ECON 314- Presentation

ECON 314- Presentation

Market in Mobile Network

Presentation Outline1. Background of Mobile Market in Hong Kong

2. After market services- Positive Network Effect

3. Discounted prices of handsets for subscribers

Different monthly charges and plans

4. Free value-added services Mobile Number Portability

5. 3G service

Background

•Keen competition among network providers after the implementation of Mobile Number Portability

•The monthly charge drops sharply

•Hong Kong's Position in the World of Telecommunications

Mobile Phone Penetration Rate**- 2nd Highest in Asia Pacific

Source: ITU Digital Access Index 2002 (Published in November 2003)

Telecommunication Indicators in Hong Kong

for the fiscal year ending 31 March 2005

Mobile Services

Cellular mobile telephone subscribers

8.214 Million

Digital cellular subscribers

8.214 Million

Percentage of population (%)

118.8%

The Mobile Market

• 3G operators first launched its services in Hong Kong in 2004

• Competition in the 2G mobile market continues to be intense

• Main mobile network providers in HK:

Sunday, PCCW, Smartone, People, One2Free,…

Various Services

• Songs downloading $5/song

• Banking services$8/month

• Online betting services$8/month

• International roaming services $55/month

Why so many services?

Why so cheap?

Network Effect

The value of a network depends on the no. of people connected to it

Increase the no. of users

Increase the value of the network

Network Effect

To attract more users

Outcome: 1. more and more services 2. lower price

provide more services

more services attract more users

Positive Feedback the strong get stronger

the weak get weaker

one single firm dominates the market

But why still so many network providers?

Collective Switching Cost

• Better off if shifting to the best network

• Due to intra network service, users stay in the network which his friends use

• No one is willing to lead the move

stay in the same network

Buying Cell Phone

• Can buy from everywhere– Specialty shop (Noki

a, Samsung, Motorla)– Large supply chain (Boardwa

y, Fortress, Wilson……)– Small retailer– Network provider

Where to buy?

• Specialty shop– Better confidence and better after sales

services

• Large supply chain – More gift

• Small retailer– Cheaper

• Network provider – Cheapest when sign contract with them

Example

• Nokia 6280– Specialty shop : $ 2780– Large supply chain :$ 2480– Small retailer : $ 2280– Network provider : $ 980 - $2480

How can network provider charge such a low price?

• Sign contract

• The longer contract, the lower price

Example (Con’t)

Number of month Monthly fee

Cell phone price

12 $128 $2480

18 $168 $1680

24 $188 $980

How service provider get profit by selling in low price

• Fixed Cost– The operation system, network etc.

• Variable Cost is relatively low– i.e, with the increase of customer use the

ir services, the total cost won’t increase much

How service provider get profit by selling in low price (Con’t)

• Attract customer by selling cell phone in low price

• Not sure whether they will incur loss when selling cell phone

• But we are sure if people buy cell phone in such low price, they need to sign contact to use their services for a period of time.

Why people choose to sign contract?

• After having a cell phone, they need an operator anyway.

• Once the gain in price reduction is larger than the charge in monthly fee, they will sign the contract.

Different Monthly Plan

Monthly charge $50 $80 $108 $138

Minutes 300 1000 2000 3000

Charge for extra minute

$1.1 $1.0 $0.9 $0.8

• For example, in the $50 plan, it cost 1 dollar to have 6 minute, but if you exceed 300 minute, it cost you $1.1 per minute, so people will tend to choose $80 plan if they use around 300 minute in order to avoid high extra charge.

Value-added Services

• Text-messaging

SMS Statistics for Special Dates (unit in thousands)

New Year Day

Chinese New Year Day

Valentine’s Day

Christmas Day

Year Sent Received Sent Received Sent Received Sent Received

2005 --- --- --- --- --- --- 8,716 11,238

2006 9,936 12,163 10,778 12,904 8,041 10,979 --- ---

Value-added Services

• Free Value-added Services:– Intra-operator SMS– Call forwarding– Caller number display– Call waiting– Voice mail– Conference call– Missed call alerts

Example

• SmarTone-Vodafone

– Monthly Plan VS. Stored-Value SIM Card

Monthly Plan

Monthly Fee Basic + Intra mins Free Service

$50 550-Intra SMS -Full Value- added services

Stored-Value SIM Card

– Call minutes ($0.2/min) 550*$0.2– Caller Number Display Free– Call waiting Free– Call Forwarding ($15/month) $15– Voice Mail ($15/month) $15– SMS ($0.2/intra sms) 10*$0.2

$142

Implications

• Bundling – Different services are bundled in a tariff pl

an

• Customers are locked-in– Free intra-operator sms– Discounted intra-operator minutes

Mobile Number Portability

• Mobile Number Portability (MNP) – enables customers to retain their mobile t

elephone numbers when changing from one mobile network operator to another mobile network operator

– Implemented from 1 March, 1999

Month Number of Successful Portings

Jan 2006 103,965

Feb 2006 109,677

Mar 2006 111,854

Apr 2006 105,539

May 2006 119,658

Jun 2006 122,521

Jul 2006 114,298

Aug 2006 125,627

Sep 2006 128,893

Benefits

• avoid the costs and inconvenience associated with a number change – cost savings from not having to change m

obile number– cost savings from switching to more effici

ent operators

Benefits

• keen competition among operators– improvements in efficiency – price reductions result from increased co

mpetition

• avoid repetition and associated costs– savings as a result of there being fewer n

umber changes

Future trend: 3G

Evolution start: since 1999 in Japan

Now: 60 3G networks in 25 countries

Reason for change: limited capacity of the existing 2G networks

What is 3G?

1st generation (1980s):

• Analogue network

2nd generation (1990s):

• Digital network

• Wireless telephone technology

• Speed: 9.6 kilobits per second

What is 3G?

3rd generation: • wireless mobile technology with data

and voice transmission capacities• high speed mobile services ( Video

calling, messaging, e-mail, games, news and information services)

• Speed: Two megabits per second• UMTS (Universal Mobile

Telecommunications Services)

Strategy adopted

Similar to the “Nintendo and Sega Case”

3G network providers:

CSL, Hutchison, SmarTone, SUNDAY

Others: “Wait-and-see” strategy

Challenges for network provider

2G network: • Huge initial capital invested• Start from 1990s• Budget not yet recover

High entry fee:• 3G service licenses• New network required

Challenges for network provider

• Lack of 2G mobile user buy-in for 3G wireless service

• Lack of coverage

• High prices of 3G mobile services

• mobile phone handsets currently available failed to excite public imagination

Cost Minimization

Government:

Flexibility in license payment Fixed license payment for the first 5 years

Suggestion from Industry:

Separating service provision from network operation

Mobile Virtual Network Operator (MVNO)

Thank You!

Q & A