A PROJECT REPORT

ON

ANALYSIS OF COMPETITION IN MOBILE PHONE

MARKETS

Project Submitted to: Md. Atif Khan

Project Submitted by

Shobhit Gurvekar

Roll No. 89

Semester VII

HIDAYATULLAH NATIONAL LAW UNIVERSITY

NEW RAIPUR (C.G.)

RESEARCH METHODOLOGY AND SOURCE OF DATA
The researcher has adopted the doctrinal methodology and the paper is descriptive in nature. The

author has mainly resorted to several online articles for the completion of the project. However

the documentary material in the form of books and articles in the library has also been referred to

for the subject matter at hand.

 MODE OF CITATION

An attempt has been made by the author to follow the Blue Book form of citation. Any

transgressions to the same is requested to be considered as typographical errors.

ANALYSIS OF COMPETITION IN THE MOBILE PHONE MARKETS OF THE UNITED
STATES AND EUROPE

Competition in an economic context is a widely studied phenomenon with a significant body of

accumulated research and theory. However, competition in the mobile phone industry, despite its
prevalence in public discussion, has received significantly less attention in academic research.
Within the international business context there are very few academic studies that seek to
analyze and compare the different geographical mobile phone markets from the viewpoint of
competition. This thesis examines competition in the mobile phone markets of the United States
and Europe in light of interviews and secondary data covering years 2002 - 2011.

The framework used for the analysis is founded on concepts drawn primarily from industrial
organization (IO) economics, IB theory and microeconomics. The first part of the thesis gives an
overview of the U.S. and European mobile phone markets and the second part focuses
specifically on Nokia, its actions and performance on the U.S. market. The findings reveal that
the U.S. and European mobile phone markets are fundamentally different. Firstly, while in
Europe several parallel sales channels exist, the U.S. market is dominated by mobile operators
that control access to the end customer. Secondly, in the U.S. market phones are generally sold
heavily subsidized and bundled, and either under the operator brand or co-branding agreements.
In addition, the U.S. market has historically split in two technologies, GSM and CDMA, as
opposed to Europe where GSM is the dominant technology.

The analysis of Nokia in the United States shows that the company’s problems appear to be
related to the very characteristics of the U.S. market and the way Nokia has reacted. First and
foremost, Nokia has had a difficult relationship with the operators who have required tailoring,
technology variations etc. In addition to its focus on GSM, Nokia seems to have refused to tailor
for operators and insisted on sales under the Nokia brand. Finally, over the years, Nokia’s
situation has been complicated by occasional disputes related e.g. to immaterial property rights
and recently problems in developing and having operators represent especially Nokia’s high-end
models.
1. Introduction

The introduction of the 1st generation of mobile handsets and networks in the early 1980s
started a gradual but irreversible process that has fundamentally changed the way people
communicate. What was originally seen as a complementary and later substitute means to fixed-
line telephony has over the 2nd, 3rd and now 4th generation of mobile communications
transformed into an irreplaceable part of people’s lives in every continent with close to 4,6
billion worldwide users (ITU, 2010) and global annual unit sales exceeding 1,1 billion in 2009.
(Nokia, 2010c) Where in developing countries calling and basic messaging still dominate, in
more advanced countries phones are used in many professional and personal contexts including,
for example, exchange of emails, photography, Internet and social media.

This tremendous change has been enabled by technological advances in areas such as electronics
and telecommunications produced by hundreds of universities and companies around the world,
but still much of the credit should be directed to those companies involved in the very business.
Mobile handset manufacturers, Nokia in the forefront, invest tens of billions of euros each year
and employ tens of thousands of people in positions related to handset development.

As of December 21, 2009, Nokia alone employed 17 196 people in research and development
(R&D) with R&D related expenses totaling 5,909 billion euros. (Nokia, 2010b) Recently,
however, the standardization of electronic components and increase in in-built processing power
has shifted R&D focus strongly from hardware to software favoring companies traditionally
strong in software R&D. In part due to the transformation of the mobile phone industry, the
competition in handset manufacturing has become increasingly intensive and aggressive. The
increased software focus has lowered barriers to entry related to hardware expertise and attracted
several new entrants such as HTC, Apple and Google to the market. Simultaneously, the mobile
phone business has moved towards competition of mobile eco systems 2 comprising phones,
mobile operating systems, application stores, cloud services, etc. further increasing the
complexity and dynamic nature of the industry.

1.2. Research questions

The primary aim of the thesis is to gain understanding of the characteristics of the European and
the U.S. mobile phone markets from the viewpoint of competition. In order to gain additional
insight into how these characteristics affect the companies, a special case focusing on Nokia in
the United States will be investigated.

The main research questions can be summarized as follows:

1) What are the specific characteristics of the European and the U.S. mobile phone markets?

2) In what respect are the two markets fundamentally different and why?

3) Why has Nokia been unsuccessful in the U.S. market?

Market Description

While the European and U.S. mobile markets developed early and the demand on these markets
is largely focused on high-end devices, applications etc. the fast economic growth and
development of Asian countries has undeniably shifted the economic power to the East. As seen
Figure 8, the Asia-Pacific region already in 2009 constituted a staggering 52,2 percent of the
global sales volume, while Europe currently has around 27 %, the United States 11 % and the
rest of the world a mere 7 %. (Datamonitor, 2010b:12) Taking into account the rapid growth rate
of the Asia-Pacific economies it would seem probable that their dominance will only grow
stronger.

Five forces analysis

Since the European and the U.S. markets present a great number of similarities, the five forces
analysis will be carried out jointly for both markets with additional remarks related to each
individual market. Driving upon Industrial Organization (IO) economics, the five forces
framework is used to evaluate the competitive conditions and the resulting attractiveness of a
given industry. For a more detailed description of the method refer to Section 2.3.

Buyer power

In the mobile phone market, the buyer power dimension consists of components such as buyer
size, buyer switching costs vs. firm switching costs, availability of existing substitute products,
dependency on existing distribution channels etc. From the viewpoint of a handset manufacturer,
there are several buyer types e.g. consumers, retailers, mobile operators and businesses. While in
Europe the end consumers can be 29 reached directly and via different middlemen, in the United
States the operators handle around 90 % of end sales and thereby control the distribution.
(Rauhala, 2010; Steinbock, 2010) Thus, the U.S. buyers (i.e. operators) generally have far greater
power than their European counterparts. Still, the consumers’ brand and product preferences
obviously greatly affect what mobile operators choose to offer and thereby also exercise power
over mobile operators. The power possessed by different buyer groups also comes from different
sources. In addition to consumers’ capability to influence mobile operators, their power also
stems from their facility and tendency to switch the brand whenever they see necessary while the
operators are generally tied to longer-term contractual obligations towards the manufacturers.
The distributors and retailers, depending on their size, then represent a middle case where they
have some contractual obligations and generally buy substantial volumes.

Supplier power

The supplier power stems from supplier switching costs, degree of input adaption, strength of
the distribution channel, scarcity of suitable suppliers, ability of suppliers to vertically integrate,
importance of quality/cost etc. In the mobile phone industry, with respect to other actors,
suppliers generally possess mediocre market power (see e.g. Datamonitor, 2010a; Datamonitor,
2010b) although in some cases companies such Nokia have been accused of dominating their
suppliers who have had no choice but to obey and adapt (Alkio & Lilius, 2009). This dominance
results, among other things, from the handset manufacturers’ agility in tendering and switching
suppliers. However, it should be noted that the emergence of large MNCs such as Samsung as
suppliers and the increasing complexity of the supplied components serve to increase supplier
power. In Europe and the United States there does not seem to be any obvious difference while
the supplying is global and, especially, not focused neither in the United Stated nor Europe.
Finally, one should note that the dependence of a company on each of its suppliers varies to a
great extent. For instance, if a mobile phone manufacturer designs 30 its hardware to match the
operating system supplied by a specific supplier (say HTC for Google Android), switching the
supplier would constitute a significant cost and might lead to supplier’s dominance.

New entrants

The situation in the mobile phone industry with respect to ‘new entrants’ is currently two-fold.
On one hand, mobile phones have reached such complexity that any company planning on
entering should generally have vast financial, technological and marketing resources. On the
other hand, the homogenization of hardware especially in the low-end and the increasing
software focus allow an easier entry for companies traditionally strong in software R&D such as
Google. Nevertheless, the capital intensity of the industry still constitutes a significant barrier of
entry and the dimension ranks average both in Europe and the United States (see e.g.
Datamonitor, 2010a; Datamonitor, 2010b). Recently, the fast economic growth, development and
internationalization the economies of certain Asian countries, South Korea, Taiwan and China in
particular, have encouraged companies from these markets to enter the European and the U.S.
markets in search of further growth. The entry of companies such as HTC (Taiwan) and ZTE
(China) has increased competition especially in the low and mid-range (Schwartz, 2009,
Medford, 2008). However, this recent increase in the number of actors in the European and the
U.S. markets also makes the market less attractive for new entrants in the future.

Degree of rivalry

The degree of rivalry also includes a great number of factors: competitor size, number of
players, level of differentiation, low-cost switching, similarity of companies etc. The mobile
phone industry is dynamic by nature with short product life cycles and changing consumer tastes.
Both in Europe and the United States there are numerous large manufacturers present in the
industry is and the competition in all categories fierce 31 (Mustonen, 2010). Even if none of the
manufacturers is able to dominate any single market, they have the power to influence prices and
their actions affect other actors. During recent years the transformation of the industry towards
software focus has also attracted new companies and added to the rivalry (Landler, 2007). The
rivalry originates from different sources in different categories. In the low and midrange the
products are feature-wise fairly similar and numerous, and the competition has a strong price
focus. In the high-end some companies, Apple in particular, have managed to differentiate their
offering and reap clearly higher than average profits. (Frommer, 2009) In general, the degree of
rivalry could be considered to rank highest among the five forces especially now that several
Asian companies are entering the market and traditional players are fighting at the cost of
profitability over their market shares (Herrala, 2009).

Threat of substitutes

Currently there would appear to be no obvious substitute for mobile phones in people’s everyday
lives. Rather, it seems that mobile phones are absorbing many of the functions of the other
electronic devices such as camera, calculator, MP3 player etc. The closest substitutes would
traditionally be fixed line telephony which obviously lacks mobility to really be considered
substitute and a laptop computer, which can be considered more of a complementary product
(also finds support in the secondary data on the US market in Chapter 5). However, it should be
noted that many of the manufacturers of complementary products may actually notice an
opportunity to become mobile phone producers mostly utilizing their existing knowledge and
expertise in electronics (take LG and Samsung for example). Thus, in the case of mobile phone
industry, threat of substitutes would not constitute a major factor in the five forces framework
(see also Datamonitor, 2010a; Datamonitor, 2010b).

Suppliers

In regard to its suppliers, any company generally needs to address questions such as “Can they
provide the quality we require at a good price?”, “Can they adjust to changes in the supply
volume?” and “What is out power relative to our suppliers and vice versa?” Increasingly,
however, large multinational companies in particular are concerned about the ethicality of their
suppliers’ operations. Recently, for example, Nokia was alleged to have used so called ‘blood
metals’ in their mobile phones, to which Nokia responded by implementing yet more stringent
systems to track the origin of its raw materials (Yle, 2010). Especially in the business of mobile
phone manufacturing, suppliers and supply chain management (SCM) play a crucial role. Since
mobile phones, smart phones in particular, contain numerous highly specialized components and
modules, handset manufacturers generally acquire most of the components, software and even
assembly from their suppliers and subcontractors (see the mobile phone value system in Figure
9). Nokia, for example, lists 35 countries as its main supplying locations and applies its so called
Code of conduct to all its business partners

Distributors

The second essential element of a company's micro-environment is distributors. The choice of

distribution channels is critical for a number of reasons. Firstly, the distributors strongly
influence the final sales price of each product and thereby directly affect the sales quantity.
Second, the distributors and later retailers play an important role in how the product is presented
to the customer and, to some extent, how it is positioned relative to competing products. Finally,
the choice of the distribution channel affects how customers perceive the brand. While Nokia, for
example, utilizes a wide range of sales channels for its Nokia branded products, it sells its luxury
phone brand Vertu (typically gold and diamond decorated, ranging from $6000 to $300 000)
only in Vertu and Nokia flagship stores (Vertu, 2011; Dialaphone, 2007) In the mobile handset
business, the distribution channel plays a crucial role. While in Europe most mobile phone
manufacturers rely on a large number of individual distributors and retailers, in North America
the bulk of handset sales is carried out by mobile network and virtual operators (see Figure 22).
The long-lasting dominance of mobile operators over distribution in the United States has
allowed them to introduce additional requirements related to e.g. tailoring and branding of
phones, and together with subsidies a commanding position in the industry. Still, the choices
related to distribution come down to the same basic questions, i.e. what are the total costs, how is
the brand communicated, how flexible is the distributor etc.

Customers

The third element of the company's micro-environment is customers. In this respect, it is

common to separate between individual consumers and organizational (or industrial) customers
(or buyers). While consumers are traditionally considered less rational and impulsive in their
decision making process, companies tend to be viewed as professional buyers following strict
budget, cost and profit considerations. (see e.g. Webster & Wind, 1972; Baumgartner &
Steenkamp, 1996) These kind of clear differences in purchasing behaviour have been questioned
(Wilson, 2000) and today’s B-to-B marketers widely recognize that emotions play an important
role also in business buying decisions (Kotler & Armstrong, 2006:178). In the mobile phone
business, consumers represent an enormous variety of tastes, preferences and affluence. In
developing countries, the sales of low-end mobile phones (often under $50) dominate, while in
developed markets of e.g. Europe and North America, consumers often opt for more advanced
models incorporating cameras, GPS navigation, Internet browsing etc. Moreover, most of these
consumers appreciate value added features and post-purchase services provided by the
manufacturer (e.g. Apple App Store, Nokia Ovi Store and Google Android Market) and often
base their purchase decision on the combination of the phone and the availability of these
services (see e.g. Singh & Goyal, 2009). Industrial buyers, on the other hand, tend to value
services related business use of the phone (e-mail, data security etc.) and supplier's ability to
provide a communications solution to the company instead of only handsets. Finally, with regard
to the mobile phone industry in Europe and the United States, there are some significant
differences in customer profiles. While in Europe a handset manufacturer can sell both directly
to the consumer and via distributors and retailers, in the United States the only major customer is
the operator that, then, functions as a distributor and retailer. This, obviously, has its effect on
what kind of marketing is needed to reach the end customer.

Competition

The Merriam-Webster dictionary defines competition as "the effort of two or more parties acting
independently to secure the business of a third party by offering the most favourable terms".
(Merriam Webster Online, 2011) Correspondingly, The New Palgrave Dictionary of Economics
states that "competition arises whenever two or more parties strive for something that all cannot
obtain." (Stigler, 2008) In this thesis, these competing "parties" are handset manufacturers who
act to "secure the business" or "strive for" the limited resource, i.e. the money, of their
customers. In terms of developed economic theory, competition is one of the most researched
areas of economics. Economists generally differentiate perfect and imperfect competition,
concluding that no other system is more Pareto efficient than perfect competition. According to
Organisation for Economic Co-operation and Development (OECD, 1999) perfect competition is
defined by four conditions: a) There are such a large number of buyers and sellers that none can
individually affect the market price. This means that the demand curve facing an individual firm
is perfectly elastic. b) In the long run, resources must be freely mobile, meaning that there are no
barriers to entry and exit. c) All market participants (buyers and sellers) must have full access to
the knowledge relevant to their production and consumption decisions. d) The products should
be homogenous. Imperfect competition, thus, occurs when any of the criteria for perfect
competition is not satisfied, e.g. when there is information asymmetry between buyers and
sellers, either buyers or sellers are able to influence prices or products are not homogenous. In
regard to the mobile phone industry, there is a clear case of imperfect competition. Firstly, the
three largest manufacturers Nokia, Samsung and LG held about 64 % of the global unit sales in
Q1/2010 while the tenth largest Huawei had 1,3 %. (Gartner, 2010) This kind of a market
situation is generally referred to as an oligopoly “in which 13 producers are so few that the
actions of each of them have an impact on price and on competitors” (Merriam Webster Online,
2011). Second, there are fairly high barriers to entry due to the capital intensive nature of the
business. In addition, gaining market share generally requires significant investments in
marketing and established manufacturers can benefit from advantages of scale. The third criteria
dealing with information symmetry and completeness might not far from what is required for
perfect competition. The mobile phone industry is well covered in media and each major product
launch is quickly followed by technical analyses of the products and comparisons to the other
products on the market. On the manufacturer side, due to the mere size of the companies, they
can be considered to, at least, have resources to produce the information they need to make
justified production decisions. Yet, it should be noted that critical views exist as to the media's
ability to provide the consumers with unbalanced and reliable information on the handset market
(see e.g. Ahonen 2010; Wilcox 2010) Finally, the last criterion related to the homogeneity of
products can easily be rejected in the handset market. The companies have highly differentiated
products in terms of design, capabilities, operating system, brand qualities etc. This is especially
true for high end phones such as Apple iPhone, Samsung Galaxy S or Nokia N8. However, in
more standard feature phones, the existence of close substitutes could be justified and the
competition in this area closer to perfect. This claim finds ground in the significantly smaller
profit margins available to the producer (see e.g. Elmer-DeWitt, 2010). Even though the
competition in the handset industry is imperfect, it is still fierce and highly dynamic. For the
purpose of this thesis, and to gain an insight into the components of competition, the Porter's
Five Forces