3/7 Worldwide internet e-commerce revenues and users 1995-2003

3/8 The value system of the mobile commerce industry

4/1 Russian cellular subscribers base

4/2 The market share of GSM

4/3 Subscriber split by region

4/4 Market share of the major mobile communications companies

4/5 Mobile penetration forecast in Moscow/Russia

4/6 Development of the ARPU of MTS and Vimpelcom in 2000

4/7 System analysis of the Russian mobile commerce market

4/8 Active adult internet users in Russia

4/9 Willingness to use the new services

4/10 Average willingness to pay for the new services

4/11 Potential monthly spending

4/12 Acceptance of payment via mobile phone

4/13 Acceptance of advertising

TABLES

5/1 Strengths and weaknesses of mobile portal players

1. INTRODUCTION

1.1. SUBJECT AND OBJECTIVES OF THE THESIS

The mobile communications industry is entering a new era. Here, not mobile telephony, but mobile data transmission is increasingly playing a leading role. A growing number of people use their mobile phone to send short messages or to receive information when they are on the move. The three markets telecommunication, information technology and multimedia are converging and paving the way for the information society. Mobile internet access is not only a vision, but is already in its first stages. The key word of this new era is “m-commerce”, the possibility to have communication, information, entertainment and transactions while mobile^[1]. The key enabler to bring all these services into the mobile environment is UMTS, the Universal Mobile Telecommunications System. It is the global telecommunication system of the third generation enabling data transmission of up to 2 Megabit per second.

This master’s thesis was written in co-operation with Siemens AG ICM N V118 sales Russian Federation. As vendor for infrastructure and applications for mobile communications as well as services and trainings for mobile network operators, Siemens has been active in Russia for several years. Due to its high growth potential the Russian mobile communications market is rather attractive for infrastructure vendors and, therefore, increasingly competitive.

In the mobile communications industry the success of an infrastructure vendor is highly dependent on the success of its customer, the mobile network operator who acts as a reference for follow-up projects of the infrastructure vendor. To support the success of the customer, infrastructure vendors have moved up the value chain and provide their operators with support in business fields such as network building, network operation as well as in strategy and marketing issues^[2].

To ensure Siemens’ long-term success in Russia it is necessary to prepare its Russian customers timely for the changes that will happen with the evolution towards the 3rd generation of mobile communications and show them their revenue possibilities.

The objective of this master’s thesis is to understand the changes which will happen in the mobile industry as a result of the market entry of UMTS and to develop a strategy for mobile network operators for the future mobile commerce market in Russia.

First of all, the theoretical frame is introduced in chapter 2. To analyse the current and the future mobile industry and the strategic options for mobile network operators I have chosen two models from Strategic management: the Market System Analysis of Kurt Aeberhard and the Value System and Strategic Analysis of Vertical Integration of Michael Porter.

Chapter 3 describes the mobile industry and its development from mobile communications to mobile commerce in general. One objective of this chapter is to show the general changes which will happen in the mobile industry and to obtain an overview of the changing market with its players and influencing factors. Therefore, in 3.2.2. the market system analysis of Kurt Aeberhard described in chapter 2.1. will be applied to today’s mobile communications market and then to a future mobile commerce market.

The other objective of this chapter is to position the mobile network operators within the value system of the mobile commerce industry and discover attractive opportunities for integration within the vertical chain. Therefore, in 3.2.3. I will apply Porter’s model of the value system described in chapter 2.2.

Chapter 4 shows the mobile industry and the evolution from mobile communications to mobile commerce in Russia. In order to obtain an overview of the Russian mobile commerce market with its possible players and influencing factors the market system analysis of Kurt Aeberhard described in chapter 2.1. will be applied to the Russian reality. Chapter 4.2.3. provides an overview of the market potential for mobile commerce in Russia by describing the results of an end user survey conducted in November 2000 in Moscow.

The aim of chapter 5 is to find the strategically appropriate degree of vertical integration for Russian mobile network operators. For this purpose I will refer to chapter 3.2.3, where I have positioned the mobile network operators within the value system of the mobile commerce industry and identified the mobile portal market as an attractive industry for integration within the vertical chain. Taking the specific characteristics of the Russian mobile industry shown in chapter 4 into account, I will conduct a strategic analysis of vertical integration into the mobile portal business by discussing the strategic benefits and costs. Hereby, I will refer to Michael Porter’s Strategic Analysis of Vertical Integration described in chapter 2.2.

Chapter 6 summarises the basic points of the strategy for Russian mobile network operators.

Figure 1/1 gives an overview of the structure of this thesis.

Figure 1/1: the Structure of this thesis

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1.2. DELIMITATION OF THE TOPIC

Mobile commerce can be described in different ways and from different points of view. To do this, various terms exist which are used interchangeably in various contexts. Among them are Mobile Data, Mobile Commerce, Mobile Internet, 3G, UMTS, 3rd generation. Mobile data is used for everything which is not mobile voice and has a rather technical focus. Mobile internet focuses on the mobile internet access. UMTS, the Universal Mobile Telecommunications System, is the network technology to bring the services into the mobile environment. It is also referred to as 3G or 3rd generation of mobile communications and is mainly used by network equipment vendors and mobile network operators.

The wording of the topic of this thesis “UMTS market entry in Russia” shows that I have written it in co-operation with Siemens AG, a network equipment vendor, and have focused on mobile network operators.

But to describe the major changes in the mobile industry I have decided for the term mobile commerce (m-commerce) because it stands for services and content and includes other terms such as mobile internet, mobile data or 3G.

Mobile commerce is defined by Lehman Brothers as the “use of mobile hand-held devices to communicate, inform, transact and entertain using text and data via connection to public and private networks.”^[3]

1.3. METHODOLOGY

This master’s thesis was created according to the following steps:

1. Definition of the subject and objectives of the thesis
2. Selection of appropriate theoretical models
3. Data capture (literature, end user survey)
4. Analysis of data
5. Description of results and solutions.

1. Definition of the subject and objectives of the thesis:

In the first step, together with Siemens ICM N V118, the following objectives of the thesis were defined: to show the changes which will happen in the mobile industry as a result of the market entry of UMTS and to develop a strategy for mobile network operators for the future mobile commerce market in Russia. Siemens wanted to focus on mobile network operators in order to prepare its Russian customers for mobile commerce and show them their revenue possibilities.

2. Selection of appropriate theoretical models:

In the second step two basic models for strategic analysis were selected: the Market System Analysis of Kurt Aeberhard and the Value System and Strategic Analysis of Vertical Integration of Michael Porter.

With the Market System Analysis of Kurt Aeberhard one can gain a first overview of the industry with its market players and influencing factors.

The Value System Model of Michael Porter is useful to position a firm within the value system of an industry and discover attractive opportunities for integration within the vertical chain. This is followed by a Strategic Analysis of Vertical Integration to find the optimal vertical scope for the firm.

3. Data capture (literature, end user survey):

The next step was the capture of relevant data.

Secondary data:

Since mobile commerce is just emerging and will be reality only in a couple of years, there are no official statistical data about it. And the fast development of mobile communications, e-commerce and m-commerce makes it very hard to find updated literature on these industries. So, the main sources of information were specialist journals and publications of market research institutes, financial analysts, consulting firms and telecommunication associations. Furthermore, Siemens has been addressing this issue for a long time and developing internal publications for marketing and technical purposes.

The special information about the Russian market comes from publications of consulting firms, partly published in the World Wide Web, and from Siemens’ internal market evaluations.

Primary data was collected in two ways:

1. By informal talks with my colleagues in the sales department for Russia who shared their insider knowledge with me while I was working on this thesis;

2. By an end user survey conducted in November 2000 in Moscow to evaluate the market potential for m-commerce in Russia. It was done by GfK Market Research Russia which carried out personal interviews with 303 respondents on the street. 153 respondents were private mobile phone users, and 150 were corporate mobile phone users.

The survey was based on a questionnaire developed by Siemens ICM Marketing in October 2000 to assess the Polish market. With the help of end user focus groups Siemens ICM Marketing selected 10 representative services for both, the business and the residential user segment. Due to financial and time constraints it was not possible to develop a special questionnaire based on focus groups for Russia. Therefore, with the support of GfK Russia the questionnaire for Poland was adapted to the Russian conditions.

Since a detailed analysis of the survey would go far beyond the scope of this thesis, here are described only the most important results. Details for Siemens’ internal purposes will be separately addressed.

4. Analysis of data:

The analysis of data was problematic, as different sources provided sometimes contradictory statements depending on their own interests, e.g. telecommunication associations. Furthermore, due to the high complexity of this issue it is nowhere addressed exhaustively. Therefore, it took a very long time to create a consistent picture of the industry. This picture is not entitled to be complete as it is based on assumptions on future developments and shows one out of many possible points of view.

2. THEORETICAL FRAME: STRATEGIC MANAGEMENT

To analyse the current and the future mobile industry and the strategic options for mobile network operators I have chosen two models: the Market System Analysis of Kurt Aeberhard and the Value System and Strategic Analysis of Vertical Integration of Michael Porter.

With the Market System Analysis of Kurt Aeberhard one can obtain a first overview of the industry with its market players and influencing factors. The Value System Model of Michael Porter is useful to position a firm within the value system of an industry in order to conduct a Strategic Analysis of Vertical Integration and find the optimal vertical scope for the firm. In this chapter I introduce these models in theory and, later on, apply them to the concrete market situation.

2.1. KURT AEBERHARD: MARKET SYSTEM ANALYSIS

The market system^[4] analysis is a method to gain a first overview of a respective market. Aeberhard defines a system as a totality of elements with specific characteristics. Between these elements certain interrelationships either exist or can be established.

In the market system analysis the respective market constitutes the system. The elements of this system are, consequently, the companies, organisations or persons that play a certain role in the exchange process of this market. The relationships of particular interest between these elements are activities to exchange goods, services, money or information.

A market system analysis is conducted with the following steps:

In a first step the market is defined. This step includes a delimitation of the segment scope of the market, that is the product varieties or other characteristics of the product range and a delimitation of the geographic scope, that is the geographic area of the market.

In a second step the structure of the defined market is recorded and analysed. This is done by identifying all companies, organisations or persons that are active on the market and all flows of information, goods and money which exist between these elements.

Companies, organisations and persons active in the market are normally the respective firm, competitors, retailers, product users, internal influencing people and external influencing parties.

External influencing parties are persons and organisations which neither refer to retailers nor to product users nor have a contractual relationship with the respective firm. As external consultants they, nevertheless, can significantly impact public opinion and, consequently, purchase decisions.

Internal influencing persons have the same impact on purchase decisions as external influencing parties, but belong to the same organisation, company or family as the buyer.

Environmental factors can be economic, social/cultural, technological or political/legislative ones. They can be global or specific to a certain geographic area.

The example of a market structure is shown in figure 2/1.

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Figure 2/1: The market as system

Source: Aeberhard

The market system analysis is a means to understand the complicated system of interrelationships between companies, organisations and persons participating in the exchange process of a market. It helps to obtain an overview of a market, its players and the interrelationships and is, therefore, normally applied to a concrete market situation with concrete market players.

In this thesis, I will apply the model to an abstract or ideal market situation, since the mobile commerce market does not yet exist. In chapter 3.2.2., I will conduct a market system analysis of an abstract mobile communications market and, afterwards, of an abstract mobile commerce market. So, the aim of chapter 3.2.2. is to show the general structure of a typical European mobile communications market and to understand the changes which will happen to this market as a result of its development into mobile commerce. I have chosen the European mobile communications market, since it is the most developed and is leading in the establishment of UMTS and mobile commerce.

In chapter 4, I will apply the model of the mobile commerce market to the specific Russian conditions with concrete market players and end user requirements. But again, this can be only an ideal market situation, since the mobile commerce market does not yet exist in Russia.

2.2. MICHAEL PORTER: THE VALUE SYSTEM AND STRATEGIC ANALYSIS OF VERTICAL INTEGRATION

The value system^[5]

A company is embedded in a larger stream of activities, the “value system”. “Gaining and sustaining competitive advantage depends on understanding not only a firm’s value chain but how the firm fits in the overall value system”^[6].

Figure 2/2 shows a value system. There are “upstream value chains” of suppliers and “downstream value chains” of channels. Suppliers create and deliver the inputs used in the company’s value chain and, thus, have a great impact on the firm’s performance. On their way to the buyer, products often pass through “channel value chains”. Performing additional activities the channels may affect the buyer and, therefore, the firm’s performance as well.

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Figure 2/2: The value system

Source: Porter

The value system is often used by consulting companies to position a firm within the value system of an industry in order to find the optimal vertical scope, that is the strategically appropriate degree of vertical integration of the firm^[7].

I will apply Porter’s model of the value system to the mobile commerce market in chapter 3.2.3.. The aim is to position the mobile network operators within the value system of the mobile commerce industry and discover attractive opportunities for integration within the vertical chain.

Having shown the specific characteristics of the Russian mobile industry in chapter 4, I will conduct a strategic analysis of vertical integration into the mobile portal business by discussing the strategic benefits and costs in chapter 5. The aim is to find the strategically appropriate degree of vertical integration for Russian mobile network operators.

The strategic analysis of vertical integration^[8]

According to Michael Porter, finding the strategically appropriate degree of vertical integration requires a strategic analysis, that is balancing the economic and administrative benefits and costs of vertical integration. “This balance, as well as the particular costs and benefits themselves, will differ greatly depending on the particular industry and on the particular strategic situation of the firm”^[9].

Strategic benefits of vertical integration may be^[10]:

- Achievement of economies, such as economies of combined operations, economies of internal control and co-ordination, economies of information, economies of avoiding the market and economies of stable relationships;
- Tap into technology;
- Assure supply and/or demand;
- Offset bargaining power and input cost distortions;
- Enhanced ability to differentiate;
- Elevate entry and mobility barriers;
- Enter a higher return business;
- Defend against foreclosure.
Strategic costs of vertical integration may be^[11]:
- Cost of overcoming mobility barriers;
- Increased operating leverage;
- Reduced flexibility to change partners;
- Higher overall exit barriers;
- Capital investment requirements;
- Foreclosure of access to supplier or consumer research and/or know-how;
- Maintaining balance;
- Dulled incentives;
- Differing managerial requirements.

When evaluating the strategic costs and benefits of vertical integration, it is important to take into account not only the current environment but also probable changes in the industry structure in the future.

To exploit the benefits of a broader vertical scope without incurring all the costs, a firm has also the possibility of “quasi-integration”. “Quasi-integration is the establishment of a relationship between vertically related businesses that is somewhere in between long-term contracts and full ownership”^[12]. Strategic partnerships of this kind are for example exclusive dealing agreements or minority equity investment.

After showing the specific characteristics of the Russian mobile industry in chapter 4, I will conduct a strategic analysis of vertical integration into the mobile portal business by discussing the strategic benefits and costs in chapter 5. The aim is to find the strategically appropriate degree of vertical integration for Russian mobile network operators.

3. THE MOBILE INDUSTRY

This chapter describes the field of activity of mobile network operators, the mobile industry, and its development from mobile communications to mobile commerce. Its purpose is to show the changes which will happen in the mobile industry as a result of the introduction of UMTS.

Chapter 3.1. deals with the current development of the mobile communications industry and world wide market trends.

Chapter 3.2. describes the evolution from mobile communications to mobile commerce and analyses the changes which will happen as a result of this evolution. This analysis is conducted applying the models introduced in chapter 2.

3.1. WORLDWIDE MARKET TRENDS

“Growth in wireless communications continues to exceed forecasts”^[13]. The number of wireless subscriptions may soon outstrip fixed lines. This is already the case in Finland and is expected to happen worldwide in 2002^[14].

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Figure 3/1: Worldwide subscribers – fixed, mobile and internet

Source: UMTS forum

Europe plays a leading role in this development, partly because of the consistency of its telecommunications standard GSM (Global system for mobile communication) which allows roaming from London to Moscow without losing service. Especially in Eastern Europe and Russia, where fixed line penetration is much lower, the development of modern communications systems is referred to as an important part of long-term economic growth. Here, it is cheaper to build up infrastructure for wireless services than to repair and extend the often obsolete fixed networks, which makes mobile communications even more attractive.

In spite of the massive growth of wireless penetration there are a number of tendencies which may be a threat to wireless operators’ revenues and profitability^[15]:

The increasingly competitive environment leads to high churn rates and low customer loyalty, whereas customer acquisition costs remain rather high, e.g. free mobile phones for a 2-year-contract.

In this environment the average revenue per customer is declining, as prices are decreasing and, with mass market penetration, subscriber demographics are shifting towards less wealthy customers. In addition, there is a growing number of customers within the prepaid segment with low usage and low revenues.

On the other hand, the high uptake and usage of new services like SMS and WAP is an indicator for an increasing demand for mobile data services. Figure 3/2 shows the European average ARPU’s for mobile voice and mobile data. Concerning the demand for data transmission, in the mobile environment the same development is expected as in fixed networks, where the amount of data has long since outstripped the demand for voice.

Figure 3/2: European average ARPU’s for mobile voice and mobile data

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Source: Siemens

3.2. EVOLUTION FROM MOBILE COMMUNICATIONS TO MOBILE COMMERCE

The mobile communications industry is facing a revolution: the evolution from the 2nd generation to the 3rd generation of mobile communications, the evolution from mobile communications to mobile commerce. Driven by convergence of communications and digital technologies, mobile commerce is expected to derive much economic activity over the next 10 years.

In this chapter, I will describe the changes which will happen in the course of this revolution and its possible results.

I will begin in chapter 3.2.1 with a description of the new service possibilities of the mobile commerce industry from the point of view of the end user. In chapter 3.2.2. I will apply the market system analysis of Kurt Aeberhard described in chapter 2.1. to today’s mobile communications market (3.2.2.1.) and then to a future mobile commerce market (3.2.2.2.) to gain an overview of the changing market with its players and influencing factors. In chapter 3.2.3. I will apply Porter’s model of the value system described in chapter 2.2. to this mobile commerce market. The aim is to position the mobile network operators within the value system of the mobile commerce industry and discover attractive opportunities for integration within the vertical chain.

3.2.1. M-COMMERCE - THE NEW SERVICE POSSIBILITIES

M-COMMERCE is defined by Lehman Brothers as the “use of mobile hand-held devices to communicate, inform, transact and entertain using text and data via connection to public and private networks.”^[16]

There are several approaches to define distinct categories of services which is a rather different task in view of the variety of the service possibilities. I chose the approach of Lehman Brothers because it shows the services from the customer’s point of view and not the technical features which stand behind them.

A selection of the most important services according to the UMTS Forum is attached in Annex 1.

Lehman Brothers distinguish four main categories of services: communication, information, entertainment and transactions.

- Communication services include short messaging, unified messaging, e-mail, chat rooms and video conferencing. It may be realised as one-to-one, one-to-many or many-to-many model.
- The category “information” encompasses information services from content providers such as media companies (e.g. Reuters, Financial Times), from the world wide web, from corporate intranets, B2B portals and web pages.
- Transaction services include for example booking and reservation, mobile shopping or banking.
- Under entertainment Lehman Brothers include audio services, video and games.

Due to the fact that the boundaries between these categories are often vague, this is more a general framework, rather than a rigid segmentation.

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Figure 3/3: Mobile commerce services

Source: Lehman Brothers

M-commerce has some unique features in comparison with e-commerce which result from the mobile environment^[17]:

- Localisation

The network knows where the user is physically located. This is a fact which creates the possibility of location based services according to the “business is local” principle. Thus, content offerings will change with the location of the user and add significant value to the services.

- Personalisation

Mobile phones are associated with a person rather than a place and, thus, much more personal than a PC. This makes it possible to personalise the services to the needs of the user to a much larger extent than currently happens on the internet.

- Instant connectivity

With UMTS it will be possible to be always online.

3.2.2. CHANGES IN THE MARKET SYSTEM

In this chapter, I refer to the model of Kurt Aeberhard described in chapter 2.1.: the market system analysis. The market system analysis is a means to understand the complicated system of interrelationships between companies, organisations and persons participating in the exchange process of a market. It helps to gain an overview of a market, its players and interrelationships and is, therefore, normally applied to a concrete market situation with concrete market players.

I will apply the model to an abstract or ideal market situation, since the mobile commerce market does not yet exist. In 3.2.2.1. I will conduct a market system analysis of an abstract mobile communications market and, afterwards in chapter 3.2.2.2., of an abstract mobile commerce market. The aim is to show the general structure of today’s European mobile communications market and to understand the changes which will happen to this market as a result of its development into mobile commerce. I have chosen the European mobile communications market, since it is the most developed and is leading in the establishment of UMTS and mobile commerce.

[...]

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^[1] see Skiba/Johnson/Shalash/Harrison, Moving in Mobile Media Mode, 1999, p. 9

^[2] see Booz-Allen & Hamilton, Mobilfunk, 1995, p. 158

^[3] Skiba/Johnson/Shalash/Harrison, Moving in Mobile Media Mode, 1999, p.9

^[4] See Aeberhard, Strategische Analyse, 1996, p.p. 148-153

^[5] see Porter, Competitive Advantage, 1985, p.p. 33-61

^[6] Porter, Competitive Advantage, 1985, p.34

^[7] see Aeberhard, Strategische Analyse, 1996, p. 185

^[8] see Porter, Competitive Strategy, 1980, p.p. 300-323

^[9] Porter, Competitive Strategy, 1980, p. 301

^[10] see Porter, Competitive Strategy, 1980, p. 303

^[11] see Porter, Competitive Strategy, 1980, p. 309

^[12] Porter, Competitive Strategy, 1980, p. 321

^[13] Skiba/Johnson/Shalash/Harrison, Moving in Mobile Media Mode, 1999, p.14

^[14] see UMTS forum, The Future Mobile Market, 1999, p.9

^[15] see Siemens ICM CA Marketing, UMTS Workshop, 2000, p.1-5

^[16] Skiba/Johnson/Shalash/Harrison, Moving in Mobile Media Mode, 1999, p.p.8-9

^[17] see Skiba/Johnson/Shalash/Harrison, Moving in Mobile Media Mode, 1999, p. 9