Telecom portals: strategic interactions and value flow analysis

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Telecom portals strategic interactions and value
flow analysis

• Amiya K. Chakravarty Tulane University, New
  Orleans
• Adrian S. Werner University College Dublin
• and Centre for Telecommunications Value Chain
  Research

This research was made possible by Science
Foundation Ireland (SFI) funding for the Centre
for Telecommunications Value Chain Research
(CTVR) under Grant No. 03/CE3/I405.
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Agenda

• Introduction Examples and motivation
• Basic business models
• Model formulation and discussion
• Model extensions and discussion
• Summary, further research

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Background and Examples

• Examples Internet and mobile portals
• i-mode (O2)
• Vodafone Live
• Yahoo
• NTT DoCoMo
• many others
• Walled garden vs. open access
• Common featureCustomers unique point of
  access to a selection of services

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Motivation

• Industrial observations
• Variety of contracts and revenue distribution
  schemes
• Most value from customer ends up with NO
• Not much scientific work so far
• Analyze and explain
• Interactions portal owner ? service providers
• Value migration from customer to ?
• Influence of uncertainty, externality effects,
• Who makes money and why?

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Business model

• Portals usually owned by NO
• Walled garden
• NO selects Content or Service Provider(s)
• Customers access to services requires access to
  portal (connectivity)
• Two basic business models

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Basic business models1. Shopping model
(individual billing)

• NO sets fees for accessing portal
• SP sets fee for accessing content
• Customers
• pay connectivity fee to NO
• pay service fee to SP
• SP pays fee for access to portal

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Basic business models2. User fee model
(combined billing)

• NO sets fee for accessing portal
• SP sets fee for accessing content
• Billing via NO collects all fees and
  subscriptions
• Connectivity fee
• Charge for service bought from SP
• NO shares percentage of service charge with SP

(Devine and Holmqvist 2001)
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Model formulation
Decision variables NO Connect. fee
Access fee Revenue share SP Service
charge

• Demand linear
• Connectivity
• Service
• Profit functions
• Network OperatorConnectivityService
• Service Provider

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Model formulation, cont.

• No service provision without connectivity
• But connectivity without service provision
• ? NO controls connectivity
• ? Utilize Stackelberg game concepts
• Network Operator principal / leader
• Service Provider agent / follower
• SP responds on NOs policy ? or
• NO incorporates in ? optimal policy
  or

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Properties and solution

• SPs profit function quadratic in ?
  unique differentiable
• NOs profit functions or
  differentiable and strictly concave in
• Solution
• Individual billing closed form for
  and thus for
• Combined billing closed form for no
  closed form for
• Benchmark model first best solution

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Profits Network Operator

• First best
• Individual
• Combined
• Double (individual combined)

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Profits Service Provider

• First best
• Individual
• Combined
• Double (individual combined)

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Discussion and interpretations

• First best (regulation)
• Extracts largest total profits
• NO higher than SP (2300 vs. 750)
• Deregulation
• Both prefer combined scheme, but
• NO large SP small
• ? Compromise, participation incentives?
• ProfitsNO much higher than SP (24502950 vs.
  0500)
• ? More even distribution?
• Competition effects?

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Extending the basic model1. Multiple service
providers

• Each SP responds individually on NOs policy
  gives
• NO incorporates all responses solves as before
• SPs prices influence each other indirectly via

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Extending the basic model2. Capacity constraint

• SP response model as before (unconstrained)gi
  ves
• NO limited capacity (connectivity service
  delivery)
• First order optimality conditions give optimal
  NO policy dependent on parameters
• Compare shadow price of R ? capacity cost

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Discussion and interpretations
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Discussion and interpretations, cont.

• Examples of observations
• Maximal profits NO SP(s)
• Monopoly unlimited capacity ? regulation
• Monopoly limited capacity ? individual billing
• Competition unlimited capacity ? combined
  billing
• Total welfare
• Monopoly ? regulation
• Competition ? combined billing
• Limited capacity can induce more even profit
  distribution
• Prove generality of observations!

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Summary

• Telecom services portal as part of value network
• Modelled value flow customers, NO, SP
• Game theoretic concepts Stackelberg game /
  leader-follower model
• Benchmark and 2 basic business
  models Individual billing, combined billing
• Three constellations Single SP, two SPs,
  limited capacity
• Derive insights economic and strategic
  mechanisms in different scenarios Prices,
  profits their distribution, demands,
• work in progress

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Further plans

• Interacting SPs
• Outsourcing portal owned by third party
• Several portals
• Uncertainty / imperfect information
• Independence from demand functions?
• Inverse roles of NO and SPprofit advantages
  only due to principals power?

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• Thank you for your attention!?