1ASSIGNMENT -1: Business Models

Q1) How would you assess the attractiveness of the telecom industry in Japan at the time of launch of i-mode services? What would you conclude from the Industrial forces analysis?

The attractiveness of the wireless telecom industry at the time of the launch of the i-mode services can be gauged by analyzing the industry forces at that time. The important forces active at the time and their analysis is as shown below:

.Threat of Substitutes:

Considering fixed landline telephones as the major substitute.

Switching Cost: (all costs in yen) (from Exhibit 15)

Fixed Landline Price: 21,270Handset: 35,500 (avg cost)

As can be seen, the mobile costs are higher than the fixed landline costs in 1999, which means the buyers can willingly switch to fixed landlines in case they want to leave mobile handsets. Although the switching costs like time required for landline installation, service and effort are high, but these can be negated by the cheaper unit costs.

The relative price and performance of substitutes: (all costs in yen) (from Ex 15)

Fixed Landline monthly: 8198

Cost per call: per 3 minute: 10

Mobile handset bill monthly: 9,270

Cost per call: Per 3 minutes: 55

As can be seen, the price of using the substitute is relatively lower than the mobile handset; hence this factor also works in favor of the fixed landline market.

2As of 1999,Market Share of Landline: 60.38/ (60.38+38.25+7.12)*100 (exhibit 1)

=57.1%

Growth rate of Landline: 1.5%From the market share it can be gauged that the customers of the fixed landline were satisfied with the performance of the fixed landline and it was exhibiting slow and steady growth.

Hence the threat of the substitute: fixed landline was high but threat from other substitutes like Pager and internet communication wasn’t high at the moment.

Bargaining power of suppliers:

Since, the suppliers are government supplying spectrum and also because spectrum is a rare natural asset, bargaining power of supplier is high. Due to strong factors like lobbying by corporate and other government regulations, the bargaining power of supplier of spectrum, the government would always remain strong. The other suppliers, which are the manufacturing partners, also have high bargaining power as the carrier operators don’t have their own manufacturing operations and hence rely on these suppliers big time.

Bargaining power of buyers:

Many network providers (5 in number) give the buyers enough opportunity to switch between operators making their bargaining power high

The telecom business by the end of 1999, became a highly volume dependent business. Also, there was a huge decline in Average Revenue Per User (ARPU) of the customers which also meant the operators had to fight on volumes. This definitely made the bargaining power if buyers high.

Threat of new entrants:

High capital expenditures meant the entrants had to have deep pockets before entering the industry.

Deregulation of the industry was done at a fast pace which lead to a large number of foreign carriers, and competition increased many times. But as mentioned, the market was soon moving towards saturation due to maturity which could hence see lower new entrants in the future but for the time, the threat of new entrants could be considered high due to enormous growth opportunity.

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Intensity of rivalry:

The structure of competition – Docomo 50%, 13% DDi, IDO 8%, J Phone 14% Tuka 7%. Hence, implying higher rivalry since the competition structure is concentrated and not fragmented.

The structure of industry costs - Industries with high fixed costs encourage competitors to fill unused capacity by price cutting. Capex/Sales ratio is 25% implying a high fixed cost component which leads to higher competition intensity.

Degree of differentiation – Since the telecom services are standardized, the degree of differentiation is less thereby suggesting a higher rivalry intensity.

Switching costs - rivalry is increased where buyers have low switching costs - i.e. there is a low cost associated with the decision to buy a product from an alternative supplier

Exit barriers - here barriers to leaving an industry are high then competitors tend to exhibit greater rivalry.

Overall, analyzing the industry forces, one can easily see the wireless telecom industry is not attractive at the time of the launch of the i-mode services.

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Q2 (a) How did Docomo create distinct value at low cost?

Docomo created distinct value by the following strategic choices which they made:

Active partnering with handset manufacturers and information providers lead them to create a ‘win-win’ partnership network. They shared the technology and knowhow with partners to help them stay ahead of competition.

DoComo adopted c-HTML for its new service, which is compact version of HTML. Using it, websites could modify their PC based websites into a new version to be displayed on the new DoComo service.

For subscription only websites, DoComo collected fees as part of its monthly bill. It saved transaction cost and time to customer.

Deregulation has lead to entry of many equipment manufacturers. It resulted into high competition among them and low cost.

Unlike mobile services, charges were based on amount of data transmitted, rather than time of usage.

DoCoMo didn’t purchase content providers but accredited official websites and mobile phones to be used with new service. Buying content providers could have imposed more fixed cost on DoCoMo.

They had secondary sources of revenue like advertisements on on i-mode. They could therefore provide services to customers at subsidized rates. Further the advertisement business attracted addition content providers to the network.

They had an established distribution network which they used to deliver i-mode phones and services at small marginal costs.

All these choices lead Docomo to differentiate itself sufficiently from its competitors and lead to higher WTP of the customers hence creating value.

5Q2 (B) How did DoCoMo Combine the strength of Mobile Phone and PC Internet?DoCoMo combined the strength of mobiles (Portability) and PC Internet (Information on web) in I –Mode. DoCoMo collaborated with Sun Microsystems developing a new application that allowed Video games and financial services on I-mode. Partnership with Symbian, led to development of new operating system adaptable to both PC’s as well as mobile phones. Moreover, i-mode was launched at a time when most telecom operators were focusing on technology races and price competition over voice based wireless devices. Regular mobile telephony had reached a high level of sophistication, but it offered few data based services such as e-mail, news and games and transaction capabilities. The i-mode succeeded in bringing together the key features of both these industries and hence created unique utility.

Q2(C) How did the value curve of DoCoMo Differ from Mobile phone and Internet?

Value Curve for mobile phones and PC internet:

Value Mobile Phone PC InternetPrice Low HighYouth Focus High LowCustomized service High LowEase of use Low HighVoice call and video telephony High LowPenetration rate High LowAccess to internet (games, email, news etc)

Not available Available

Ease

of use

Youth Fo

cus

Customize

d servi

ce

Voice ca

ll and vi

deo te

lephony

Penetr

ation ra

tePric

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102030405060708090

100

MobilePC Internet

Fig: value curves

6Difference between i-mode docomo value curve and those above:The value curves of the general mobile phone and the PC internet are shown graphically above. BY combining the key advantages of the two industries of cell phone and PC internet, the Docomo, with its i-mode service, created a totally different value curve for itself.For the a small premium of 25% more than regular phones, the users could buy i-mode handsets. It gave the users access to i-mode netwrok through a monthly rental and acccess to subscription sites by extra fees. The value curve of the i-mode docomo handsets would the best features of both moblies and PC internet, although the price would be higher than the mobile phones due to extra fees. It has high ease of use, youth focus and customized service, making it the best value curve available at the time. The prices set for the content sites were benchmarked against weekly magazines most Japanese pick up, hence the customers could shift from magazines to the online content service, leading to no extra cost to them actually.

Q3)  How did DoCoMo make profits out of its i-Mode services?

We have explained this answer in two ways, first by explaining the business model of Docomo i-mode and second by the Blue Ocean Idea Index.

Blue Ocean Idea Index

BOI IndexUtilityPriceCost

Adoption

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Docomo I-Mode

NTT Docomo’s i-mode was launched in Japan at a time when most telecom operators were focused on voice based wireless devices. I-Mode was launched to offer the Internet on cell phones. The i-mode service brought together the key advantages of the cell phone industry and the PC internet industry. This created unique and superior buyer utility. The services offered by the i-mode were made available at a price which was accessible to the mass of buyers. The various fees/charges involved were in a zone where it reached the masses quickly. NTT Docomo also worked hard to obtain the capabilities needed to deliver the service within its cost target in order to turn a profit. By creating a good partnership network with its manufacturing partners, the company achieved its target costs. Also, collaborative arrangements with key foreign partners reduced developmental costs. Finally, a special team was created with young people and a new head was given mandate and autonomy and the team head held open discussions with the team members on how to create the new market for mobile

7data communications. All this created a favorable corporate environment for the adoption of i-mode.As explained above, the i-mode service passed all four criteria on the BOI index, hence it was able to capture market and generate huge revenues and profitsBusiness Model of Docomo i-mode

8.Docomo made several strategic choices to help it create and capture value to make profits out of i-mode project. The strategic choice lead to important consequences which lead to more tangible results and created a value loop leading to more profits. The important choice of accredition of official websites and phones to be used with the new service lead to high volumes of customers and which lead to more content which lead to more customers and this formed a virtuous circle. The choice of autonomous team made of young employees and appointment of a new dynamic head of the team lead to more innovation which lead to a better product, leading to an increase in the WTP of the customers. The choice of using widely adopted technologies lead to easy flow and conversion of data which lead to more easy partnering with content providers and hence lower costs to them. Partnerships with Sun and Simian lead to lower development costs and faster launch time leading to more reliability, eventually leading to more volumes and higher profits. Electronic concierge along with many other choices led to easy to use products, which lead to higher acceptability among the customers and hence higher volumes and higher profits.

All the choices and the consequences eventually lead to greater willingness to pay for the customers and hence higher revenues and profits.