The Role of Regulation in the Evolution of Mobile Services Industry

Transcription

1 The Role of Regulation in the Evolution of Mobile Services Industry Jarkko VESA Eera Finland Ltd, Helsinki Abstract: This article describes the evolution of mobile internet services in Finland and Japan and analyses the impact of telecom regulation on the structure and dynamics of the mobile industry. The structural analysis is based on conceptual frameworks such as Mobile Market Matrix (MMM) and the strength of networks analysis. It is argued that the vertical/integrated structure of the Japanese market has been more successful in migrating consumers from 2nd generation voice-centric services to the next generation of mobile content services. The internet-like, "mix-and-match" industry structure adopted in the Finnish market may not be optimal during a major shift in technology or business models. Furthermore, the article demonstrates how regulatory actions have very different effects depending on industry structure and product architecture. These findings are examined in the light of the i2010 initiative. The importance of strong business networks and strong mobile operators in building the ecosystem is also emphasized. Key words: telecom regulation, mobile services industry, industry evolution, i2010, business networks and platformization. The impact of regulation on the structure of the telecom industry and the strength of innovation networks often receives less attention than issues such as end-user pricing or termination fees. However, as the comparison of the Japanese and the Finnish mobile markets documented in this article demonstrates, in markets where mobile operators have assumed the role of value chain coordinator, or orchestrator of the business networks, mobile data services are taking off faster. This article argues that telecom regulation plays an important role in the development of the competitive landscape in individual national markets. The Finnish market will serve as an example of how low end-user prices and high penetration rates can be achieved in a way that is harmful to the evolution of the ICT services industry and the development of the information society. The objective of this article is to demonstrate that, in addition to the traditional approaches to telecom regulation, the impact of regulation can be analysed and understood through analysis of industry structure. In successful markets, telecom operators orchestrate and coordinate large COMMUNICATIONS & STRATEGIES, no. 65, 1 st quarter 2007, p. 147.

2 148 No. 65, 1 st Q business networks. As long as the technology (i.e. the networks, handsets, middleware, user-interfaces, etc.) is immature and content and services are not very standardised, attempts to imitate the market-driven approach that dominates the world of the internet will not succeed. As the analysis of the Finnish mobile markets shows, Finland tried this approach with little success. If Europe wants to catch up with the U.S. or Asia in ICT services, it will be essential to understand the important role of telecom operators as enablers of the various services that initiatives such as i2010 build upon. If European operators lose their ability or willingness to invest and to educate consumers, it is unlikely that the next generation of mobile services will emerge by themselves or at least without major delays. The article is organised as follows: the following section provides a brief introduction to the two case markets and the section after compares their structures and dynamics. Then we describe some of their basic characteristics and introduce the strength of networks concept. We then discuss the implications of the analysis of the two markets for the i2010 initiative and some basic assumptions underlying the EU's regulatory framework. The last section of the paper provides a summary and conclusion. The two case markets In this section we briefly discuss two very different kinds of mobile markets those of Finland and Japan which will be used as a basis for the analysis of the impact of regulation on industry evolution. The Finnish mobile market When it comes to mobile telephony, Finland has much to be proud of. The first commercial GSM network was opened in Finland by Radiolinja in Finland was also the first country in the world to grant licenses for 3G mobile networks in March However, despite Finland's initial strong position in the global mobile race, it has fallen behind in international rankings over the past few years. The Finnish mobile services market followed a path of its own for fifteen years. At the beginning of the 1990s the Ministry of Transport and

3 J. VESA 149 Telecommunications (MINTC) decided to ban handset and subscription bundling. On April 1st 2006 this long tradition came to an end, and bundling of the 3G subscription and handset was allowed. The 'SIM only' approach resulted in the speedy takeoff of GSM services, making Finland one of the world's leading mobile markets. In 1999 Finland had the world's highest mobile phone penetration and in 2005, the number of subscriptions exceeded 100% of the population (ITviikko, February 16 th 2006). Figure 1 Development of Elisa's and Sonera's monthly ARPU in Finland 42,0 40,0 38,0 Euro 36,0 34,0 Sonera (FIN) Elisa (FIN) 32,0 30,0 28,0 03/Q1 03/Q2 03/Q3 03/Q4 04/Q1 04/Q2 04/Q3 04/Q4 05/Q1 05/Q2 05/Q3 05/Q The market situation started to change rapidly in Finland when mobile number portability (MNP) was introduced on July 25 th MNP was introduced in a consumer-friendly manner in Finland: consumers did not pay to switch operators, and operators were to port the number within five working days. Since 2003, ARPU has gone down from approximately EUR 40 to below EUR 30 (see figure 1). The 'open doors' policy adopted by the Finnish regulatory authorities as of February 2006 had attracted 13 service operators, MVNOs or resellers to this small market of just over 5 million people. From an industry structure point of view, the Finnish GSM market (figure 2) is horizontally structured and has a modular product architecture. The Finnish market resembles the 'mix-and-match' type PC market. Based on his analysis of the computer industry, FINE (1998) warned that this kind of market structure will eventually lead to a price war within each layer. This kind of development has been seen in the Finnish market, where the most intense competition has been seen between various operators' mobile subscriptions. As all three networks offer high quality access, and there are only minor differences in the functionality of standard GSM subscriptions, price became the primary criterion for customers in choosing an operator.

4 150 No. 65, 1 st Q Figure 2 - The horizontal and modular structure of the Finnish mobile market (in February 2006) Handsets Nokia Samsung Siemens Sony Ericsson Motorola Network operators Service operators Resellers Mobile Portal Applications Open standards (GSM, GPRS, EDGE, UMTS) TeliaSonera Elisa Finnet Sonera AINA Elisa Kolumbus DNA Cubio Tele Finland Saunalahti Spinbox Fujitsu Hesburger SK Mobile Stockmann Dial (Saunalahti) (Sonera) (Elisa) Open standards (WAP) Sonera SurfPort Zed MTV3 Open standards (Java, XML) Java games Browser Messaging Helsingin Sanomat Buumi.net Location-based services Content Movie trailers Weather Music News Maps The characteristics of the Finnish mobile market are briefly discussed above. We would argue that the Finnish market has performed less strongly than many other markets especially bearing in mind its initial leading position. To support our argument we compare the Finnish market with a totally different type of market Japan, which is regarded as one the world's most advanced mobile markets in terms of the diffusion of next generation, non-voice mobile services. The Japanese mobile market The Japanese mobile market has been analysed in great detail in recent years. Due to space constraints we present only a brief description of the Japanese market in this paper. Table 1 presents the market shares of the three Japanese mobile operators at the end of December 2005 (source: NTT DoCoMo, KDDI, and Vodafone, January 2006).

5 J. VESA 151 Table 1 - Market shares of Japanese mobile operators (end Dec. 2005) Mobile operator Subscribers (million) Market share % NTT DoCoMo 51,9 56,2 % KDDI 25,3 27,4 % Vodafone K.K. 15,1 16,4 % Total 92,3 100,0 % What makes Japan such an interesting case market for future mobile services is the large number of mobile internet subscriptions: 77.5 million subscribers, or 84% of all mobile phone subscribers as shown in table 2. Japan also has close to 40 million 3G cellular phone service subscribers. (source: updated 11/30/2005). Table 2 - Japanese mobile Internet subscriptions (in Nov. 2005) Mobile internet service providers Subscribers (million) Market share % i-mode 45,2 58,4 % EZWeb 19,5 25,1 % J-Sky / Vodafone Live! 12,8 16,5 % Total 77,5 100,0 % Competition in the Japanese market is intense, even though churn rates are lower than in Europe. One explanation for lower churn rates has been the absence of mobile number portability (MNP), which was introduced in the Japanese market on October 24 th, However, unlike in the Finnish market, where MNP is free for subscribers switching operators, Japanese operators have agreed on MNP transfer fees. These port-out fees bring the total cost of changing carriers and using MNP to around Yen 5,000, or EUR 35 ( August 31 st 2006). Another factor that may lessen the eagerness of Japanese subscribers to use the MNP option is the fact that addresses are linked to mobile subscriptions. Another major change in the Japanese market will be the entry of three new mobile operators the first new players in the mobile network market for a period of 12 years. In November 2005 MIC said that it planned to grant licenses to Softbank, eaccess and IP Mobile (New York Times, November 10 th 2005). The Japanese mobile services industry is a vertical market with an integrated product architecture (see figure 3). All three network operators, i.e. NTT DoCoMo, KDDI and Vodafone K.K. (renamed Softbank Mobile on October 1 st 2006), are also service providers and have their own mobile portals. Even the handset business is closely controlled by the operators, as handsets are typically manufactured according to each operator's technical specifications.

6 152 No. 65, 1 st Q Figure 3 - The vertical and integrated Japanese market (October 2006) Consumers Business customers Handset Mobile network Mobile portal Handset Mobile network Mobile portal Handset Mobile network Mobile portal Applications Content Applications Content Applications Content ICT Industry Music Industry Retail Industry Game Industry Comparison of the two case markets We continue our analysis of the two mobile services markets with a comparison of structure and performance. Firstly we look at the structure of the Japanese and the Finnish markets by using the Mobile Market Matrix. Comparison of market structures The Mobile Market Matrix (MMM) is a 3x3 matrix with two dimensions: type of service architecture and dominant industry structure. The matrix is derived from MIT professor Charles Fine's Double Helix model. FINE (1998) argues that industries oscillate between a vertical/integrated industry structure and a horizontal / modular product architecture.

7 J. VESA 153 In the Double Helix model, the Japanese 2G mobile market represents a vertical/integrated configuration, while the Finnish market is a horizontal/ modular market. VESA (2005) argues that regulation in the form of a handset subsidy ban has prevented the Finnish mobile services market from following the industry's natural evolution towards an operator-driven model. As discussed earlier in this article, the situation for 3G handsets and subscriptions in the Finnish market changed once bundling was allowed in April In the Japanese market, policy makers did not allow the entry of new players into the 2G market, which stabilised the market and allowed for longterm development of integrated service offerings by the three mobile operator ecosystems. As soon as new players enter, and as the technology used in Japanese mobile services gets closer to the global standards in the 3G world, the Japanese market will start moving towards a more modular product architecture and a horizontal industry structure. However, the extent of this development will depend on factors such as business culture and tradition in relation to how companies cooperate. The reason for using the Mobile Market Matrix (see figure 4) rather than the Double Helix model arises from the empirical findings from the analysis of various mobile markets, i.e. there are markets that do not fit the dichotomy suggested by Fine. Furthermore, the mobile industry is moving increasingly towards a platform approach, which represents an intermediate solution between an integrated product architecture and a modular architecture. One example of this kind of development is the Linux and Symbian compatible software platform for 3G FOMA handsets developed by NTT DoCoMo in order to improve time-to-market and cost-effectiveness (NTT DoCoMo, November 18 th 2004). The Japanese mobile services giant is actively trying to use more standardized components, such as the Symbian OS and W-CDMA technology. However, instead of using the application software platforms currently available in the market, NTT DoCoMo wants to maintain control of the platform. The conclusion is that NTT DoCoMo is moving away from a closed, integrated product architecture towards a more open, platform-based product architecture, while retaining strict control over platform specifications.

8 154 No. 65, 1 st Q Figure 4 - Japan and Finland in the Mobile Market Matrix (MMM) Integrated Japan 2G Operator-driven, Closed system Service Architecture Platform Operator-driven, platform based Japan 3G (DoCoMo) Unbundled Retail model Finland 2G Finland 3G Modular Horizontal Hybrid Industry Structure Vertical The key message from this brief overview of structural differences in the two case markets is that although the mobile services industry is becoming increasingly global, there are major differences between markets. These differences can be largely explained by the regulatory framework applied in these markets, which is the focus of this article. Below we compare the performance of the two case markets. Comparison of key performance indicators The first key performance indicator used in the comparison is monthly average revenue per user (ARPU). As figure 5 shows, there are several visible trends in the development of ARPU figures for the four operators in the two case markets (Elisa and TeliaSonera in Finland, and NTT DoCoMo and Vodafone K.K. in Japan) used as examples here. The first trend is that average revenue is decreasing in both markets, although the decrease in ARPU has been much more dramatic in the Finnish market. ARPU figures for Japan are much higher than in Finland, which can be partly explained by

9 J. VESA 155 more active use of mobile services, but also by higher prices of services in the Japanese market. Sachio Semmoto, CEO of eaccess, argues that Japanese operators offer interesting value added services, but basic mobile services are expensive and not used very often (Tietoviikko, June 16 th 2005). For instance, during the period of April-June 2005, average minutes of use (MoU) of NTT DoCoMo's 2G customers totaled 126 minutes per month, while the MoU of TeliaSonera's 2G customers in Finland over the same time period amounted to 285 minutes per month. In other words, TeliaSonera's GSM customers talked over twice as much as NTT DoCoMo's "mova" customers on average. The customers of NTT DoCoMo's 3G service "FOMA" talked 214 minutes per month on average in Q (source: operators' data). Industry analysts have argued that Japanese consumers pay the highest prices for mobile voice services, about four times as much per minute as cellphone users in New York ("Japan opens", November 9 th 2005). However, when it comes to mobile data services (a.k.a. mobile internet services), the picture is totally different: According to SAARIKOSKI (2006), the average cost of SMS text message in Finland in August 2004 was around EUR 0.1. Saarikoski highlights that the cost of sending the same information on a third generation WCDMA network in Japan using is about EUR 0.001, i.e. there is a hundred fold difference in the price of sending 160 characters. Moreover, in addition to inexpensive mobile communication services, which are by far the most popular genre of mobile data services in Europe, the price cap of Yen 300, or about USD 2.5, per month for the majority of mobile content services set by NTT DoCoMo has made the use of mobile data services an attractive alternative for Japanese customers. Figure 5 - Comparison of monthly ARPU of selected operators ARPU (euro) 55,0 50,0 45,0 40,0 35,0 30,0 25,0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q DoCoMo (FOMA + mova) Vodafone K.K. (JAPAN) Sonera (FIN) Elisa (FIN)

10 156 No. 65, 1 st Q Another interesting KPI is the percentage of non-voice services (i.e., SMS, MMS, data traffic, etc.) in total ARPU. Figure 6 shows that, despite nearly simultaneous launch in 1999, there are major differences in the use of non-voice services between the two case markets. The two Japanese operators NTT DoCoMo (27.2% in Q4 2005) and Vodafone K.K. (29.9% in Q4 2005) are, as expected, ranked high. The Finnish operators Elisa (17%) and TeliaSonera (13%) are lagging, despite the country's active SMS usage. Figure 6 - Non-voice service revenues in Percentage 30,0 25,0 20,0 15,0 10,0 Q3 Q4 Q1 Q2 Q3 Q NTT DoCoMo (JAPAN) Vodafone K.K. (JAPAN) Sonera (FIN) Elisa (FIN) We conclude that in addition to structural differences, there are also major differences in the performance of the two markets. The horizontal/ modular structure of the Finnish market, combined with mobile number portability and the ban on SIM locking and longer contracts, led the market to a price war between basic GSM subscriptions. The vertical/integrated structure of the Japanese market has led to very high ARPU levels, but also to high adoption and usage of mobile data services. These two case markets, i.e. Finland and Japan, were selected because they represent "polar types" of cases when analysed in the light of industry structure and the usage of mobile data services. This article does not argue that the findings and observations of these two markets as such would allow generalization to, for instance, other EU markets. The objective is to identify factors affecting the evolution of mobile services markets by using Finland and Japan as examples an analysis of a wider selection of markets would require a different, more quantitative research approach, which due to space constraints, is beyond the scope of this article. However, the analysis described above raises interesting questions: Why has the Finnish mobile market, with its strong starting position at the end of 1990s as one of the leading mobile markets in the GSM voice and SMS era, performed so badly in terms of the takeoff of non-messaging data services and 3G services?

11 J. VESA 157 Is it possible that the market-driven approach might not be ideal when moving from highly standardised voice-services to more complex mobile data services? Moreover, while the Finnish regulatory environment has brought down the prices of mobile services (average revenue per user fell 11% in Finland in 2005) and attracted a lot of competitors to the market, it is justifiable to ask whether the industry has paid too high a price in the form of layoffs, dropping margins, the lack of investment in service development and the slow takeoff of new services? In order to better understand the dynamics behind these developments, we look at the role of business networks in migrating consumers from one generation of technology to another during a period of disruptive technological change such as the shift from voice-based to mobile data services. Mobile services and the strength of mobile business networks There is a major difference between traditional communication centric mobile voice services, and content centric mobile data services of the future which "consist of several different building blocks that all have to work seamlessly together in order to offer a positive user experience" (VESA, 2005, p. 11). Mobile services can be described as complex goods, which MITCHELL & SINGH (1996) define as "an applied system with components that have multiple interactions and constitute a non-decomposable whole". In mobile data services, the components are handsets, mobile networks, applications and services: if any of these four components fail, the users soon give up trying to use these services. A key issue in the success of mobile data services and other digital services in Europe is how to manage the complexity of mobile internet services? It is argued here that business networks play a vital role in this process. Strength of mobile business networks As the analysis of the Japanese market demonstrates, the Japanese mobile market consists of three business networks, each of which is orchestrated and coordinated by a mobile operator. These business

12 158 No. 65, 1 st Q networks cross traditional industry boundaries in order to create extensive service offerings. In the Finnish market, coordination of the mobile services offering has traditionally been accomplished by the market, with no clear operator guidance. We will use a construct called "the Strength of Network" developed by FRELS et al. (2003) in order to understand the differences between mobile services business networks in the two case markets. The strength of networks concept consists of four components: (1) stand-alone product performance, (2) user network, (3) complements network, and (4) producer network. (1) Stand-alone product performance The first component is related to the performance and characteristics of the core product (or service) itself or the utility delivered by the product. Next, each of the four components of mobile data services is scored on a scale from 1 to 5, where 5 indicates optimal performance (see table 3). Network While the mature 2G/2.5G networks offer reasonably good quality and enough capacity in both case markets, Japan is clearly ahead of the Finnish market in the implementation of 3G networks. Table 3 - Strength of mobile services business networks in the case markets Construct Japan Finland (1) Stand-alone product performance (18) (8) Network 4 2 Handset 5 2 Services 5 2 Content 4 2 (2) User network (24) (16) Current size 5 1 Expected future size 5 2 Compatibility among members 5 4 Accessibility of network 5 5 Quality of users 4 4 (3) Complements network (23) (10) Make the focalm product more productive or complete (4) Producer network (23) (10) Functionally equivalent to the focal product Compatible with the focal product Total score 88 44

13 J. VESA 159 Handset The Japanese handsets are smaller, lighter and boast more advanced functionality than most European and North American cellphones. The latest slim models by Motorola and the multimedia devices by Nokia are closing the gap, but in the "installed base" of handsets there is still a clear difference between Japan and Finland. End-user prices of handsets are low in Japan due to high levels of operator subsidies. However, as a result of increasing competition, operators are forced to look for new ways of reducing handset costs. In the Finnish market, the handset base is in fact worse than in Europe on average (see table 4). Table 4 - Handset functionality in Finland vs. rest of Europe (Elisa, 2006) WAP GPRS MMS Java xhtml 3G Finland 59,3 % 52,0 % 16,0 % 21,4 % 20,0 % 0,3 % Europe 86,0 % 72,0 % 60,0 % 61,0 % 53,0 % 9,0 % Services and content The Japanese mobile market is clearly in the lead when it comes to the quantity and quality of mobile services and content. In Finland, value-adding services are still scarce and the content business is mainly about ringtones and logos. (2) The user network The second component focuses on the user network. As table 3 shows, Japan gets almost maximum scores in this category. Current size of the user network In Japan, the current size of the mobile subscriber network is over 92 million and the number of mobile internet users is 77.5 million. As discussed earlier, the current size of the user network of mobile internet services in Finland is very small. Expected future size The mobile phone penetration rate in Japan is still modest 72.4% (November 2005). If penetration reaches levels similar to many European countries, it should increase to 100% of the population, which would mean

14 160 No. 65, 1 st Q over 127 million subscribers. In the Finnish mobile market the expected future size of the user network is limited due to the small size of the market (population of 5.3 million). Compatibility This component refers to homogeneity amongst existing and potential users. In the Japanese market compatibility within the population is high. The Finnish market can also be said to be reasonably homogeneous. Accessibility of network This component is similar to the concept of observability of adoption, and its influence on other members of the social system in innovation diffusion literature. In Japan, mobile phones and services are highly visible in daily life, while in Europe, people perhaps pay less attention to other people's mobile phones and the services they use. Quality of users The next component refers to "the technological expertise, innovativeness, soundness, reliability, and reputation of users who have adopted the technology" (FRELS et al. 2003, p. 33). In the Japanese market, where the penetration rate of mobile internet services is already high, the quality of users is perhaps less important than in Finland, which is still at the beginning of the mobile internet diffusion curve. (3) The complements network The third category refers to "complementary products and services that make the focal product more productive and complete as a part of a whole solution" (FRELS et al. 2003, p. 33). In Japan the complements network is very strong, offering everything from printing kiosks for camera-phones to vending machines for mobile phone purchases. In Finland, the emergence of complements network has been slow. (4) The producer network The fourth category measures the amount of competitive and compatible product and service offerings. Once again, the producer network in Japan is

15 J. VESA 161 strong on all levels. There is a large number of handset makers, three mobile operators are offering advanced new services (and three more are entering the market), and in the content business, there is plenty of content available. In Finland the three network operators have been struggling due to intense price competition. Operators have been forced to cut large parts of their service and content projects, which has created problems for Finnish mobile content and service providers. As table 3 shows, Japan is the clear winner in the comparison with 88 points (out of 100 points). Japan takes the lead in all four areas of the comparison, while Finland suffers from a small handset base, the slow takeoff of 3G networks and services, its limited market size, the low penetration of mobile internet services, a limited complements network, and a producer network of operators struggling with decreasing margins due to intense price competition (although this trend did see a reversal during the second half of 2006 due to changes in the competitive landscape and the introduction of bundling). To summarize, the comparison demonstrates that even though access, i.e. high mobile phone penetration and network coverage, is an essential building block of mobile services, the next generation of mobile services require a much broader view of service creation and delivery, and industry boundaries and collaboration. This is an important message for the i2010 initiative: if Europe wants to succeed with i2010 it must understand the role of business networks in the creation of successful service industry and the role of mobile operators in building those collaboration networks. The next section of this paper discusses the implications of our findings for the European i2010 initiative, and the evolution of the digital services industry in Europe in general. Discussion: implications for the i2010 initiative In the previous three sections we analysed two different kinds of mobile markets in order to understand the differences in market structures and the success of next generation mobile data services. We now look at the implications of these findings for the European Information Society initiative i2010. The GSM industry was an important driver of Europe's ICT success, but what will happen once the industry takes the next step towards mobile internet services? Will Europe lose its leading position to Asia or the U.S. or has this position already been lost?

16 162 No. 65, 1 st Q i2010 European Information Society According to the EU, "information and communications technologies (ICT) are a powerful driver for economy-wide productivity, growth and jobs and are arguably Europe's best-bet investment for the future" (EU memo, June 1 st 2005). Moreover, "ICTs have the potential to transform the way in which we work, live and interact" as digital convergence creates unique opportunities for firms "to modernize their business processes and deliver a wide range of services" and for consumers "to experience a range of new content and services", and for governments "to offer efficient, modern, interactive public services on line". The i2010 initiative is a "comprehensive strategy to guide information society and media policies" (EU memo, June 1 st, 2005). However, as we have seen from the discussion in this article, Europe has not been as successful as, for instance, the leading Asian markets in developing digital services that make people's lives better and more enjoyable. We contend that the reason for this is that European policy makers, regulators and service providers have not truly understood the nature of complex consumer services such as mobile internet services. Too much competition European policy makers and regulators firmly believe that increasing competition in mobile markets will more or less automatically lead to a broader service offering and increased use of digital services. Although this would seem to be the case according to various economic theories, there is empirical evidence that increasing competition beyond a certain point may, in fact, lead to a less desirable outcome. The question of how many is too many in mobile competition has been raised in various markets where the regulator has opened the market to a large number of network or service operators. One such market is Hong Kong. According to WATERS (2004, p. 1), "Hong Kong has 11 2G networks spread between 6 operators servicing a population of approximately 7 million, with an existing penetration of over 100%". He argues that although, "it would seem to make intuitive sense that if competition is good, then more competitors would be even better" (p. 2), in

17 J. VESA 163 reality this is not the case. Waters warns of the long-run risks of too low prices in the short term. "Because mobile network costs are mostly fixed and sunk, intense competition can drive prices below even long-run incremental costs. Increasing the number of operators may drive down prices which will be highly visible and attractive to consumers. But these short term benefits will be offset by losing or foregoing innovation in the longer term because competitors are left without the resources in new technology and product development." (WATERS, 2004, p. 2). Developments in the Finnish market during the period of support Waters' view. By lowering the barriers to entry into the Finnish market, supported by the very consumer-friendly implementation of mobile number portability and the ban of fixed long-term contracts, the Finnish regulatory environment led to a market of three nation-wide mobile networks and 13 service operators or resellers in a country of little over 5 million people. As discussed earlier in this article, the Finnish market has gone through a price war which hit all operators hard over the past 2-3 years. In 2006, after network operator Elisa took over the fourth largest operator, MVNO Saunalahti, reseller ACN left the market, and TeliaSonera discontinued the sales of their "no-frills" brand Tele Finland, the market proved far less competitive. This development gives support to the argument that the number of competitors is a critical factor in the evolution of the mobile market. The inverted U-curve of competition There is empirical evidence that the guiding principle of many European NRAs, namely that "more competition is good", does not apply in all circumstances. Based on their survey of nearly 4,000 firms in 24 transition countries, CARLIN et al. (2004) found "evidence of the importance of minimum rivalry in both innovation and growth". However, they also found, "some less clear-cut evidence that the presence of a few rivals is more conducive to performance than the presence of many competitors", which can be seen in the empirical data as "a clear inverted-u relationship between firm growth and the number of competitors faced by the firm" (p. 2). What they found was that firms facing between one and three competitors had average sales growth of nearly 11% over the three years to 1999, while monopolists saw real sales decline by over 1%. However, firms facing more than three competitors had sales growth of below 2%. So the conclusion is that a few (1 3) is better than one, but a few is also better than many (> 3).

18 164 No. 65, 1 st Q The lesson from the analysis presented in this article is that different market structures react in a different way to new market entrants, for instance. In the Finnish market the high number of competing companies has not led to innovative services or growth. Instead, revenues and margins have fallen, investments in 3G networks were delayed, mobile services are not popular, and even the handset base has poor functionality. However, in the Japanese market, where mobile internet penetration and usage is high, increasing the number of competitors may lower the prices of basic mobile services at least. Yet there is a risk that increasing competition will force KDDI, NTT DoCoMo and Softbank Mobile (the former Vodafone K.K.) to cut their investments in the development of new services, such as ubiquitous computing. Summary and conclusion This article has described the evolution of mobile internet services in two markets and analysed the impact of telecom regulation on the structure and dynamics of the mobile industry. Experience in the Finnish mobile services market shows that the internetlike business model may not be optimal during a major shift in technology or business models. This also highlights the importance of adapting the regulatory framework to the lifecycle of technologies and services. Over the past five years, the mobile industry has experienced dramatic changes and most markets have been working hard to prepare for the future. In the Finnish market, however, regulatory activities have focused on increasing competition and lowering the prices of basic GSM and SMS services through the introduction of very efficient and inexpensive mobile number portability, and by making the barriers to market entry as low as possible, while maintaining the handset subsidy ban for GSM handsets and subscriptions. As a result of these activities, Finland has fallen behind the rest of the Europe when it comes to quality of handsets, the penetration of 3G subscriptions, and mobile internet usage. The Finnish case shows that a high mobile phone penetration rate and the low prices of basic services do not lead automatically to successful mobile services markets. On the contrary, the mix-and-match market tends to produce a price war, diminishing revenues and margins, the commoditized bulk business of cheap mobile phones and basic, no-frills subscriptions.

19 J. VESA 165 We have shown how similar regulatory actions can have very different kinds of effects depending on the industry structure and product architecture. It is argued here that Europe will face similar issues when it comes to promoting the diffusion of broadband content and services through the i2010 initiative. As the analyses in this article demonstrate, access is essential but is not a sufficient to guarantee the success of digital services on its own. If the business networks or ecosystems in individual markets are not successful, the i2010 initiative will run into major problems and the services will not takeoff. The role of regulation in this process is essential not only in defining the amount and type of competition the ICT industry will experience, but also in setting the guidelines for industry structure: In the Finnish market the handset subsidy ban led to a vendor-driven market structure, which was successful during the GSM era, but has failed to lead the market into the world of mobile internet and 3G. In Japan, the regulator gave the three network operators an opportunity to build up their business and to take the consumers to the mobile internet world before introducing MNP in the market and giving new players enter. Time will tell whether the introduction of new mobile networks in the Japanese market will lead to new and innovative services, which is what the Japanese regulator hopes for, or whether the newcomers will compete only over price as is the case in Europe. Our conclusion is that in successful markets, telecom operators orchestrate and coordinate large business networks. As long as the technology is immature and content and services are not very standardised, attempts to imitate the market-driven approach of the internet world will not succeed. It is also important to understand the central role of mobile operators as enablers of initiatives like i2010. When mobile operators are successful, as in Japan (with the exception of Vodafone K.K. where the legacy of innovative and successful J-Phone was destroyed in a matter of years), they invest in service development. Investment in service development and strong mobile ecosystems are also the cornerstone of successful information society developments. High penetration of broadband access is no guarantee that services will be used. Consumers and business customers must be introduced appropriately to the world of digital content and services. In the world's most successful mobile markets this is usually the responsibility of the mobile operator. Europe must stop treating mobile operators as outlaws, and understand and encourage their role as business orchestrators and value-network coordinators.

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