Porters five forces of vodafone, O2 and T-mobile

University Degree Business and Administrative studies

1.0 PORTER’S FIVE FORCES ANALYSIS

The five forces analysis is a useful tool which will be used to ascertain the intensity of competition within the internal environment of the industry. The tool serves as a framework used to determine the attractiveness in terms of profitability of the industry. According to Porter, M.E (1980), the state of competition in an industry depends on five forces which constitute the micro-environment (fig 3.). In this analysis, those significant operating factors of the micro-environment will be identified and examined.

COMPETITIVE ARENA

For the purpose of evaluating the intensity of rivalry in the MNO industry, the competitors to be analysed are; Telefonica O2, Vodafone and T-Mobile.

TELEFONICA O2 UK; Established in 2001, O2 is currently the leading provider of mobile services in the UK in terms of revenue, consumer penetration and number of stores. The company is currently leading the market with a total customer base at almost 20 million as at 31st December 2008 and market share of 28.2% (taking into account its 50:50 joint venture with Tesco mobile). O2 has repeatedly had outstanding performance in the UK, fuelled by four major sectors35: Number one in customer satisfaction- evident in their contract churn rate which reduced from 1.5% to 1.3% by the end of 2008; Their SIM-only Simplicity tariff; The success of top range products in the market, including Blackberry and iPhone; The success of their broadband service. O2’s target market is the ‘Text Generation’ of 16-25 year olds and this is imputed in their competitive strategy such as the their free text sim cards. O2 recently rolled-out three new products to target the family segment of the UK market35. The products are; O2 Joggler, O2 Calendar and Your Family Bolt-on all designed to help family life run more smoothly and save families money. The roll-out will re-position O2’s brand as family oriented41.

VODAFONE; Vodafone, currently the world’s largest phone company by market capitalisation was the first network operator to operate in the UK. On 1st January 1985, the first UK mobile call was made on Vodafone’s network. It currently has its mobile operations in 27 countries around the globe with 186.8 million proportionate customers worldwide36. In the UK, it is currently the second largest mobile phone company in terms of subscriptions, but number two in terms of revenue. The group attributes its success to investments in infrastructure, innovation and award-winning customer service and the ability to deliver outstanding benefits of mobile communications. Vodafone’s operating strategy is customer focused and product led; they strive to be the leading innovators of products, using the latest technology42. Vodafone believes in positive associations with winners, and being involved in activities which inspire and excite the public. The group currently sponsors top range sporting brands such as the Manchester United Team and Ferrari Formula 1 racing team which increases brand awareness and preference. This is a key strategy the company employs aimed at building its brand to become globally renowned. Vodafone’s target market include but not limited to business customers reflected in their

T-Mobile; T-mobile formerly known as one2one was acquired by Deutch Telecom in 1999, and rebranded T-Mobile in 2002. T-Mobile was the first operator to launch picture messaging in 2002, the first personalised ringtone service in Europe in 2003, pay as you go service and HSDPA for high speed mobile access. Currently operating in the UK with a customer base of over 17 million, T-Moble stands at number 3 in terms of number of subscriptions, partly from its 50:50 joint venture with virgin mobile.

Figure 2 Market Share in Term of Subscriptions

Source; Mintel Mobile Phones and Network Providers - UK - November 2008

Vodafone was once market leader, but was overtaken by O2. Market share is relatively balanced between the three operators.

1.1 INTENSITY OF RIVALRY

The network operators industry is highly competitive and the rivalry can be characterised as intense and cutthroat. The factors influencing the degree of intensity are discussed below;

Number of Competitors; The early days (late 1980s) of the MNO industry were characterized by domination by very few companies; O2 and Vodafone in the UK. This was ...

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Figure 2 Market Share in Term of Subscriptions

Source; Mintel Mobile Phones and Network Providers - UK - November 2008

Vodafone was once market leader, but was overtaken by O2. Market share is relatively balanced between the three operators.

1.1 INTENSITY OF RIVALRY

The network operators industry is highly competitive and the rivalry can be characterised as intense and cutthroat. The factors influencing the degree of intensity are discussed below;

Number of Competitors; The early days (late 1980s) of the MNO industry were characterized by domination by very few companies; O2 and Vodafone in the UK. This was the effect of regulation and restrictions on licenses that existed which sheltered the companies from competition. However, recent deregulation and liberalisation in the industry has opened up the markets for entry by new players, therefore increasing competition. As a result of deregulation, the industry has seen entry of several new companies, increased innovation of new technologies and services, presenting the end users with a plethora of choices37. Currently, there are 16 mobile network operators in the UK, ten of which are Mobile Virtual Network Operators. The high concentration in the industry means players have to compete for the same assets and customers within the UK market and this intensifies rivalry.

Due to the existent high level of competition, operators seek to gain competitive advantage by effecting competitive strategies such as;

Changing Prices; Competitors often introduce lower prices in terms of tariffs and charges to gain temporary competitive advantage. For instance, Vodafone has recently abolished roaming charges for calls, texts and picture messaging within Europe all through the summer. No other competitor currently has this offer, and the price promotion encourages travellers who are on other networks to subscribe to Vodafone, consequently increasing its customer base. Such a strategy will only give Vodafone a temporary competitive advantage as price changes are easily matched and it is likely that rival networks will adopt the strategy.

Product Innovation & Differentiation; Improving existing products and innovating new ones can be a significant source of competitive advantage for operators. Vodafone has always aimed to be at the fore front of innovation with launch of services such as Vodafone live! which increased its customer base by 1million in the first six months of its launch. T-Mobile also has been a leader in innovation launching products such as the flext price plan which gained one two million customers two years after launch. Also, O2 introduced the Sim-only tariff which was them copied by T-Mobile. T-Mobile’s sim only was targeted at students.

Lack of Differentiation and Low Switching Costs; Mobile phones services are viewed as commodities by the consumer. Thus, consumers’ choice of network operator is largely dependent on attractive low prices and services as there is minimal differentiation between products and services offered. This heightens industry rivalry as players compete intensively to provide value for customers in terms of low prices. An effect of competitive low prices in the industry is that revenues of the industry as a whole is reduced. The operators typically adopt each other’s strategies. For example, T-Mobile launched its family tariff in 2007 which was recently adopted by 02.

Also, mobile phone users are able to move between networks that they believe to beneficial with little or no costs. This is particularly easy for pay as you go customers as compared to contract customers who may have to wait till the end of the contract or pay an amount to switch networks. Reduced portability times and the ability for consumers to retain their numbers when transferred to another network makes switching cost low. Though costs of switching for business customers who use specifically tailored plans and products may be higher, the general switching costs in the industry is low. This low costs of switching between providers increases rivalry.

High Fixed Costs; High fixed costs in an industry increases rivalry. The network operators have very high fixed cost attributed to development of infrastructure and mainly to the fees paid for obtaining spectrum licenses. Vodafone paid £5.3 billion; T-Mobile (then one2one) paid £4 billion, while O2 paid £3.4bn to obtain licenses to operate 3G services38. These high fixed cost incurred has created pressure on the operators to maximise spectrum capacity evident in increasing price cuts and reductions from operators. The end result of this is increased completion and rivalry between operators.

High Exit Barriers; The MNO industry is characterized by high exit barriers because the assets owned by operators are highly specialized. For example network infrastructure such as masts and base stations as well as billing systems cannot be employed for many other purposes. The effects of high exit barriers are that operators may encounter challenges in liquidation and possibly low liquidation values. This also increases rivalry because when faced with difficulties in terms of profitability, operators may continue to operate using desperate measures such as extreme price cuts rather than exiting the market. Such a strategy will adversely impact on the revenues of incumbent operators.

1.2 THREAT OF SUBSTITUTE PRODUCTS

A number of substitute products that may pose threats to MNOs exist. Fixed line services have traditionally been the main form of communications, but have been overtaken by the growth of mobile networks. Although land lines in the UK remain relatively popular, I do not subscribe to the idea that fixed lines pose a significant threat to mobile operators because it does not fulfil some of the purposes of mobile communications, such as instant messaging services video calls amongst others.

A more considerable threat is the growing popularity of VoIP provided by Skype. In my opinion, this service which utilizes internet on computers and WiFi on smart phones could be a direct substitute for mobile operators. Skype offers to its subscribers, free phone calls and instant messages to other Skype users around the globe and low cost services to mobiles. As at the March 2009, Skype had 405 million users and this number may very well continue to grow as it has currently rolled out its services on Nokia’s N97 and the 3 network. The success of Skype is facilitated by the increasing popularity of high speed internet and wireless devices39, 40.

1.3 BARGAINING POWER OF BUYERS; High buyer bargaining power within an industry essentially results is enforcing price drops.

Size and Concentration of Buyers; Despite the current high penetration rates and possibly, saturation in the UK market, the number of subscription is still increasing though at a slow pace. Currently, there are over 74 million mobile subscriptions in the UK indicating a concentrated buyer group. This tremendously high number of buyers means that they are able to bargain and demand lower prices as operators try to achieve customer satisfaction. From personal experience, threats of switching to another network have driven offerings of lower prices from operators. This is because there is a wide variety of operators and services to choose from without incurring high switching costs, therefore, consumers are able to achieve high bargaining power as operators seek to attract and retain customers.

The Buyer Has Full Information; As discussed in the socio-cultural factors of the PEST analysis, the rapid penetration of broadband in the UK has had the effect of consumers having easy access to full information regarding mobile operators and the quality of their services, tariffs offered across the range of competitors, and sometimes even costs. This gives the buyer greater ability to make informed choices, thereby increasing their bargaining power.

Furthermore, low switching costs and lack of differentiation which have been discussed under the intensity of rivals also increases buyers’ bargaining power.

1.4 BARGAINING POWER OF SUPPLIERS;

The primary supplier to the MNO industry is mobile phone manufacturers such as Nokia, Samsung, and Sony Ericsson. Other suppliers include content providers, providers of network infrastructure and software suppliers. It may seem at first that the bargaining power of suppliers is high since the MNOs would not be in operation without them. However, in-depth analysis reveals that this may not be the case. In terms mobile phone manufactures, although the market is dominated by a few companies; Nokia, Sony Ericsson and Samsung, the range of manufacturers is very wide and more concentrated than the MNO industry. This means that MNOs are able to choose from a wider variety thereby decreasing bargaining power of the handset manufacturers. However, I feel that this only reduces the bargaining power of handset manufacturers moderately. I attribute this to the reasoning that MNOs compete with each other to secure exclusive deals to provide top of the range handsets thereby giving the handset manufacturer high bargaining power. For example, O2 and Vodafone competed against each other in 2007 to secure a deal with Apple to exclusively supply its iPhone. Vodafone lost the battle, but O2 apparently paid a very high price to secure this deal. Exclusivity provides competitive advantage for the network operators; O2 accounted a proportion of its outstanding performance in 2008 to the success of the iPhone. Vodafone also secured a deal to exclusively supply the Blackberry Storm,

Handset manufacturers’ bargaining power is furthermore reduced as several MNOs increasingly launch their own brand mobile phones, making them less dependent on manufacturers. For example, O2 launched own brand phone- Cocoon, in 2007 and T-Mobile launched own-brand phone MDA Compact V in May 2008.

Also, numerous contents and software suppliers exist in the UK market. These companies range from big ones such as Microsoft and IBM to smaller companies. The highly concentrated market makes the bargaining power for these companies low.

Other factors that make the bargaining power of the handset manufacturers low include;

The MNO industry is the most important supplier group for handset manufacturers and as such their revenues are closely related. I feel the manufacturers may have to be cautious in their bargaining to secure their revenues.

1.5 THREAT OF NEW ENTRANTS; threat of new entrants into the MNO industry is dependent on the barriers that exist. These are discussed below;

Economies of Scale; MNOs incur fixed costs such as from building and maintaining cell sites as well as costs from the network operations centres. These costs are regardless of customer base and the cost of serving one customer represents only a tiny proportion of the total costs. Existing operators are able to achieve economies of scale because they have been in the business for long enabling efficient production. This poses a threat to new entrants as I feel they will be unable to compete with incumbent operators.

Capital Requirements; the capital requirements for operating a mobile network are relatively high. Incumbent operators have employed large amounts of capital due to high payments to obtain licences to operate 3G networks as well as development of base stations masts. New entrants would naturally have to obtain a license and build infrastructure ad this poses a threat to any new entrants.

Government and Legal Barriers; Prior to the EU regulation on liberalisation, (discussed in PEST above) entry into the MNO industry was extremely low because it was tremendously difficult to obtain a spectrum license from the government due to its scarce nature. Though recent regulations by the EU aim to liberalize frequency spectrum, only a limited number of operators can enter the market because of the scarce nature of spectrum.

In summary of the conducted Porters’ analysis of the MNO industry, I highlight that industry players should be aware of the following points;

Intensity of rivalry between operators is high because of high fixed costs, high exit barriers, low switching costs and low product differentiation.
Substitute products such as Skype pose a significant threat to incumbent MNOs
Bargaining power of buyers is high resulting in moderate profits.
Bargaining power of suppliers is high or low depending on the situation. For example high in exclusivity deals
New entrants do not pose a significant threat to incumbent operators.

References

http://www.o2.co.uk/

Todeva, E., & John, R. (2001) Shaping the Competition and Building Competitive Advantage in the Global Telecommunication Industry: The Case of British Telecommunications Plc. University of Surrey, School of Management