Mobile Commerce

ERIC GIRIAT

(162-173)M-commerce.v4 6/26/00 2:36 PM Page 162

pward of 300 million people—more than own PCs—across the world subscribe to mobile telephones. If, as forecast, this figure passes

one billion by 2003, mobile telephones will be as common as television sets.

Such a penetration rate—combined with technology that provides for the fast transfer of data on mobile networks, standard protocols thatdeliver Internet-like services on smaller screens, and the very personalnature of mobile telephones—will drive a mobile-commerce revolution(see sidebar, “M-commerce: The next big thing,” on the next spread).Within three years, the annual value of goods and services transacted overmobile networks could reach $13 billion, or 7 percent of all e-commercetransactions.1

Wireless operators are well placed to benefit from this growth because theyalone own and operate the mobile networks that make m-commerce possible.But as available bandwidth proliferates and the coverage capabilities of net-works converge, the basic business of transporting data will become morecompetitive, and profit margins will fall. Hence operators are keen to seekvalue-creating opportunities beyond the simple transport of data.

U

E L E C T R O N I C C O M M E R C E 163

Mobile-telephone operators could compete on all levels of the mobile-commerce value chain—but they should think twice before they do.

Nick Barnett, Stephen Hodges, and Michael J. Wilshire

1Analysys (a European telecom consultancy) report, “Mobile e-commerce,” February 2000.

Nick Barnett and Stephen Hodges are consultants and Michael Wilshire is a principal in McKinsey’sLondon office. Copyright © 2000 McKinsey & Company. All rights reserved.

This article can be found on our Web site at www.mckinseyquarterly.com/electron/mcop00.asp.

An operator ’s manualM-commerce:


Four main forces underpin the mobile-commerce

revolution: third-generation technologies, the

Wireless Application Protocol (WAP) and iMode

platforms, handset penetration, and personalized

services.

1. Third-generation technologies

Unfortunately, the current (second) generation

of wireless networks and handsets supports

data rates of only 9.6 kilobits per second, far

below the 64-kilobit-per-second capacities

of landline copper wires. That situation will

improve this year, however, as GSM (Global

System for Mobile Communication), the most

common cellular standard, is extended by the

General Packet Radio System. GPRS can support

data rates of 112 kilobits per second, almost

twice the rate of a standard computer modem

and enough to support high-quality streamed

audio. True third-generation networks, based on

the UMTS (Universal Mobile Telephone System)

standard, will raise the rate to 2 megabits per

second—one-fifth of the bandwidth available on

the standard Ethernet in today’s offices (Exhibit A).

The high speed at which Internet data can be

downloaded is only one important characteristic

of the new networks. In current wireless net-

works, most data communication, apart from the

limited Short Message Service (SMS), requires

a circuit-switched connection: a user must con-

nect to a server to check e-mail, for example.

This limitation has two drawbacks. First, users

find themselves on-line even when they are not

sending data (while reading or composing e-mail,

for example), so they pay higher costs and net-

work capacity is wasted. In addition, since the

connection can be initiated only from the mobile

handset, asynchronous services, such as auto-

matic forwarding of e-mail, are not possible.

Like the wired Internet, GPRS networks use a

connectionless (packet-switched) communica-

tions mechanism. Data are split into chunks

called packets, to which an address uniquely

identifying the destination is appended. This

means that although a GPRS handset is, in

effect, permanently connected to the network,

164 THE McKINSEY QUARTERLY 2000 NUMBER 3

E X H I B I T A

Third-generation technologies: A battle for bandwidth

Thousands of bits per second

1Global System for Mobile Communication.2General Packet Radio System.3Universal Mobile Telephone System.

First generation:GSM1

Second generation:GPRS2

Third generation:UMTS3

0

20

1,000

2,000

1998 2002

Messaging SMS (Short Message Service)

2000

100

2004

Graphics,audio

10

Medium-qualityvideo

High-qualityvideo

Text

M-commerce: The next big thing


it uses network capacity only when packets are

actually being sent.

2. The WAP and iMode

Two of the leading platforms for delivering

Internet content to mobile telephones and other

wireless devices—the Wireless Application

Protocol and iMode—were designed to take

into account the constraints of wireless com-

munications: limited bandwidth and end-

system processing as well as a constrained

user interface.

Each platform defines a standard markup lan-

guage that permits an application’s user inter-

face to be specified independently of the end

device. The delivery of these services is inde-

pendent of the underlying networking tech-

nology, so applications can be used on different

networks, just as Internet applications can.

3. Handset penetration

The uptake of mobile telephones has been

nothing short of phenomenal, and the trend is

expected to continue (Exhibit B). Nokia predicts

that within three years people will use mobile

telephones to access the Internet more often

than they use personal computers.

4. Personalization

The wireless Internet has three main features that

permit mobile interactive services to be more per-

sonalized than traditional Internet applications are.

First, mobile telephones are carried by their owners

almost everywhere and kept switched on most of

the time (especially in Europe, where mobile users

aren’t charged for incoming calls). Consumers can

thus not only gain access to wireless services

wherever there is a network presence but also

keep tabs on time-critical information, such as

stock market reports or urgent messages.

Second, wireless-network operators—at least

those using the GSM standard—are uniquely

able to determine the identity of a user. Since

mobile telephones are not usually shared, and

a personal-identification number often protects

them, the telephone itself can be used as a

means of identification. Finally, operators can

detect a user’s exact location, enabling a whole

range of new applications.

165M - C O M M E R C E : A N O P E R AT O R ’ S M A N U A L

E X H I B I T B

Europe picks up the phone

1Includes Austria, Belgium, Finland, France, Germany, Italy, Norway, Spain, Sweden, and the United Kingdom.2Forecast.Source: Financial Times; Lehman Brothers; McKinsey analysis

Mobile phone penetration in Europe,1 percent

1993 20052199919981997199619951994

100

0

1020

30

40

50

60

7080

90

Compound annualgrowth rate = 36%


In theory, mobile operators could compete at all levels of the m-commercevalue chain, from the provision of basic technical services to the supply oflucrative, customer-facing content. The high stock market valuations of

Internet-related companies, theirpowerful financial muscle, and theabsence of strong competition atall levels in the new industry mighteven tempt them to try. The dangeris that they will spread their skillsand resources too thin. Moreover,

given the first-mover advantages associated with much Internet-relatedbusiness, such companies risk forfeiting long-term shareholder value unlessthey concentrate on areas in which they naturally hold a strong competitiveadvantage.2

Operators thus need to make difficult decisions about which parts of thevalue chain to compete in—and how—and which parts to avoid.

The m-commerce value chain

There are seven links in the m-commerce value chain.

At the bottom is transport: the maintenance and operation of the infrastruc-ture3 that provides for data communication between mobile users and appli-cation providers. The second link consists of basic enabling services, such as server hosting, data backup, and systems integration. Vendors wishing totarget wireless customers need these services to make products available viamobile telephones.

Transaction support is the third link of the value chain. Many wirelessservices will require some form of payment—usually from the user to theservice provider to pay for, say, books or CDs—but possibly also in theother direction, for refunds or customer reward schemes. Transaction sup-port provides the mechanisms for assisting those transactions, for security,and for billing users.

The fourth link is presentation services. Providers convert the content ofInternet-based applications, which are formatted in a standard known asHTML (HyperText Markup Language), into a standard such as WML


2Many Internet-related businesses are characterized by low but rising entry barriers created througheconomies of scale in building a brand, network effects (the increasing utility of a service as more peoplecome to use it), and economies of scale or scope in constructing the underlying technology platform.

3This infrastructure includes the backbone network, GPRS/UMTS (General Packet Radio System/UniversalMobile Telephone System) base stations, and the gateway between the mobile network and the Internet.

Operators will have to makedifficult decisions about wherein the value chain to compete


(Wireless Markup Language), an HTML subset suitable for the small, low-resolution screens of wireless devices. Content that isn’t already on theInternet can be formatted directly into a wireless standard.

Personalization support is the fifth link of the chain. One of the main valuepropositions of m-commerce is its ability to personalize applications forindividual users. Providers that wish to offer the best m-commerce servicesneed information such as the user’s name, address, location, and billingdetails (the number of a credit card or a bank account, for example) andeven—because the size of the screen affects the kind of information thatcan be viewed—the type of device used to connect to the service. Companiesthat can provide such information will form a valuable link.

User applications are the sixth link of the value chain. Possible applicationsrange from those currently available on the wired Internet (including banking,book purchasing, e-mail, news, and travel) to new services designed specificallyfor mobile consumers (informationabout where to find the nearestcoffee shop, for example, or theautomatic notification of nearbyfriends). At the highest point in thechain are the content aggregators:businesses that design and operateportals, which provide information in a category or search facilities to helpusers find their way around the Internet. This function is particularly impor-tant for m-commerce because mobile telephones have small screens and lim-ited input mechanisms—notably, no mouse and a non-QWERTY keypad.Users will want portals that simplify the search, avoid throwing up too muchinformation, and require minimum input.

Opportunities for operators

Few industries offer the opportunity to compete in every link of a valuechain, but mobile operators have the necessary technical skills, particularlyat the lower end. They also have the billing systems for payments, as well asbrands that potentially position them well for customer-related activitieshigher up the chain. In addition, their control of the wireless infrastructureand their ability to configure subscribers’ handsets to make themselves thedefault Internet access provider give them the power to limit subscribers’access to competitors’ services—at least initially—and therefore to buildtheir own branded ones.

Early indications are that operators will indeed try to use these advantagesto capture value in many parts of the chain. Sonera and Cellnet, for example,


Portals are particularly important for m-commerce because mobiletelephones have small screens


have already launched portals; Vodafone AirTouch and Cellnet have applicationservices; Telenor and Sonera offer transaction facilities; and NTT DoCoMosupplies basic enabling services, presentation services, and personalizationfacilities. A glance at recent stock market valuations of the Internet counter-parts of the companies supplying these services shows the potential attrac-

tion of such businesses: Yahoo! (content aggregator) is valued at $89 billion, Amazon (applications) at $21 billion, Exodus

Communications (enabling services) at $25 billion, andEngage Technologies (personalization) at $5 billion.4

But a glance at the Internet also reveals it to be a special-ists’ world where fierce competition forces companies to

excel. The Internet players will compete with mobile oper-ators, exploiting the distinct advantages—such as brands and

experience—the Internet players have already developed on theWorld Wide Web. To withstand the competition, mobile operators should con-centrate on the four areas in which they have a strong advantage—transport,personalization support, content aggregation, and transaction support—andmove quickly to capture these opportunities by adopting four strategies.

1. Drive traffic growth by offering a wide variety of data services

Data traffic (mostly driven by the simple text-messaging service called theShort Message Service, or SMS) already contributes 10 percent of the rev-enues of some wireless operators and, according to forecasts, will soon over-take voice traffic as the main source of revenue for mobile operators as awhole. But as volumes rise, profit margins fall: in the United Kingdom, callcharges have dropped by about 77 percent in ten years.5

In response, some operators have used their control of the network infra-structure to try to lock in value at stake elsewhere in the chain. By presettingtheir subscribers’ telephones to make themselves the default Internet accessprovider and blocking unauthorized services, operators have the opportunityboth to charge application providers for access to their subscriber base andto build their own branded services.

This “walled-garden strategy” might provide higher revenues in the shortterm, but in the longer term it is flawed. First, it fails to maximize demandfor data traffic, because users may be barred from their favorite on-lineservices. Second, it runs the risk of driving away those dissatisfied sub-scribers, who may switch to a competitor to get exactly what they want.


4As of March 14, 2000.5These Analysys figures are based on the average monthly bill for a high-usage business customer takingadvantage of the cheapest available tariff.


Since consumers increasingly choose their wireless providers on the basisof the data services available, this second point is an important one.McKinsey research in the Asia-Pacific region, for example, indicates thathalf of all subscribers (and up to 70 percent of high-value ones in somecountries) would switch operators to get better wireless data services. Itfollows that the first operator in a region to offer unrestricted access todata services could capture a lucrative portion of the subscribers of othernetworks.

The best way to go on profiting from transport is therefore to increase trafficon the network. This can be done only by offering subscribers access to thewidest possible range of data services, an approach that has been validated inthe Japanese market by the successof NTT DoCoMo’s iMode service.Launched in February 1999, within a year it was offering more than3,000 Internet-like services and hadattracted three million fee-payingsubscribers (rising by 10,000 a dayon average). Average revenue persubscriber also rose by about $120 a year—$30 from flat-rate subscriptionfees and $90 from increased traffic revenue.

2. Attract content providers by offering good user information

Customer data are a valuable asset in the off- and on-line worlds alike, forthe more a vendor knows about a customer, the more it can personalize the information or service it provides. The end result is likely to be a morevaluable service, reckoned both by price charged and by the vendor’s abilityto attract and retain customers.

In the wired world, Internet vendors use various techniques to personalize acustomer’s visit to their sites. These techniques range from “cookies” pushedto the user’s computer to ensure that repeat visitors are recognized andappropriate data recalled, on the one hand, to complex collaborative filtersthat predict the preferences of customers from their behavior, on the other.(An example is Amazon.com’s “customers who bought this book alsobought . . .” service, which exploits the purchasing patterns of similar cus-tomers to suggest books or CDs that users might enjoy.)

In the wireless world, personalization will be even more important, forscreens are small, limiting the amount of information that can be shown,and information can be tailored with the help of a few personal details. (A search for a restaurant, say, might be refined by the user’s location and


The way to proffit from transport isto increase traffic on the networkby offering subscribers access tothe widest range of data services


spending bracket.) The kind of device that is used will also determine thekind of information that can be sent: a stock quotation service, such as

Yahoo! Finance, could supply share-price graphs to devices with suffi-ciently large screens.

Input capabilities too are limited,which means that users will benefitif input forms can be filled in auto-matically on their behalf. A CD

vendor, for example, could simply ask customers to verify payment infor-mation and a shipping address rather than have them fill out forms fromscratch. Mobile operators hold plenty of this kind of personal informationon subscribers and are well placed to supply application providers with thedata they require (subject to legal restrictions, which differ from countryto country).

Mobile operators can also use this information to drive traffic growth, forapplication providers are likely to be attracted to the networks whose opera-tors supply the most useful customer data. A larger number of applicationproviders will in turn attract more customers to the network. The upturn intraffic will attract more application providers, more customers, and so on ina virtuous circle.

3. Assume the role of a wireless portal

Like portals in the wired world, wireless portals have a degree of controlover what users see on the Internet, so the portal provider can charge serviceproviders and advertisers high fees. Given the projected penetration rates ofmobile devices and mobile consumers’ increased reliance on portal services,many observers expect wireless portals to be as highly valued on the stockmarket as their established Internet equivalents.6

Operators enjoy some natural advantages in providing portal services. First,the operators can control the configuration of telephones for all their newsubscribers and thus make their portals the default start screen.7 Second,the operators’ information about subscribers permits them to tailor the con-tent provided. Indeed, the way portals use this personal information couldturn out to be the main factor distinguishing good from mediocre portals.(A good one, for example, wouldn’t require users to fill in personal detailsfor each site they visited—an off-putting task on a small keypad.) But


6Goldman Sachs recently valued Vodafone’s Multi-Access Portal at almost $29 billion, for example—a valuation based on Goldman’s predictions of the potential revenue sources for a wireless portal.

7Although the user can modify this, doing so requires some effort.

Application providers will probablybe attracted to those networkswhose operators can supply themost useful data on customers


Internet experience indicates that operators will have to move quickly tosucceed as portal providers. In the United Kingdom, Freeserve stole a marchon competitive portals by offering free Internet access and retains a strongfirst-mover advantage.

Operators must also decide whether to build the portal alone or with apartner. Despite some natural strengths as portal providers, operators haveso far shown limited skill in selecting, aggregating, and customizing content,for though they are good on the technical side, they are light on the kind of media and marketing skills that characterize successful Internet portalproviders. And the value at stake at this level of the chain ensures that opera-tors will face stiff competition, not least from existing Internet portals withstrong brands, a large subscriber base, and plenty of experience.Several established companies, including Microsoft, Yahoo!,Excite@Home, and America Online, have already launchedwireless portals.

Operators have three broad options when considering a portal strategy. They can operate their own portalunder their existing brand—the approach taken byoperators such as Telia Mobile and NTT DoCoMo,which identified the potential of m-commerce longbefore others did. They can outsource the provision of theportal to one of the new breed of wireless portals, such as AirFlash orRoom33, perhaps rebranding the service under their own names. Or theycan form a co-branding partnership with an established portal. The lattertwo options are the safest bet for less advanced operators, particularly incountries where existing Internet portals will offer strong competition. Thebenefits to both parties are clear: the operator gains access to the aggregationskills of the portal; the portal gets hold of the operator’s customers andinformation about them.

4. Provide transaction support with a wide range of payment choices

All operators have systems to bill and charge their subscribers. The samesystems can be used to bill subscribers for goods and services sold bythird-party vendors on the network and to levy a per-transaction charge to vendors.

Some operators have already spotted this opportunity. Sonera makes itpossible for subscribers to buy soft drinks from vending machines bydialing a number, and the cost is then charged to the subscriber’s mobile-telephone account. Telenor is experimenting with a similar system thatpermits customers to book cinema tickets, while subscribers to NTT



DoCoMo can add all of their m-commerce transactions to their monthlymobile bills.

Not surprisingly, this role is being contested by credit card companies that havetheir own billing systems, established relationships with service providers,

and expertise in making customers’credit and transactions secure.These credit card companies areeven threatening to bypass operatorsaltogether by forming relationshipsdirectly with handset vendors. Visaand Nokia, for example, are jointlydeveloping a system permitting con-

sumers to pay for goods and services using bank information stored in a tele-phone’s memory.

Yet mobile consumers will probably demand a choice of payment mecha-nisms: their credit card account, their bank account, and their monthly telephone bill, for example. To offer customers a choice of payment methods,smart operators are thus likely to join up with one or more banks or creditcard companies. Sonera recently did precisely this with MasterCard.

Where not to play

In the areas of basic enabling services, presentation services, and user appli-cations, wireless operators hold no natural advantages and are likely to facestrong competition. Because of the similar skills required in the wireless andwired worlds, existing Web-hosting companies and system integrators thatalready focus narrowly on these businesses will probably dominate basicenabling services.

Presentation services will typically be provided by software companies thatconvert standard HTML into a form suitable for wireless devices and byInternet design firms that offer direct conversion services. Existing Internetcontent providers will in any case have a strong lead in user applications,since the providers quickly make existing services available to mobile con-sumers. The most successful applications, moreover, tend to be developed by focused entrepreneurs who dedicate themselves to the task.

One question remains: how broadly should mobile operators compete in thefour areas in which they have a competitive advantage? Given the likelycompetition, operators should consider placing their big bets in no morethan two areas, depending on where they have the strongest advantages as


To offer customers a choice ofpayment methods, smart operatorswill probably join with one or morebanks or credit card companies


measured by knowledge, skills, or the absence of competition. Elsewhere,they should seek to dilute their level of risk by forming strategic partnershipsor joint ventures.

It is important to remember that m-commerce is developing fast and thatmobile operators need to establish an early lead to capture maximum long-term value. Focus is one of the surest ways to build on what is already theirstrong starting position in this market.



Date post:	20-May-2017
Category:	Documents
Upload:	dhiraj-patil
View:	213 times
Download:	0 times

Mobile Commerce

Documents