Power of Substitutes – Wireless service industry

Complementor Power – Wireless service industry

Factors Underlying Buyer Power	Response	Effect on Industry	Strength	Rank	Weight	Reasoning
Functionality driven handsets critical to wireless service providers?	Yes	Moderately Favorable	2.5	1	30%	More functionality drives more consumers towards wireless service providers
Technological advances helping in developing faster data transmission critical to wireless service providers?	Yes	Moderately Favorable	2.5	3	20%	Increasingly becoming popular in US and Europe, but not so in emerging markets where wireless service is used primarily to communicate
Access to content which can be used by consumers critical to wireless service providers?	Yes	Moderately Favorable	2.5	4	20%	Exclusive content becoming more important in US and Europe with increased data usage
Low cost technological advances critical to wireless service providers?	Yes	Favorable	1	2	30%	Low cost to consumers is an attractive proposition across the globe
OVERALL COMPLEMENTOR POWER LEVEL		Moderately Favorable	2.0

Exhibit II (B) 1 – Part B: Level 2 Analysis for Wireless Service Provider Industry

II (B) 2a: Threat of Rivalry

The fixed costs are comparatively much higher than variable costs, due to expensive capital costs associated with telecom equipment.

The exit barriers though are somewhat low as the infrastructure could be sold to other wireless service firms and could also be leveraged to provide other value-added services like mobile internet access.

Hence, due to little product differentiation and slowing market conditions in high revenue markets of US and Europe, overall threat of rivalry remains high and is moderately unfavorable for a new entrant in the wireless service industry.

II (B) 2b: Barriers to Entry

Due to the high initial capital costs and large subscriber base, economies of scale need to be realized by the wireless service providers to become a competing force. Also wireless service providers have exclusive access to handset manufacturers and hence the distribution channels for their service. With increased focus in established markets of US and Europe on new feature driven handsets, having exclusive access to popular, function driven handsets can be an asset. New entrants also need to get the FCC approval and exclusive access to frequency bandwidth. Lastly, this is a maturing market in the high revenue segments in US and Europe and hence chances of retaliation by existing players are very high.

Hence overall barriers to entry remain high and are moderately unfavorable for a new entrant in to the wireless service industry.

II (B) 2c: Supplier Power

There are numerous suppliers who can provide the necessary hardware equipment to the wireless service provider firms with increased cross selling of wireless equipment. For example, Samsung Networks and Telecommunication division of Samsung Electronics, supplies telecommunication equipment to both AT&T and Sprint^cxl. Also, as there are only two distinct wireless service protocols (CDMA and GSM), the hardware can be used for multiple wireless service providers.

Suppliers for the specialized wireless equipment invest heavily in R&D, and due to high capital costs can charge higher premium.

Hence the overall ability of suppliers to influence the wireless service is moderately unfavorable to the wireless service industry.

II (B) 2d: Buyer Power

The wireless service industry is experiencing slow growth in the high revenue markets in US and Europe as of now. US sales of mobile phone service are forecast to increase at an inflation-adjusted annual rate of 7.3% till 2011^cxli. This dynamic might change with the emerging markets where growth is about to take off. Buyers have numerous substitute options and this is very important to the wireless service industry firm to attain economies of scale in order to justify high capital investments for future infrastructure improvements. For example, one of Cingular’s strategic moves is to focus on increasing its customer base so as to justify investing in its upgrade from 2G to 3G networks in the US^cxlii. Firms are also attaining economies of scales through acquisitions of wireless service firms (e.g. Cingular acquiring AT&T wireless in 2004) to gain access to the network infrastructure and provide better services to end consumers^cxliii. The wireless service fee for the buyer is a recurring cost and hence the buyer is sensitive to this factor.

Hence overall buyer power is moderately unfavorable to the wireless service industry.

II (B) 2e: Power of substitutes

There are large numbers of substitutes available to the buyer with increased competition from landline companies, cable television operators, Wi-Fi and VoIP providers^cxliv, although this is partially offset by the advantages of mobile communication and the fee associated with breaking the contract with the wireless firm.. Also, the supplier has the option of selling handsets to other wireless service providers, beyond a usual initial contract period.

Hence overall the power of substitutes is unfavorable to the wireless service industry.

II (B) 2f: Complementor power

There is increased data usage by handset users in the US and Europe leading to an increased demand for wireless networks to provide adequate bandwidth and exclusive content to the end users. Highly functional handsets are also a complement to the industry to provide the data access in a user friendly manner. Low cost technological advances in wireless networks are also considered important by the end user due to widespread use of the mobile devices.

Hence complementor power is moderately favorable for wireless service industry.

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