Analysing the effects of Net Neutrality on current and alternative business models

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has title::Creating Business models for Mobile Network Operators in order to create value, within the limitations set by Net Neutrality
status: finished
Master: project within::Information Sciences
Student name: student name::Danillo Albert Felixdaal
Dates
Start start date:=2011/09/15
End end date:=2012/03/01
Supervision
Supervisor: Chris van Aart
Second supervisor: Bram van Tiel (PwC)
Company: has company::PwC
Thesis: has thesis::Media:Danillo Felixdaal - Master Thesis -Creating Business models for Mobile Network Operators in order to create value, within the limitations set by Net Neutrality-1.doc
Poster: has poster::Media:Danillo Felixdaal.doc

Signature supervisor



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Abstract

In a continuously changing market it is not easy to predict how the market is going to behave. Various Mobile Network Operators (MNOs) are reporting revenue losses (the amount of these losses vary per MNO) caused by competing 3rd party services such as Whatsapp and Skype. MNOs are exploring alternatives to deal with these losses, in order to create value and maintain a valuable business. Some of these considerations (e.g. price discrimination schemes such as access tiering)are in violation of Net Neutrality. Net Neutrality could be described best as a useful public network, thatis treating all sites/content and platforms equally without discrimination based on data, application and or service. The premise for MNOs is that new business models should meet Net Neutrality (according to new Telecom act). A business model is a broad term for various elements based upon different blueprints, which are based upon different requirements that are all related together. The design of a business model depends on various factors varying from e.g. design choices based upon domain, involved parties, etc. The design of a business model goes true a process of evolution and should be looked at as an ongoing progress in order for a business to reach its goals.

By explaining Net Neutrality, business models, and developing a scientific method for the evaluation of the business models. The following research question is answered within this thesis: “What Business Models can be employed by MNOs in order to create value, within the limitations set by Net Neutrality” In the process of answering the research question it became clear that the value created by the current business model does not meet current and future market demand. The value offering is currently mainly provided by third parties. The current business model is one where the MNO provides services (e.g. voice, SMS/MMS, mobile internet) to end consumer, where in exchange for these services the customer pays a fee. The amount of this fee depends on the options a customer selects to satisfy the need. Because the MNO cannot provide a custom package for each specific customer, the MNO provides a set of packages from which a customer can select, that what best fits to the need of the consumer. The packages vary from voice, SMS, MMS packages that bundles an amount of minutes, SMS and MMS messages, to packages that bundles voice, SMS, MMS and mobile internet services.

Within the currently employed model the MNO is being used as a bit pipe (a transfer hatch, where the MNO is responsible for transporting data over the network the MNO is running, but is not able to monetize on the services and applications that make use of their mobile network). Although during the start of the research it became quite clear quickly that the current business model wouldn’t be sufficient. It needed to be evaluated to what extent, by gaining an understanding in Net Neutrality, its advantages and disadvantages on MNO and consumer. But also by gaining an understanding of the current market, the design and evaluation process of business models. We started to look at methods for the design of business models. This led us to a method called e3value. The e3value approach is an approach to explore innovative business ideas in a value web setting. This is done by using a lightweight graphical, conceptual model based approach in combination with scenarios, aware of the notion of economic value. It enabled us to illustrate the business of an organisation. The e3value methodology focuses on the exchanges of economic value between parties related to the value chain of the organisation, and what they request in return for doing so. By employing e3value, we were able to model the current business model, and design a second and third business model. These two models will help address the limitation of the current business model, and address consumer demand in a way that value is created for consumer and placing the MNO in a position where it generates revenue by providing services which are now provided by 3rd parties. The second business model that was designed, which is referred to as “App store model”, is based upon the business model that is currently applied by the MNO. Though in addition to its current primary activities it adds an App Store/market, based upon a Broker platform model, as described by Vana Goncalves et all, (2010) to its primary activities.” A broker platform relies on other actors that control most of the assets for establishing the value proposition, but does integrate customer ownership” (Vana Goncalves et all, 2010). Examples of broker platforms are storefronts such as Handango and Mobihand.

The “App store model” addresses the need of consumers by providing a platform for consumers, allowing easier access to services and applications. The MNO also offers extra measures (e.g. carrier billing) to ease the use of these services. By doing so the suggested business model creates value for the MNO and provides competitive advantages for the MNO. It is hard to tell to what extent the “App store model” functions within the limitation set by Net Neutrality. Study shows it will be hard to measure to what extent a MNO upholds Net Neutrality ruling without specific methods or tools. It also depends on the MNO’s transparency towards watchdogs and consumer. The App Store does ensure that the need to employ non neutral schemes (e.g. price discrimination) which don’t comply with Net Neutrality rules is minimized. Although this business model has a lower technological feasibility then the current business model. It does provide technical flexibility to an extent where new technologies, offering great flexibility in usage as a complement to existing strategies.

The third business model that was designed, which is referred to as “Developer involvement model”, is based upon the current model and “App store model”, with another layer is added. The MNO now takes responsibility for actively developing applications, and does so by partnering with a developing party with developing experience, who develops applications under the name of the MNO. These applications are distributed via the MNOs App Store. The MNO receives a fee per each sold app. The MNO also receives a fee for the distribution of third party applications based upon agreement with the third party developing parties. The MNO opens up some of its services to third party developers. This is done by use of an application programming interface (API). (An API is a set of definitions on which an application/service can communicate with another application/service or component. An API defines access to the functionality that is behind the API. The outside world knows no details of the functionality or implementation, but thanks to the API functionality is used, as long as they meet the API.) The developing party pays a fee for the use of these API’s. If the API is insufficient, the MNO offers a toolset for third party developers in order to build applications based upon services provided by MNO. This model enables the MNO to gain an even higher competitive advantage relative to the current market. This is done by employing an App Store/market and developing applications that fit the need of the consumer, and providing API’s with a set of tools to 3rd party developers in order to provide content that wasn’t available to consumer, nor 3rd party developers before. So in general, it allows the MNO to generate revenue via multiple channels that weren’t available to the MNO before. Although like the “App store model”, this business model is less technologically feasible then the current business model. It does offer a great amount of technical flexibility. The “Developer involvement model” also minimizes the need to employ non neutral schemes, even more then the second business model (App Store model), because of the available value creators within the model. By developing the Business model evaluation (BME) framework, we where able to evaluate the business models. With the BME framework we used a process where we measured the business models by researching, defining and prioritizing the critical success factors (CSFs) for the mobile telecom industry. “CSFs are for any business, the limited number of areas in which, if they are satisfactory, will insure successful performance for the organization. They are the few key areas where things must go right for the business to flourish.” (Rockart, 1981). By defining the critical success factors it allowed us to determine a weight per CSF. The weight is interpreted as: “What impact has the CSF on a company and industry results”. Within the framework all CSF’s where added to separate tables. These tables contained the three business models that are up for evaluation. Next to the weight per CSF, a score was given to each business model. The score should be interpreted as: “To what extent does the business model satisfy the CSF”. By using a simple calculation formula (Factor (Weight x Score) +nFactor / SUM of all weights), we where able to calculate a final score for each business model. The critical success factors, weight per CSF and score per business model where based upon literature study, own experience (gut feeling) and were validated by domain experts. By doing so we were able to answer our research question considering the “Developer involvement model” as the greatest value creator, and best employable business model for MNO in order to create value within the limitations set by Net Neutrality. The foundation of this research is based upon literature study, business review and expert interviews. The Literature study suggest that, although the discussion about Net Neutrality is going on for years and shifted by fast innovations from telephone networks to the Internet, the long term (positive or negative) effect may still yet come to the horizon. There where new business models should be explored in order to function within the limitations set by net neutrality, the business review and expert interviews suggest that the telecom industry is a fast moving constantly changing environment. Meaning business models should be evaluated more frequently in order to maintain a valuable business and meet consumer demand. Though the use of critical success factors as a measuring method for the evaluation of business models have proven useful, other evaluation methods should be considered, in order to provide MNOs other, and maybe even faster methods for evaluation business models.

During the research several observations have been made. For instance, the necessity for the research into tools ,or methods enabling MNOs to show their compliance towards Net Neutrality. But also the question if more research, measuring the long term effects of Net Neutrality should have been done before the suggestion of the addition of Net Neutrality to the telecom act came to mind. In the end we found the most striking observation that although much have been written by researchers about the negative influences of content providers and 3rd party services on MNO. It became clear that while at first hand it might not seem so, MNOs do not have to reduce themselves to bit pipes because there are still many options for value creation, in order to maintain a healthy existence.