The connectivity model may be viable for some small mobile service companies with limited financial resources and high-speed network capacity that can compete on price, rather than on the breadth and quality of their services. An operator choosing such an approach would have to limit capital expenditures on the network and service platforms, which would compel it to eliminate most marketing and customer care costs, reducing these functions to the bare minimum.
But this approach won’t work for the major carriers, especially those that have already made significant 3G investments. To earn the required return on their investments in high-speed networks, these operators can’t afford to cede to other players any of the potential revenue streams they can earn from content transmitted through their networks. For the majors, the integrated service model makes more sense.
Under it, mobile operators will get involved in — and extract revenue and profit from — all the critical points in the value chain that affect the user experience. Mobile operators may play multiple roles in packaging, promoting, and selling content, subscriptions, and services offered by third-party content companies. These partnerships are crucial to the mobile operator’s ability to expand revenue streams, grow market share, and capture more value from the customer relationship.
Perhaps the most important value-generating step is enhancing the relationship between the handset maker and the mobile operator. In the past, mobile operators had little involvement in handset design and configuration, except in Japan. Operators typically set prices and managed customer access to their service. Handset manufacturers drove improvements in the devices, such as decreased size and weight, longer battery life, and different ring tones. Mobile operators were content to buy and sell largely undifferentiated handsets.
With the growth of mobile data services, the arm’s-length relationship between mobile operators and their device suppliers needs to end. Applying the integrated strategy, carriers will concentrate on enhancing the handset’s “service environment” — the device’s interface and its underlying software platforms, which are critical to creating devices and applications that are easy to use, reliable, and secure.
Simple cobranding of the handset case (e.g., the Sprint name and logo printed on Sanyo’s 8100 picture phone) has been common for years. Now leading mobile operators are getting involved in more creative tactics that enhance their brand, such as selecting the device’s operating system and preloaded software applications. Some mobile carriers have set up exclusive distribution agreements with manufacturers to sell a specific handset model, with features designed to support the carrier’s multimedia service. Such design collaboration and marketing partnerships with mobile operators are especially attractive to device manufacturers because they help the manufacturers sell a larger number of tailored, higher-priced, higher-margin multifunction handsets. (See “How Mobile Operators Are Disrupting the Handset Industry,” at the end of this article.)
We expect more network operators will look to device manufacturers to tailor handsets for their services, based on specific hardware, software, and product features. Manufacturers could even design entire service environments for specific mobile operators and offer them as preconfigured integrated solutions.
Through increased cooperation with mobile operators, handset manufacturers and component suppliers should be better able to focus their research and development on innovations that can be brought to market rapidly and successfully. Manufacturers can also work with mobile operators to keep costs down and responsiveness up. For example, inventory levels for components and finished products can be managed jointly through demand forecasting. Moreover, component costs can be reduced when operators select in advance components that can be standardized. For instance, there could be two or three screen types for all handsets, which would help manufacturers customize their products for specific customer segments while still maintaining economies of scale and margins.