The Mobile Telephone as an Innovation Network

Papers March 7, 2010 9:34 pm

Abstract: From its early beginnings in a 1908 U.S. Patent, the mobile telephone has reshaped human communications and provided rich new platforms for innovation, which go way beyond classic synchronous audio communication. This paper explores the role of the mobile telephone as an innovation network, its challenges and future opportunities.

Introduction

The mobile telephone, in spite of being quite a recent invention (mid 50’s), with a significant adoption rate of over 50% that started just 10 years ago, has managed to dramatically change our technological and social landscape. Indeed, it has permanently redefined mobile communications, making us reachable 24/7 in almost all urban areas around the world, like it or not. (Ling, 2007)

This paper explores the mobile phone phenomenon from the industry level, focusing on the interactions of the different players and the technology behind them. The hypothesis is that between the specific technologies that enable mobile communications and the different industries involved, there are special interactions that generate a particularly fertile ground for all kind of new products and services, therefore generating an interesting industrial ecosystem which can be described as one of the most important “innovation networks” of our time.

As any complex ecosystem (technological, sociological or biological), this innovation network lives in a delicate balance; where the mobile networks, the device manufacturers and the multiple service providers can destroy or create great amounts of value even with apparently minor decisions (Lorenzoni, 1995). This issue is particularly important for private and public policy makers because restrictions or new standards meant to apply only for certain players might dramatically affect other participants of the industry.

To begin this analysis, firstly a brief historical and evolutionary view of the mobile telephone will be provided. Secondly, the concept of the mobile telephone as an innovation network will be expanded. Thirdly the challenges as well as the opportunities of the industry will be discussed, finalizing with general conclusions.

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2 History and Evolution of the Mobile Telephone

Even though the concept of mobile telephone emerged soon after the beginnings of  landline telephony with the 1908, U.S. Patent 887,357, it was not until 1971, with the first commercial “car radio phone” network in Finland (ARP), that the concept was put in practice at a commercial scale. (Ling, 2007)From then onwards, and as shown in the timeline in figure 1, a rapid technological evolution pushed the devices and the networks to levels good enough for the global mass market (with reliability, coverage and costs originally being the biggest concerns). This massification hit an important milestone for the developed markets during the year 2000 when the penetration of the mobile phone reached the levels of landlines. This occurred  just 3 years after in the developing world; a place which  since  has experimented penetration growth rates high enough to rival the penetration in developed economies. (Figure 1 and Figure 2).With the beginnings of worldwide massification in the year 2000, the competitive forces increased substantially. More mobile operators got into the market as well as an increasing number of device manufacturers. This meant that to create competitive advantages the different companies had to innovate urgently. These innovations materialized into an avalanche of new features in the devices and technological improvements in the network. This can be better visualized in the 2000-2010 “digital decade” timeline figure 1 and in figure 3 which provides a list of the modern telephone features that are becoming a standard in 2010 handsets.

3 The mobile telephone as an innovation network

By its own technological nature, the telephone constitute the first real time and point to point telecommunications network. What this paper proposes is that the mobile telephone has also achieved the status of one of the most important innovation networks of our time;  generating and nurturing, from the industry viewpoint, innovation on a massive scale.In essence and as defined by Tidd and Bessant (2009), an innovation network is a “complex, interconnected group or system” where the networking effect between the participants generate or increase innovation in an amount or degree that otherwise couldn’t  be achieved without the network effect.In the specific case of the mobile telephone and the industry and subsystems around it it is possible to identify 3 key players on which the whole system relies to create value as shown in figure 4. Figure 4, The key players in the mobile telephone innovation network. Original. (Based on Ling, 2007)

The purpose of this figure is to illustrate the strong bonds between the different industries; the mobile networks (or carriers), who provide the network infrastructure containing the antennas and all the telecommunication hardware (excluding the handsets), the device manufacturers, who usually sell the devices through the mobile networks but increasingly directly (like the case of Google’s Nexus One) and the vast amount of service/content providers, from creators of apps, music or software to Wi-Fi “hot spots” wireless internet providers which  offer broadband to notebooks and cell phones.

The relationships inside the network

To explore the relationships inside the network, the 3 key players will be explained in additional detail, focusing on their main role, their critical interactions and interdependencies. Also, to help understand the services that emerged out of this innovation network figure 5 is provided.• Mobile Networks:Mobile networks represent “the last mile” of the mobile telephone industry from the customer’s perspective. They are characterized by big corporate companies, with huge sunk costs in infrastructure. This  usually leads to there being no more than 3 relevant players in each market and a virtual oligopoly. Because these companies have the direct contact with the customers, they can control vital aspects of the industry like pricing, coverage, usage and contract policies. This makes them key decision makers and stewards of how the entire industry balances.

This power is both an advantage and a burden. It means that they can establish the rules of the game, protecting their own self interest, but that they also have to manage innovation way beyond their organizational frontiers. They have to ensure that the incentives they create, directly and indirectly, and the actions they pursue are well aligned with the creation of value for the customer. Additionally they have to try to appropriate part of that generated value but leave enough for the customer and the industrial third parties involved (Cooray, 2008). This is not an easy task but is an important one; if they fail to nurture and protect the innovation network around them, they have the risk of slowing down the whole industry because of the lack of innovation and the subsequent stagnation in sales growth. Thus, this invites disruptive forces to compete for a piece of the market and eventually leaves them out of business.

Interestingly, the size that makes them stronger in the short term is also what limits their ability to generate out of the box innovations (Dekleva, 2007). Given the scale, specialization and complexity of their operations they cannot afford a more opportunistic and exploratory approach to develop new product and services. Thus they have to rely on the innovation power of the much more fragmented device manufacturers and other service and content providers.

• Device Manufacturers:This group of global and highly competitive manufacturers of mobile telephones are the companies that bring the concrete piece of technology with which the customer interacts. During the 90’s they were seen as the providers of a basic piece of hardware, no different than many fixed line phone manufacturers (Bohlin, 2010). The customer was expecting reliability and a simple set of features from them. Although elements like the design have always been an important feature in this personal item; the relationship with the manufacturer was expected to be merely transactional and in many cases intermediated by the carrier.
In recent years and especially since 2007 with the introduction of Apple’s iphone, the whole paradigm appears to have changed, shifting power from the carrier to the device manufacturer. This dramatic transition occurs because of two main reasons. Firstly there is the diversification in the use of the mobile telephone where communication, productivity tools and entertainment well beyond simple phone calls converge. Secondly there is the creation of new virtual marketplaces for applications and multimedia content independent from the carriers (Like itunes and Apple’s app store). These two elements together make the customers sometimes choose the handset first and then the carrier, introducing an additional threat of commoditization for the network providers.

• Service/Content Providers:With the emergence of more sophisticated handsets and wireless access to the internet, a new breed of relatively small companies scattered around the world has been created to provide paid and free (with advertising) content to mobile devices. These companies fill the important gap between the potential benefits of the technology and the actual content and services available to make use of that potential. Without them, companies like Apple cannot fulfil their value proposition in their gadgets (because they would be unable to create the huge amount of specialized apps and content on their own) and the network providers wouldn’t have as much demand for wireless internet access, harming  an important area of their business.

4 The Challenges and Problems of the Mobile Telephone

Considering what has been discussed before, some of the biggest challenges come from the coordination and interactions between the 3 key players in this industry. As suggested by Dhanaraj & Parkhe, 2006 and Gomes-Casseres, 1994, as loosely coupled systems, innovation networks can have unstable linkages amongst their members. Competitive pressures between themselves can exacerbate the instability and actors may stop collaborating or, worse, start collaborating with firms belonging to competing networks, which in this case can mean the development of parallel structures, like mobile phones operating via VoIP, which in presence of extensive Wi-Fi, or an equivalent, could completely destroy the business for current mobile networks. Another critical issue is the agility required to agree and implement new open standards for communications, which encourage the creation of wide platforms to innovate and reduce the costs of long fights between multiple standards among different companies, industries and countries.A different set of challenges, out of this specific context, are how to address the different requirements of the growing demand for mobile services in the developing world; sustainability issues, especially about the e-waste generated, health and safety aspects as diverse as driving while talking and the potential harmful effect of electromagnetic emissions and the rapid evolution of requirements and expectations that an ever more sophisticated customer is actively demanding.

5 Future Opportunities and Benefits

Looking at the trends towards an increasing use of mobile services and products and the convergence of multiple devices into the mobile phone, the future of it at the centre of our daily communications seems to be secured. What is not necessarily secure is the future of the current providers, particularly the mobile networks, because of their intrinsic inflexibilities resulting from their big infrastructure sunk costs. For this specific group, the most interesting opportunities are the expansion into developed countries, utilizing more flexible and cheaper infrastructure and developing, in alliance with the other players, a custom made offer of products and services that satisfy the specific needs of places like Africa and Asia. This is where there is still an important amount of people without affordable and reliable means of communication. Other interesting option is to transform themselves into the biggest internet providers, in a moment where most of our smart devices are not only able to connect to Wi-Fi but increasingly to 3G and eventually 4G networks, this possibility seems not far away and a potential source of significant revenues.

6 Conclusion

Innovation networks are delicate ecosystems that can be easily disrupted for good or bad. The decisions of one player can affect dramatically the other, and come back in unpredictable ways. There is also an amazing space to bring new ideas to the market because  not only does competition exist naturally between the different firms, but there  is also a huge array of symbiotic interactions.  This means that small firms can get into the industry with a reduced amount of money but still participate and get access to millions of customers as seen with small iphone app developing companies and independent music producers, which can now offer their products along big names like Google and Apple.The next big battles in the mobile world are moving away from the carriers to the device manufacturers and nowadays even to companies developing the operating systems for the phones, like Google with Android, Apple with Iphone OS and Microsoft with Windows Phone 7.All these new dynamics will spur dramatics shifts in the future, and only the ones aware of the importance of the innovation networks behind themselves will be able to succeed. Rapidly, the mobile industry has entered into an exciting new era, where it is no longer about customers control and lock in strategies, but actually continuous innovations and a willingness to collaborate with other players.

7 References

• Bohlin, Anders; Gruber, Harald; Koutroumpis, Pantelis, 2010. Diffusion of new technology generations in mobile communications. Information Economics & Policy, Mar2010, Vol. 22 Issue 1, p51-60• Cooray M, 2008, Mobile Phones: The Intersection of Technology, Policy and Social Issues, 10th International-Business-Information-Management-Association Conference, JUN 30-JUL 01, 2008 Kuala Lumpur, Malaysia, Source: Innovation and Knowledge Management in Business Globalization: Theory & Practice, Pages: 550-557• Dekleva, Sasha; Shim, J. P.; Varshney, Upkar; Knoerzer, Geoffrey, 2007. Evolution and Emerging Issues in Mobile Wireless Networks. Communications of the ACM, Jun2007, Vol. 50 Issue 6, p38-43• Dhanaraj C, Parkhe A , 2006, Orchestrating innovation networks, The Academy of Management Review (USA), Jul 2006 Vol 31 No 3, p659-670• Gomes-Casseres, B. 1994. Group versus group: How alliance networks compete. Harvard Business Review, 72(4): 62–74.• International Telecommunications Union, 2007. Market Information and Statistics [online]. Available from: www.itu.int/ITU-D/ict/• Koski, Heli; Kretschmer, Tobias, 2007. Innovation and Dominant Design in Mobile Telephony. Industry & Innovation, Jul2007, Vol. 14 Issue 3, p305-324• Ling, Richard Seyler, 2007. The mobile connection: the cell phone’s impact on society. Morgan Kaufmann• Lorenzoni, G., & Baden-Fuller, C. 1995. Creating a strategic center to manage a web of partners. California Management Review, 37(3): 146–163.• Tidd, Joseph, 2009. Managing innovation: integrating technological market and organizational change. 4rd edition. Wiley

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