Who's on first?

Partnerships between traditional and non-traditional wireless enterprises will be key to future success in this industry segment. What remains in question is how current and planned deployments of the data-based products and services will reshape and complicate the wireless landscape

Respondents to a recent survey by management consultants PRTM, cosponsored by Telephony magazine, expect that next generation wireless networks will be operational in their primary geographies within the next year and a half. What isn’t known is how current and planned deployments of the data-based products and services referred to as 2.5 and 3G will reshape and complicate the wireless industry.

As traditional and nontraditional wireless enterprises converge to form content/delivery partnerships, the positions of advantage within the industry’s value chain will shift according to still-emerging patterns of consumer demand and preference. How will the distribution of revenues and profits change over time? What types of service offerings and business structures will be required to manage these changes? How can companies best implement the necessary changes?

FIGURES WHERE WILL THE MONEY COME FROM? HOW AND WHERE SERVICES ARE DEVELOPED WHY FORM A PARTNERSHIP? Examples of participants in each value chain element ABOUT THE SURVEY

The survey was designed to explore these questions. In it, next generation wireless technologies were defined as 2.5 and 3G systems, including GPRS, EDGE, cdma2000-1x/3x and WCDMA/UMTS. First- and second-generation technologies, such as cdmaOne, GSM, TDMA and AMPS were excluded.

Key findings can be summarized as three themes: shifts in revenues and profits; partnering for integration; and partnering best practices.

Companies are seeking to capitalize on or compensate for shifts in revenues and profits among the various elements of the wireless value chain through integrated next generation offerings.

...companies able to seamlessly provide content and applications truly useful to consumers will thrive.

Respondents expect a gradual revenue shift away from wireless network operators and toward content and applications providers as the locus of value shifts from transport toward content. SMS text messaging is one example. New location-based wireless services, coupled with an improved ability to charge for content (through microbilling, ASP models, etc.), are the key factors behind the anticipated reapportionment of revenues within the wireless industry. At the same time, wireless operators face both mounting competition and the commoditization of their offerings, much as we saw with landline long-distance landline operators.

While the largest share of revenue will continue to accrue to wireless operators over the next five years, the distribution of revenue across the value chain elements will become more equitable. Content and applications providers’ annual revenues are expected to grow the fastest, doubling from 11% to 22% of the total.

Respondents expect the wireless industry as a whole to become more profitable over the next five years. Net profit margins are expected to grow, with the largest increases in profitability accruing to content and applications providers that are able to take advantage of economies of scale by spreading their fixed costs over wider customer bases. Wireless operators are expected to hold net profit margins constant by focusing on their most profitable customers,, and by increasing efficiencies.

For the wireless industry’s expected gains to materialize, companies will need to develop offerings that span multiple value chain elements. The great majority of respondents (78%) report that their next generation business plans focus on multiple value chain elements.

Furthermore, companies with superior relative rates of revenue growth attach the greatest importance to integrated offerings. Traditional wireless companies will look to share in the growth and profitability of the new content- and applications-based developments while companies new to wireless will need to offer solutions that combine delivery with content. Recent telematics ventures such as Wingcast and OnStar are excellent examples of non-traditional players (automotive OEMs in this case) partnering with existing wireless value chain participants to bring new integrated offerings to consumers.

Multi-element participation in the value chain, both direct and indirect, is expected to increase over the next five years. The largest shift is expected from “one element” to “two element” companies. The number of companies participating in only one value chain element is expected to decrease from 39% in 2001 to 28% by the end of 2005.

Partnerships will be the preferred means of integrating across the next generation wireless value chain.

The desire to provide integrated offerings and the expectation of participating in multiple value chain elements both indicate the transition away from transaction-oriented interactions among value chain participants in favor of more closely coupled business structures. Although the development of cross-chain capabilities in-house is the ultimate in integration, survey respondents generally prefer to partner with holders of existing capabilities.

Content and applications providers, expected to enjoy the greatest revenue and profitability growth, are expected to see the most partnering activity. Wireless operators expect to form, on average, 21 partnerships with content and applications providers by 2003. Conversely, content and applications providers expect to form, on average, two partnerships with wireless operators and three partnerships with delivery platforms and applications by 2003.

We surveyed respondents about a range of anticipated partnership types, including alliances, minority investments, joint ventures and acquisitions, with varying degrees of coupling and tightness of integration. While the types of partnerships preferred depend on respondents’ particular locations within the value chain, strategic/product alliances are the most likely approach to creating partnerships in all value chain elements.

Overall, respondents expect to form “tighter” partnerships (i.e., acquisitions, joint ventures, minority investments) with wireless operators and delivery platforms/applications providers. “Looser” partnerships (i.e., non-exclusive strategy/product alliances and marketing alliances) are favored with content and applications providers, and with portals and access providers. Verizon Wireless, AT&T Wireless, Sprint PCS and Palm all have alliances with Yahoo Mobile, for instance, and are listed as partners on Yahoo’s website.

The two most important reasons cited for forming partnerships are to exploit capabilities not available in-house, and to gain time-to-market advantage. Contributing reasons for partnering are to obtain a cost advantage over in-house capabilities, and to leverage the brands or customer bases of potential partners. Brand and customer leverage were particularly cited by content and applications providers as reasons for partnering.

Partnerships will be most successful when formed and managed according to “partnering best-practices.”

Clearly, companies face challenges in partnering with new elements of the next generation wireless value chain with which they have no familiarity or relationships. The most-cited challenge in forming partnerships is in making the right connections and introductions, particularly as traditional wireless companies and non-traditional companies try to make connections.

Beyond making connections, traditional and nontraditional wireless participants then face the challenges of sharing customer information, integrating processes and systems, and aligning business models. Those hurdles are not insurmountable, however. NTT DoCoMo has just formed a partnership with Coca-Cola to test “intelligent” soft-drink vending machines that disseminate brand messaging to consumers in conjunction with the i-mode network.

Through its engagements with clients in the wireless services industry, PRTM has identified a set of seven partnering best practices. We asked respondents about their application of those practices.

SUCCESSFUL PARTNERING Clear partnership goals are mutually identified and communicated. The due diligence process begins with an exacting evaluation of partnership needs, followed by partner selection based on explicit criteria. A single senior management sponsor speaks for the company both before and after the partnership. Partnerships are analyzed to determine which functions should be integrated and which should remain separate. Potential conflicts among the partners’ operational functions are identified and controlled prior to partnership formation. Partners create a network of interpersonal relationships from executives through middle management. Partnerships are managed to be seamless from the customer perspective.

Most companies use some sort of structured approach to determining whether a partnership is warranted, selecting the best partner, and then building an effective partnership. Over two-thirds--(70%) use two or more of the partnering best practices--and 40% use four or more.

The best practices most commonly used by respondents are a due diligence process, senior management sponsorship, and clear identification of common goals. Those companies that report greater past success at forming partnerships are more likely to use a greater number of the partnering best practices. Those same companies are also more likely to enjoy higher profit margins.

Which segments of the wireless industry will be the greatest beneficiaries of next generation technologies? Companies that continue to rely on traditional roles and offerings risk either missing out on the profits created by value chain shifts or being overrun by those shifts, while companies able to seamlessly provide content and applications truly useful to consumers will thrive.

The essential differences between leaders and laggards will be simple:

• recognition of the importance of integrated, cross-value-chain offerings

• skill in forging the necessary partnerships to efficiently provide those offerings.

Mastery of the art of partnering is overwhelmingly tied to greater revenue and profit growth. However, simply naming a host of new partners will not do. Quality, not volume, is essential. Successful partnerships, forged through partnering best practices, are required to transform the gaps in the next-generation wireless value chain into profitable new ventures. Companies that can form these bridges will ride the crest of next-generation wireless services.
Greg Chiasson (gchiasson@prtm.com) is a principal in the Worldwide Telecommunications Practice of management consultants PRTM (www.prtm.com). He is based in the firm's Chicago office. James Guyton is a consultant in PRTM’s Washington, D.C., office. PRTM business analyst Kevin Bonebrake contributed to this article and the underlying survey.

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ABOUT THE SURVEY
As traditional and nontraditional wireless enterprises converge to form content/delivery partnerships, the positions of advantage within the industry’s value chain will shift according to still-emerging patterns of consumer demand and preference. How will the distribution of revenues and profits change over time? What types of service offerings and business structures will be required to manage these changes? How can companies best implement the necessary changes?

COMPANY REPRESENTATION BY INDUSTRY

Ninety-one respondents, representing more than 80 companies, participated in the survey. company representation by industry. The mean annual revenue of the respondents’ companies is $641 million. Individual revenues range from under $20 million for start-up content and application providers,, to $3 billion or more for major wireless operators.

By geography, 40% of the respondents’ companies serve more than one geographic region. Over half (56%) serve North America, 48% serve Europe, and 48% serve Asia. Respondents were chiefly senior and middle managers, predominantly in general management (33%), technology planning (16%), and operations (15%) positions.

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Examples of participants in each value chain element
TYPE	EXAMPLES
Element 1 Content & Application Providers	Bloomberg MapQuest
Element 2 Portal and Access Providers	Yahoo AvantGo
Element 3 Wireless Network Operators	Sprint PCS Vodafone
Element 4 Support Services	Spectrasite Convergys
Element 5 Delivery Platforms & Applications	Nokia Palm

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