The response strategies of incumbent mobile network operators on the disruptive potential of public W-LAN in Germany

This paper examines how three incumbent mobile network operators (MNOs) in Germany responded in terms of their strategy to the emergence of the wireless local area network (W-LAN) technology and how they interpreted this potentially disruptive technology in their own strategic context. Additionally, prior empirical results and forecasts on the limited disruptive potential of W-LAN for the German MNOs lacked persuasive firm-level evidence to distinguish the real reason for the presented observations and analysis. So far it was unclear whether the observations were caused by successful response strategies of incumbent MNOs or by the inherent limited disruptive potential of the W-LAN technology. For this purpose case studies of three major MNOs in Germany were performed to assess and compare their respective response strategies. Using the theoretical framework of disruptive technology, the results were evaluated in a cross-case analysis to study how these firms interpreted and reacted to the potential disruptiveness of W-LAN. The results indicate significant differences for the respective MNOs between their perception of W-LAN as a potential disruptive technology, their strategic development processes inside the organisation to understand the potential impact of W-LAN on their respective business model, and to enforce an appropriate response strategy and structural implementation. This incumbent heterogeneity depends primarily on their idiosyncratic strategic and structural context. These findings reveal that the incumbent MNOs in Germany were aware of the disruptive technology concept but did not react in a theory-conform way. However, since W-LAN had a sustaining impact on the MNOs and their response strategies followed sustaining reaction patterns, earlier studies, which show a limited disruptive potential of W-LAN for the German MNOs, are supported.     

The Influence of Regulation and Disruptive Potential on Incumbents' Submarket Entry Decision and Success in the Context of a Network Industry

This paper uses the theoretical perspectives of disruptive innovation, network externalities, and regulation to study the submarket strategies of incumbent firms that operate in a regulated network industry. In this setting, the impact of potentially disruptive innovations might be different because of the tighter regulation of incumbent firms. By analyzing the entry and success patterns of incumbent mobile network operators (MNOs) in the public hotspot markets in 17 Western European countries, we focus on how regulation and network effects as well as disruption factors influence the incumbent firms' strategies. In doing so, this paper departs from prior research that has primarily focused on unregulated industries and combines contradicting explanations from disruptive innovation theory, the motivation/ability framework, regulation theory, as well as network effects to provide a comprehensive analysis on how incumbents behave in a regulated network industry that is being confronted with a potentially disruptive innovation. In particular, while disruptive innovation theory predicts that the incumbents' vast experience in an industry could cause them to avoid entering new submarkets created by potentially disruptive innovations, the desire to avoid regulation could encourage such submarket entry. Furthermore, in regulated network industries, incumbent firms might have a stronger motivation to enter new submarkets as the importance of single customers and high market shares could be substantially different. These contrasting insights are used to develop an integrative research model and to derive hypotheses on incumbents' submarket entry decision and success. Drawing on cross‐sectional, multicountry data of 62 MNOs that operate in 17 Western European countries, this study uses logit and tobit regressions to test the impact of disruption factors, regulation, and network externalities on the entry decision and success of incumbent firms. The results reveal that the incumbent MNOs are caught in an area of conflict between the regulated industry context and their international technology strategy. The findings suggest that the incumbent MNOs' motivation and ability to escape regulation positively influenced their submarket entry and success in the public hotspot market. Thus, the potentially disruptive scenario was successfully turned into a potentially sustaining one as the incumbent MNOs could enhance their presence in the mobile broadband market. The testing on a multicountry basis as well as the positive influence of ethnocentric technology strategies for public hotspots, which are devised in the headquarters' location and are then brought out internationally, shed new light on an industry that has typically been characterized by country‐by‐country decisions. These findings may also reveal challenges for future research on disruptive innovations in multinational industries and expose future challenges for regulative authorities and managers. This paper thereby adds to the theory of disruptive innovation as it includes the influence of regulation on incumbents in network industries. Additionally, this study expands on previous findings on the disruptive potential of wireless local area network technology by employing a multi‐country analysis in 17 Western European countries.     

Access regulation and infrastructure investment in the mobile telecommunications industry

While mobile virtual network operators (MVNOs) increase competition in the mobile telecommunications industry, granting market access to MVNOs may have unwanted consequences. In particular, infrastructure investment by incumbent mobile network operators (MNOs) may be smaller. This paper examines the effects of MVNO entry and access regulation on the investment behavior of MNOs. It uses firm-level data for 58 MNOs in 21 OECD countries during 2000–2008. The results suggest that mandated provision of access is related to lower investment intensity of MNOs, while voluntary access provision has no effect. Although reduced investment incentives do not necessarily correspond to under-investment, this underscores the need for those countries where MVNOs are provided access to address the issue of investment incentives.     

Disentangling the effects on OTT platform performance of three strategies: Pricing,M&As,and content investments

OTT streaming services have been restructuring the global multimedia industry, and there have been strategic actions and reactions among OTT players and traditional pay-TV platforms. This study found that Pricing and Content investments are key factors affecting market share and subscribership in global OTT markets, and M&As have positive effects on the two performance measures, although with less statistical confidence. OTT-specialized firms in the UK, Germany, France, Japan, and South Korea did not expand subscribers to the same extent as those in the US, but they were able to expand their market share in the UK and Germany while failing to increase it in the other three countries. Local OTT players, especially those in Europe and Asia, might need to be more strategic in coping with US-based firms’ expansion by materializing the positive interaction effects among the three strategies to increase both their subscriber base and market share.     

When Is a Disruptive Innovation Disruptive?*

A disruptive innovation (i.e., one that dramatically disrupts the current market) is not necessarily a disruptive innovation (as Clayton Christensen defines this term). To aid in understanding why some innovations are more (or less) disruptive to the long‐term health of incumbents, this article offers terminology and a framework complementary to Christensen's work, focusing on the diffusion pattern of the new product. The framework and model presented herein suggest that when an innovation diffuses from the low end upward toward the high end, a pattern called low‐end encroachment, the incumbent may be tempted to overlook its potential impact. Three possible types of low‐end encroachment are illustrated: the fringe‐market, detached‐market, and immediate scenarios. Conversely, when the pattern is one of high‐end encroachment, the impact on the current market is immediate and striking. A three‐step framework is identified to assess the potential diffusion pattern and impact of an innovation, thereby helping a firm determine the threat or opportunity that an innovation represents.     

Spectrum auctions in a thin market: The Korean case

In 2010, the Korean government adopted spectrum auctions and introduced a market mechanism into spectrum management. However, the government has often been confronted with conflicts between diverse policy goals of spectrum auctions. A thin spectrum market, where only three incumbent MNOs bid for spectrum, has led to concerns that the government may fail to maximize revenues.Based on the past experiences in Korea, this paper examines the Korean government's choice of auction rules in the face of conflicting policy goals. This paper also recommends that the government implement the following regulatory reforms and consider the auction related measures to deepen its spectrum market or increase the number of bidders: (i) relaxation of foreign ownership restrictions, (ii) introduction of regional or site-specific spectrum licenses, and (iii) modification of auction formats. Spectrum markets tend to be thin in many countries, and the Korean experience may offer implications for those countries when they implement spectrum auctions.     

The Effects of Mainstream and Emerging Customer Orientations on Radical and Disruptive Innovations

The merits of being customer‐oriented for firm innovation have long been debated. Firms focused on their existing customers have been argued to be less innovative. This paper distinguishes between mainstream and emerging customer orientations and examines their effects on the introduction of disruptive and radical product innovations. Radical product innovations draw on a substantially new technology and could initially be targeted at a mainstream or an emerging market. In contrast, disruptive innovations are initially targeted at an emerging market, and may not involve the newest technology. This paper hypothesizes that mainstream customer orientation is negatively related to disruptive innovation and positively related to radical innovation, and that emerging customer orientation is positively related to disruptive innovation. To test these hypotheses, longitudinal and multiple informant data from senior executives in 128 SBUs of 19 Fortune 200 corporations are analyzed, with technology scanning and willingness to cannibalize as key control variables. The results support the hypotheses, providing evidence for contrasting effects of being oriented to mainstream customers and/or emerging customers on radical and disruptive innovations. Mainstream customer orientation has a positive impact on the introduction of radical innovations but a negative impact on disruptive innovation, while emerging customer orientation has a positive effect on disruptive innovation and is unrelated to radical innovations. Technology scanning is positively related to radical innovation but not to disruptive innovation, supporting the idea that disruptive innovation may not require new technology. In contrast, willingness to cannibalize is positively related to disruptive innovation but not to radical innovation, supporting the idea that radical innovation does not require cannibalization of existing investments. Additionally, mainstream customer orientation is found to have a near‐zero correlation with emerging customer orientation, indicating that the two can coexist and can be pursued simultaneously.     

Analysing disruptive potential: the case of wireless local area network and mobile communications network companies

In this article, we analyse the prediction that wireless local area network (W-LAN) technologies will be disruptive for incumbent mobile communications network operators. For this purpose, we develop a methodology of guided interviews to assess technologies for their disruptive characteristics based on theory of disruptive technology developed by Christensen (1997) and recent extensions. The application of our comprehensive step-by-step method improves the precision of the disruptive technology concept and its usability for practitioners to make ex ante distinctions between disruptive technologies and other phenomena caused by emerging technologies. Our method predicts that contrary to common assumptions, W-LAN is not likely to represent a disruptive technology for the established mobile communications network firms in terms of Christensen's concept. This research was conducted in close collaboration with Vodafone Pilotentwicklung, an R&D and technology monitoring unit of the Vodafone Group. Vodafone provided part of the empirical data through expert interviews and market reports.     

Competition in wholesale markets: Do MNOs compete to host MVNOs?

This paper extends previous research examining wholesale market shares of mobile network operators (MNOs). This study demonstrates that wholesale market concentration has decreased over time because of the increase of competition of MNOs for hosting mobile virtual network operators (MVNOs). However, differences in wholesale market shares between MNOs have not disappeared. We propose that those operators that are late entrants in a market and belong to an international group with a proactive attitude towards hosting virtual operators positively influences wholesale market shares of MNOs. The empirical analysis is based on a panel data from 2000 to 2010 corresponding to MNOs and virtual operators in five European countries with high development of the virtual mobile industry. By closely examining KPN we show how being an international mobile group specialising in the wholesale market across Europe has enabled it to exploit complementarities that exist between traditional and virtual businesses.     

The Impact of PV on the German Power Market

During the last months, the discussion on feed-in tariffs (FiT) for photovoltaic (PV) installations in Germany has gained new momentum. On the one hand, the issue of over-subsidisation due to the fact that module prices have been decreasing faster than feed-in tariffs was discussed. On the other hand, increasing costs to the consumers of power were put on the agenda after the unprecedented increase in new PV capacity in Germany in 2009. After the general election in September 2009 this discussion lead to different proposals for adjusting the FiT scheme. In summer 2010 a bill was passed amending the current FiT. Both, in the discussion and in the bill, an important aspect has been neglected so far: the impact of the massively increasing PV capacities on the economics of conventional power plants. The present study fills this gap. In the first part, it is qualitatively shown how the power price and the equilibrium quantity on the power exchange change with increasing PV capacities. These findings can be directly translated into shrinking revenues for operators of conventional power plants. In the second part, a quantitative analysis of the German power market is provided. The effects of different PV scenarios on the wholesale power price and the total revenues (i.e., price multiplied by quantity) of all conventional power plants are calculated. For an incumbent operator of a coal-fired power plant, the contribution margin may decrease by more than 25% and for a new, yet to build gas-fired combined cycle power plant it may drop by more than 30%. The study concludes that the PV support scheme can be understood as the accelerator pedal for the structural change in the German power sector. Implementing the changes in the feed-in tariffs as presented in the bill will require more and faster changes in the overall design of the power market to provide sufficient incentives for backup capacities when the sun is not shining. It would also be accompanied by additional acceleration costs. Absolute caps on the added capacity, rather than further cuts in the tariffs, could buy some time for a careful redesign of the market and may reduce resistance from incumbent operators.     

Why do incumbents sometimes succeed? Investigating the role of interorganizational trust on the adoption of disruptive technology

Previous research has noted that new firms traditionally have more success with the diffusion of disruptive technologies than do incumbent firms. For the development of disruptive technologies, newer firms appear to be advantageous as they are generally more flexible in resource allocation. However, exceptions can be found in various industries in which incumbents have been able to succeed with their own disruptive technologies. One possible explanation for these exceptions is the influence of pre-existing levels of trust already developed between incumbents and potential buyers of disruptive technologies. In order to explore this further, this article provides a link between interorganizational trust and the adoption of new, disruptive technologies in industrial markets. By surveying 134 current and potential Software-as-a-Service (SaaS) users, we show how pre-existing, interorganizational trust impacts the perceptions a potential buyer has towards a disruptive technology and how these perceptions influence a buyers' intention to adopt a new, disruptive technology. Beyond trust, we use perceived ease of use, perceived value, perceived usefulness and financial stability to create a predictive model for intention to adopt. Holistically, this article provides insight on how buyer–supplier relationships generally favor incumbent firms and can impact a buyers' perception of a new, disruptive technology.     

When are technologies disruptive? a demand‐based view of the emergence of competition

By identifying the possibility that technologies with inferior performance can displace established incumbents, the notion of disruptive technologies, pioneered by Christensen (1997), has had a profound effect on the way in which scholars and managers approach technology competition. While the phenomenon of disruptive technologies has been well documented, the underlying theoretical drivers of technology disruption are less well understood. This article identifies the demand conditions that enable disruptive dynamics. By examining how consumers evaluate technology and how this evaluation changes as performance improves, it offers new theoretical insight into the impact of the structure of the demand environment on competitive dynamics. Two new constructs—preference overlap and preference symmetry—are introduced to characterize the relationships among the preferences of different market segments. The article presents a formal model that examines how these relationships lead to the emergence of different competitive regimes. The model is analyzed using computer simulation. The theory and model results hold implications for understanding the dynamics of disruptive technologies and suggest new indicators for assessing disruptive threats. Copyright © 2002 John Wiley & Sons, Ltd.     

The impact of regulation on the retail prices in fixed-line telephony across the European Union

This paper estimates reduced-form models for incumbent prices in the fixed telecommunications industry using data for European Union (EU) countries from 1998 to 2002. The regulation of fixed-line telephony has a significant impact on prices for residential consumers. Liberalization of the telecommunications industry decreased retail prices by about 8.2%. The introduction of carrier pre-selection and number portability had a negative impact on price levels. The estimation results also suggest that a 1% decrease in termination charges on the incumbent network led on average to a 0.17% decrease in the cost of usage basket for residential consumers. Furthermore, in the pricing regressions for incumbent local and national calls at peak and off-peak times interconnection charges are significant only in the estimation of national peak prices. A 1% decrease in single transit interconnection charges on the incumbent network led to a 0.31% decrease in incumbent national prices at peak times, as calculated for the average prices in the EU in 2002.     

Tying in evolving industries,when future entry cannot be deterred

We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when tying cannot be used as a defensive strategy to protect the incumbent’s dominant position in the primary market. By engaging in tying, an incumbent firm sacrifices current profits but can exclude a more efficient rival from a complementary market by depriving it of the critical scale it needs to be successful. In turn, exclusion in the complementary market allows the incumbent to be in a favorable position when a more efficient rival will enter the primary market, and to appropriate some of the rival’s efficiency rents. The paper also shows that tying is a more profitable exclusionary strategy than pure bundling, and that exclusion is the less likely the higher the proportion of consumers who multi-home.     

Royalties vs. upfront lump-sum fees in data communication environments

Mobile communications markets worldwide, today, are saturated, the number of mobile network operators (MNOs) in market is declining, mobile revenues are stagnant or falling, MNOs are becoming wireless Internet service providers, and economies of scope are strengthening. This paper challenges existing dominant views on spectrum assignment and license fee payments, estimates spectrum fees that MNOs would have paid under royalties and then compares them with upfront lump-sum fees actually paid by 3G licensees. This paper further proposes that governments need to consider assigning additional spectrum to incumbents as needs arise without using auctions and adopting royalties as a way of collecting spectrum fees should they collect them.     

An analysis of the disruptive impact of the entry of Free Mobile into the French mobile telecommunications market

The issue of disruptive operators has recently gained interest among researchers and regulators. From a regulator's perspective, disruptive operators can increase competitive rivalry in markets dominated by a handful of large companies, thereby allowing consumers to obtain more benefits in terms of price and quality. Largely overlooked in this discussion has been the impact that the specific identity, complementary assets of operators, and their strategies have on the marketplace dynamics. In this paper we explore the impact that one such operator – Free Mobile – has had on the French mobile telecommunications market. Drawing on a wide range of secondary sources, our analysis finds that the entry and subsequent growth of Free Mobile has had a complex and multi-faceted impact on the market. Their growth has been at the expense of the other three mobile network operators active in the French market, while their innovative business model, which enables it to compete on the basis of low costs, has been copied by its rivals. The specific characteristics of Free Mobile and of its strategy have contributed to a significantly alteration to how competition occurs in this market. This, in turn, triggers a strong incentive for restructuring, which is actually restrained by regulatory concerns.     

Recent Developments at the CMA: 2016–2017

We discuss three interesting cases that the Competition and Markets Authority (CMA) has dealt with over the past year. First, we cover the ICE/Trayport vertical merger, which was prohibited by the CMA. Second, we discuss the CMA’s recent market investigation into the UK energy sector. The CMA arrived at the unexpected finding that markets with homogeneous products, multiple players and low entry barriers can still lead to significant competition concerns. Finally, we discuss the CMA’s work in relation to retail most favoured nation clauses, and include econometric results showing the impact of these clauses on platforms’ commission fees .     

Cellular economies of scale and why disparities in spectrum holdings are detrimental

Now that traffic volumes are increasing rapidly, the cost of expanding capacity has become a large portion of expenditures for Mobile Network Operators (MNOs). This paper uses an engineering-economic model to show that there are strong economies of scale when expanding capacity, because an MNO with more spectrum benefits more from every new cell tower, and an MNO with more towers benefits more from every new MHz of spectrum. While it is technically possible to expand capacity by increasing either towers or spectrum holdings, we find that the cost-effective approach is to increase both types of assets at a similar rate. In the absence of countervailing policies, the big MNOs are well positioned to get bigger, in terms of spectrum holdings, towers, and ultimately market share. For policymakers, this economy of scale creates a trade-off between two important objectives: reducing the cost of cellular capacity, and increasing competition. This paper derives the Pareto optimal division of spectrum with respect to these two competing objectives, and shows that any Pareto optimal assignment will split the spectrum fairly evenly among competing MNOs. This is not simply a method of ensuring that there are many competitors; spectrum should be divided fairly evenly regardless of whether the number of competitors is large or small. A large disparity in spectrum holdings may yield poor results with respect to both objectives, i.e. the lower cost-effectiveness of a larger number of MNOs, and the lower competitive pressure of a smaller number of MNOs. One effective way to achieve a division of spectrum that is close to Pareto optimal is a spectrum cap, provided that this cap is set at a level consistent with other policies and policy objectives, including antitrust policy.     

Access regulation,entry and investments in telecommunications

This paper presents a model of competition between an incumbent and an entrant firm in telecommunications. The entrant has the option to enter the market with or without having preliminary invested in its own infrastructure; in case of facility based entry, the entrant has also the option to invest in the provision of enhanced services. In the case of resale based entry the entrant needs access to the incumbent network. Unlike the rival, the incumbent has always the option to upgrade the existing network to provide advanced services. We study the impact of access regulation on the type of entry and on firms’ investments. We find that without regulation the incumbent sets the access charge to prevent resale based entry and this generates a social inefficient level of facility based entry. Access regulation may discourage welfare enhancing investments, thus also inducing a socially inefficient outcome. We extend the model to account for negotiated interconnection in the case of facilities based entry.