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 / Spring 2004 / Issue 34(originally published by Booz & Company)


A Master Model for Mobile Multimedia

In this transitional time in the wireless industry, all companies involved will need to work hard to win the confidence and loyalty of new users of these services, and be smart about setting expectations. To be sure, many services introduced in 2003 will not be around in 2007. And such practical constraints as a lack of battery power to support hours of multimedia use will have to be overcome. But the hurdles are temporary; in the long run we believe the industry as a whole, and players individually, will ultimately be healthier and more profitable, in no small part because of the partnership model we have described.

In the past, the wireless industry has been hurt because many players were not winners in their relationships with others in the value chain. This is changing as demand for wireless products and services grows, and companies discover that collaboration is the best way to accelerate innovation, increase profits for individual companies, and enrich the overall market.

If you’re successful and growing, you can manage any way you want to,” Harvard Business School professor Clayton Christensen has observed. “Growth makes so many dimensions of management easier. It’s when growth stops that things get tough.” Clearly, today’s mobile operators have reached this crossroads. In the wireless industry, or in any industry where the case for change is clear but the path is less so, companies need to understand the interests of other market participants and anticipate their potential plays, as well as possible diversification moves they themselves could make.

Companies that become “masters” of the industry when the going gets toughest are those that actively and creatively build portfolios of business options — options that enable them to maintain strength in their traditional businesses while they build an alternative, and better, future. For the wireless industry, that future is multimedia data services.

How Mobile Operators Are Disrupting the Handset Industry

For the past decade, five manufacturers — Nokia, Motorola, Samsung, Siemens, and Sony Ericsson — have accounted for 70 percent of the handset shipments worldwide. Such stability has enabled several handset makers to develop leading consumer brands, recognizable user interfaces, and strong service innovation teams, thereby positioning themselves as user-friendly companies.

Focusing on network quality and offering the right service plan to attract new subscribers, mobile service providers traditionally bought indistinguishable handsets at a premium on the assumption that the manufacturers would drive innovation and new services to market. With the growth in data services, mobile operators are now working with handset makers to develop distinctive features (such as embedded ring tones and other elements of the user interface), create loyalty clubs, and tap into many other elements that create value.

Japanese operators have worked with handset manufacturers from the start. NTT DoCoMo, for example, includes handset manufacturers in its own R&D centers in order to specify device requirements and retain greater control over the wireless value chain. The fragmented nature of the wireless services market in the United States and Europe prevented any single operator from achieving the scale necessary to influence handset manufacturers as NTT DoCoMo has done. However, U.S. and European mobile operators’ activity in the handset industry today shows how the wireless market environment is changing, and how mobile operators are repositioning themselves to capture more value.

Flagship cobranded handsets being introduced to support mobile operators’ new data services, such as polyphonic ring tones and downloadable games, reflect this new market reality. And it is becoming more common for mobile carriers to set up exclusive distribution agreements with suppliers for specific handset models. In October 2003, for instance, France Télécom’s Orange introduced the Motorola MPx200, which uses the Microsoft Windows operating system, marketing it with special services “exclusive to Orange.”

Mobile operators are also benefiting from the end of a completely vertically integrated production system controlled by handset makers. A multitude of specialized component suppliers have emerged:

  • Application providers. Adoption of Internet protocol technology in the mobile environment enables many application developers to extend their existing applications to the wireless environment (e.g., AOL’s successful instant messaging application).
  • Operating systems providers. Three available systems are: SavaJe, a Java-based operating system for handsets, funded by Vodafone and Orange; Symbian, an operating system developed by a consortium of handset manufacturers; and the Microsoft offering.
  • Outsourced equipment manufacturers. The 2000-01 downturn in the handset industry triggered the outsourcing of manufacturing to specialized players, such as Flextronics and Solectron. In the process, traditional handset manufacturers (e.g., Sony Ericsson) lost their monopoly in manufacturing.
  • Design manufacturers. To cope with the proliferation of handset models, manufacturers created a subindustry of original design manufacturers, which include such companies as Microcell and HTC. These design firms specialize in such areas as the look and feel of the handset case and the internal architecture of the handset.

The rise of component specialists has given mobile operators greater latitude to influence handset design and production costs. From a cost perspective, by disintermediating the vertically integrated handset supplier and cutting their margins, mobile telecom operators can save as much as 15 percent on the wholesale handset price.

Through their involvement in product specifications and customization, mobile operators earn more revenues from the services they provide. According to our interviews with mobile operators in 2003, consumers using customized handsets had a 50 to 60 percent higher monthly average data volume and usage rate than consumers using noncustomized handsets.

Overall, more mobile operators are seeing collaboration with handset makers as necessary to developing a new business model that goes beyond connectivity.

— Alexandre Froment-Curtil and Frederick Knops

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  1. Carolina Junqueira, Sajai Krishnan, Gregor Harter, and Mark Page, “Capturing Value in the Enterprise Wireless Market,” s+b enews, 12/19/01; Click here. 
  2. Raul L. Katz, “Irrational Exuberance: How the Telecom Industry Went Astray,” s+b, Summer 2003; Click here. 
  3. Raul L. Katz, Eric J. Riddleberger, Bharat V. Sarma, and Daniel H. Yang, “Will Prepaid Service Be the Next Wireless Frontier?” s+b enews, 8/15/02; Click here. 
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  5. Venkatesh Shankar, Tony O’Driscoll, and David Reibstein, “Rational Exuberance: The Wireless Industry’s Killer ‘B,’” s+b, Summer 2003; Click here. 
  6. David Pringle, “Nokia Unveils a Major Shake-Up,” Wall Street Journal, September 29, 2003
  7. Financial Times IT Review, October 13, 2003
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