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E L E C T R O N I C

C O M M E R C E

M-commerce:
An operators manual

Nick Barnett, Stephen Hodges, and Michael J. Wilshire

Mobile-telephone operators could compete on all levels of the
mobile-commerce value chainbut they should think twice before they do.

pward of 300 million people more than own PCsacross the

world subscribe to mobile telephones. If, as forecast, this figure passes

one billion by 2003, mobile telephones will be as common as television sets.
Such a penetration rate combined with technology that provides for
the fast transfer of data on mobile networks, standard protocols that
deliver Internet-like services on smaller screens, and the very personal
nature of mobile telephones will drive a mobile-commerce revolution
(see sidebar, M-commerce: The next big thing, on the next spread).
Within three years, the annual value of goods and services transacted over
mobile networks could reach $13 billion, or 7 percent of all e-commerce
transactions.1
Wireless operators are well placed to benefit from this growth because they
alone own and operate the mobile networks that make m-commerce possible.
But as available bandwidth proliferates and the coverage capabilities of networks converge, the basic business of transporting data will become more
competitive, and profit margins will fall. Hence operators are keen to seek
value-creating opportunities beyond the simple transport of data.

Analysys (a European telecom consultancy) report, Mobile e-commerce, February 2000.

Nick Barnett and Stephen Hodges are consultants and Michael Wilshire is a principal in McKinseys
London office. Copyright 2000 McKinsey & Company. All rights reserved.
This article can be found on our Web site at www.mckinseyquarterly.com/electron/mcop00.asp.

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M-commerce: The next big thing

Four main forces underpin the mobile-commerce
revolution: third-generation technologies, the
Wireless Application Protocol (WAP) and iMode
platforms, handset penetration, and personalized
services.

1. Third-generation technologies
Unfortunately, the current (second) generation
of wireless networks and handsets supports
data rates of only 9.6 kilobits per second, far
below the 64-kilobit-per-second capacities
of landline copper wires. That situation will
improve this year, however, as GSM (Global
System for Mobile Communication), the most
common cellular standard, is extended by the
General Packet Radio System. GPRS can support
data rates of 112 kilobits per second, almost
twice the rate of a standard computer modem
and enough to support high-quality streamed
audio. True third-generation networks, based on
the UMTS (Universal Mobile Telephone System)
standard, will raise the rate to 2 megabits per
secondone-fifth of the bandwidth available on
the standard Ethernet in todays offices (Exhibit A).

The high speed at which Internet data can be

downloaded is only one important characteristic
of the new networks. In current wireless networks, most data communication, apart from the
limited Short Message Service (SMS), requires
a circuit-switched connection: a user must connect to a server to check e-mail, for example.
This limitation has two drawbacks. First, users
find themselves on-line even when they are not
sending data (while reading or composing e-mail,
for example), so they pay higher costs and network capacity is wasted. In addition, since the
connection can be initiated only from the mobile
handset, asynchronous services, such as automatic forwarding of e-mail, are not possible.
Like the wired Internet, GPRS networks use a
connectionless (packet-switched) communications mechanism. Data are split into chunks
called packets, to which an address uniquely
identifying the destination is appended. This
means that although a GPRS handset is, in
effect, permanently connected to the network,

EXHIBIT A

Third-generation technologies: A battle for bandwidth

Thousands of bits per second
First generation:
GSM1

Second generation:
GPRS2

Third generation:
UMTS3

2,000
High-quality
video
1,000
Mediumquality
video

100

Graphics,
audio

20
10
0
1998
1

Text
Messaging SMS (Short Message Service)

Global System for Mobile Communication.

General Packet Radio System.
3
Universal Mobile Telephone System.
2

2000

2002

2004

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it uses network capacity only when packets are

actually being sent.

telephones to access the Internet more often

than they use personal computers.

2. The WAP and iMode

4. Personalization

Two of the leading platforms for delivering

Internet content to mobile telephones and other
wireless devicesthe Wireless Application
Protocol and iModewere designed to take
into account the constraints of wireless communications: limited bandwidth and endsystem processing as well as a constrained
user interface.

The wireless Internet has three main features that

permit mobile interactive services to be more personalized than traditional Internet applications are.

Each platform defines a standard markup language that permits an applications user interface to be specified independently of the end
device. The delivery of these services is independent of the underlying networking technology, so applications can be used on different
networks, just as Internet applications can.

3. Handset penetration
The uptake of mobile telephones has been
nothing short of phenomenal, and the trend is
expected to continue (Exhibit B). Nokia predicts
that within three years people will use mobile

First, mobile telephones are carried by their owners

almost everywhere and kept switched on most of
the time (especially in Europe, where mobile users
arent charged for incoming calls). Consumers can
thus not only gain access to wireless services
wherever there is a network presence but also
keep tabs on time-critical information, such as
stock market reports or urgent messages.
Second, wireless-network operatorsat least
those using the GSM standardare uniquely
able to determine the identity of a user. Since
mobile telephones are not usually shared, and
a personal-identification number often protects
them, the telephone itself can be used as a
means of identification. Finally, operators can
detect a users exact location, enabling a whole
range of new applications.

EXHIBIT B

Europe picks up the phone

Mobile phone penetration in Europe,1 percent
100
90
80
70
60
50
40
30
20
10
0
1993
1

Compound annual
growth rate = 36%

1994

1995

1996

1997

1998

1999

Includes Austria, Belgium, Finland, France, Germany, Italy, Norway, Spain, Sweden, and the United Kingdom.
2
Forecast.
Source: Financial Times; Lehman Brothers; McKinsey analysis

20052

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In theory, mobile operators could compete at all levels of the m-commerce

value chain, from the provision of basic technical services to the supply of
lucrative, customer-facing content. The high stock market valuations of
Internet-related companies, their
powerful financial muscle, and the
absence of strong competition at
Operators will have to make
all levels in the new industry might
difficult decisions about where
even tempt them to try. The danger
in the value chain to compete
is that they will spread their skills
and resources too thin. Moreover,
given the first-mover advantages associated with much Internet-related
business, such companies risk forfeiting long-term shareholder value unless
they concentrate on areas in which they naturally hold a strong competitive
advantage.2
Operators thus need to make difficult decisions about which parts of the
value chain to compete inand howand which parts to avoid.

The m-commerce value chain

There are seven links in the m-commerce value chain.
At the bottom is transport: the maintenance and operation of the infrastructure3 that provides for data communication between mobile users and application providers. The second link consists of basic enabling services, such
as server hosting, data backup, and systems integration. Vendors wishing to
target wireless customers need these services to make products available via
mobile telephones.
Transaction support is the third link of the value chain. Many wireless
services will require some form of paymentusually from the user to the
service provider to pay for, say, books or CDs but possibly also in the
other direction, for refunds or customer reward schemes. Transaction support provides the mechanisms for assisting those transactions, for security,
and for billing users.
The fourth link is presentation services. Providers convert the content of
Internet-based applications, which are formatted in a standard known as
HTML (HyperText Markup Language), into a standard such as WML
2

Many Internet-related businesses are characterized by low but rising entry barriers created through
economies of scale in building a brand, network effects (the increasing utility of a service as more people
come to use it), and economies of scale or scope in constructing the underlying technology platform.

This infrastructure includes the backbone network, GPRS/UMTS (General Packet Radio System/Universal
Mobile Telephone System) base stations, and the gateway between the mobile network and the Internet.

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(Wireless Markup Language), an HTML subset suitable for the small, lowresolution screens of wireless devices. Content that isnt already on the
Internet can be formatted directly into a wireless standard.
Personalization support is the fifth link of the chain. One of the main value
propositions of m-commerce is its ability to personalize applications for
individual users. Providers that wish to offer the best m-commerce services
need information such as the users name, address, location, and billing
details (the number of a credit card or a bank account, for example) and
evenbecause the size of the screen affects the kind of information that
can be viewedthe type of device used to connect to the service. Companies
that can provide such information will form a valuable link.
User applications are the sixth link of the value chain. Possible applications
range from those currently available on the wired Internet (including banking,
book purchasing, e-mail, news, and travel) to new services designed specifically
for mobile consumers (information
about where to find the nearest
coffee shop, for example, or the
Portals are particularly important
automatic notification of nearby
for m-commerce because mobile
friends). At the highest point in the
telephones have small screens
chain are the content aggregators:
businesses that design and operate
portals, which provide information in a category or search facilities to help
users find their way around the Internet. This function is particularly important for m-commerce because mobile telephones have small screens and limited input mechanismsnotably, no mouse and a non-QWERTY keypad.
Users will want portals that simplify the search, avoid throwing up too much
information, and require minimum input.

Opportunities for operators

Few industries offer the opportunity to compete in every link of a value
chain, but mobile operators have the necessary technical skills, particularly
at the lower end. They also have the billing systems for payments, as well as
brands that potentially position them well for customer-related activities
higher up the chain. In addition, their control of the wireless infrastructure
and their ability to configure subscribers handsets to make themselves the
default Internet access provider give them the power to limit subscribers
access to competitors services at least initiallyand therefore to build
their own branded ones.
Early indications are that operators will indeed try to use these advantages
to capture value in many parts of the chain. Sonera and Cellnet, for example,

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have already launched portals; Vodafone AirTouch and Cellnet have application
services; Telenor and Sonera offer transaction facilities; and NTT DoCoMo
supplies basic enabling services, presentation services, and personalization
facilities. A glance at recent stock market valuations of the Internet counterparts of the companies supplying these services shows the potential attraction of such businesses: Yahoo! (content aggregator) is valued at
$89 billion, Amazon (applications) at $21 billion, Exodus
Communications (enabling services) at $25 billion, and
Engage Technologies (personalization) at $5 billion.4
But a glance at the Internet also reveals it to be a specialists world where fierce competition forces companies to
excel. The Internet players will compete with mobile operators, exploiting the distinct advantagessuch as brands and
experience the Internet players have already developed on the
World Wide Web. To withstand the competition, mobile operators should concentrate on the four areas in which they have a strong advantagetransport,
personalization support, content aggregation, and transaction supportand
move quickly to capture these opportunities by adopting four strategies.

1. Drive traffic growth by offering a wide variety of data services

Data traffic (mostly driven by the simple text-messaging service called the
Short Message Service, or SMS) already contributes 10 percent of the revenues of some wireless operators and, according to forecasts, will soon overtake voice traffic as the main source of revenue for mobile operators as a
whole. But as volumes rise, profit margins fall: in the United Kingdom, call
charges have dropped by about 77 percent in ten years.5
In response, some operators have used their control of the network infrastructure to try to lock in value at stake elsewhere in the chain. By presetting
their subscribers telephones to make themselves the default Internet access
provider and blocking unauthorized services, operators have the opportunity
both to charge application providers for access to their subscriber base and
to build their own branded services.
This walled-garden strategy might provide higher revenues in the short
term, but in the longer term it is flawed. First, it fails to maximize demand
for data traffic, because users may be barred from their favorite on-line
services. Second, it runs the risk of driving away those dissatisfied subscribers, who may switch to a competitor to get exactly what they want.
4

As of March 14, 2000.

These Analysys figures are based on the average monthly bill for a high-usage business customer taking
advantage of the cheapest available tariff.

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169

Since consumers increasingly choose their wireless providers on the basis

of the data services available, this second point is an important one.
McKinsey research in the Asia-Pacific region, for example, indicates that
half of all subscribers (and up to 70 percent of high-value ones in some
countries) would switch operators to get better wireless data services. It
follows that the first operator in a region to offer unrestricted access to
data services could capture a lucrative portion of the subscribers of other
networks.
The best way to go on profiting from transport is therefore to increase traffic
on the network. This can be done only by offering subscribers access to the
widest possible range of data services, an approach that has been validated in
the Japanese market by the success
of NTT DoCoMos iMode service.
The way to proffit from transport is
Launched in February 1999, within
to increase traffic on the network
a year it was offering more than
by offering subscribers access to
3,000 Internet-like services and had
the widest range of data services
attracted three million fee-paying
subscribers (rising by 10,000 a day
on average). Average revenue per
subscriber also rose by about $120 a year$30 from flat-rate subscription
fees and $90 from increased traffic revenue.

2. Attract content providers by offering good user information

Customer data are a valuable asset in the off- and on-line worlds alike, for
the more a vendor knows about a customer, the more it can personalize
the information or service it provides. The end result is likely to be a more
valuable service, reckoned both by price charged and by the vendors ability
to attract and retain customers.
In the wired world, Internet vendors use various techniques to personalize a
customers visit to their sites. These techniques range from cookies pushed
to the users computer to ensure that repeat visitors are recognized and
appropriate data recalled, on the one hand, to complex collaborative filters
that predict the preferences of customers from their behavior, on the other.
(An example is Amazon.coms customers who bought this book also
bought . . . service, which exploits the purchasing patterns of similar customers to suggest books or CDs that users might enjoy.)
In the wireless world, personalization will be even more important, for
screens are small, limiting the amount of information that can be shown,
and information can be tailored with the help of a few personal details.
(A search for a restaurant, say, might be refined by the users location and

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spending bracket.) The kind of device that is used will also determine the
kind of information that can be sent: a stock quotation service, such as
Yahoo! Finance, could supply shareprice graphs to devices with sufficiently large screens.
Application providers will probably

be attracted to those networks

whose operators can supply the
most useful data on customers

Input capabilities too are limited,

which means that users will benefit
if input forms can be filled in automatically on their behalf. A CD
vendor, for example, could simply ask customers to verify payment information and a shipping address rather than have them fill out forms from
scratch. Mobile operators hold plenty of this kind of personal information
on subscribers and are well placed to supply application providers with the
data they require (subject to legal restrictions, which differ from country
to country).
Mobile operators can also use this information to drive traffic growth, for
application providers are likely to be attracted to the networks whose operators supply the most useful customer data. A larger number of application
providers will in turn attract more customers to the network. The upturn in
traffic will attract more application providers, more customers, and so on in
a virtuous circle.

3. Assume the role of a wireless portal

Like portals in the wired world, wireless portals have a degree of control
over what users see on the Internet, so the portal provider can charge service
providers and advertisers high fees. Given the projected penetration rates of
mobile devices and mobile consumers increased reliance on portal services,
many observers expect wireless portals to be as highly valued on the stock
market as their established Internet equivalents.6
Operators enjoy some natural advantages in providing portal services. First,
the operators can control the configuration of telephones for all their new
subscribers and thus make their portals the default start screen.7 Second,
the operators information about subscribers permits them to tailor the content provided. Indeed, the way portals use this personal information could
turn out to be the main factor distinguishing good from mediocre portals.
(A good one, for example, wouldnt require users to fill in personal details
for each site they visited an off-putting task on a small keypad.) But
6

Goldman Sachs recently valued Vodafones Multi-Access Portal at almost $29 billion, for example
a valuation based on Goldmans predictions of the potential revenue sources for a wireless portal.

Although the user can modify this, doing so requires some effort.

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Internet experience indicates that operators will have to move quickly to

succeed as portal providers. In the United Kingdom, Freeserve stole a march
on competitive portals by offering free Internet access and retains a strong
first-mover advantage.
Operators must also decide whether to build the portal alone or with a
partner. Despite some natural strengths as portal providers, operators have
so far shown limited skill in selecting, aggregating, and customizing content,
for though they are good on the technical side, they are light on the kind
of media and marketing skills that characterize successful Internet portal
providers. And the value at stake at this level of the chain ensures that operators will face stiff competition, not least from existing Internet portals with
strong brands, a large subscriber base, and plenty of experience.
Several established companies, including Microsoft, Yahoo!,
Excite@Home, and America Online, have already launched
wireless portals.
Operators have three broad options when considering
a portal strategy. They can operate their own portal
under their existing brandthe approach taken by
operators such as Telia Mobile and NTT DoCoMo,
which identified the potential of m-commerce long
before others did. They can outsource the provision of the
portal to one of the new breed of wireless portals, such as AirFlash or
Room33, perhaps rebranding the service under their own names. Or they
can form a co-branding partnership with an established portal. The latter
two options are the safest bet for less advanced operators, particularly in
countries where existing Internet portals will offer strong competition. The
benefits to both parties are clear: the operator gains access to the aggregation
skills of the portal; the portal gets hold of the operators customers and
information about them.

4. Provide transaction support with a wide range of payment choices

All operators have systems to bill and charge their subscribers. The same
systems can be used to bill subscribers for goods and services sold by
third-party vendors on the network and to levy a per-transaction charge
to vendors.
Some operators have already spotted this opportunity. Sonera makes it
possible for subscribers to buy soft drinks from vending machines by
dialing a number, and the cost is then charged to the subscribers mobiletelephone account. Telenor is experimenting with a similar system that
permits customers to book cinema tickets, while subscribers to NTT

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DoCoMo can add all of their m-commerce transactions to their monthly

mobile bills.
Not surprisingly, this role is being contested by credit card companies that have
their own billing systems, established relationships with service providers,
and expertise in making customers
credit and transactions secure.
These credit card companies are
To offer customers a choice of
payment methods, smart operators even threatening to bypass operators
will probably join with one or more altogether by forming relationships
directly with handset vendors. Visa
banks or credit card companies
and Nokia, for example, are jointly
developing a system permitting consumers to pay for goods and services using bank information stored in a telephones memory.
Yet mobile consumers will probably demand a choice of payment mechanisms: their credit card account, their bank account, and their monthly
telephone bill, for example. To offer customers a choice of payment methods,
smart operators are thus likely to join up with one or more banks or credit
card companies. Sonera recently did precisely this with MasterCard.

Where not to play

In the areas of basic enabling services, presentation services, and user applications, wireless operators hold no natural advantages and are likely to face
strong competition. Because of the similar skills required in the wireless and
wired worlds, existing Web-hosting companies and system integrators that
already focus narrowly on these businesses will probably dominate basic
enabling services.
Presentation services will typically be provided by software companies that
convert standard HTML into a form suitable for wireless devices and by
Internet design firms that offer direct conversion services. Existing Internet
content providers will in any case have a strong lead in user applications,
since the providers quickly make existing services available to mobile consumers. The most successful applications, moreover, tend to be developed
by focused entrepreneurs who dedicate themselves to the task.
One question remains: how broadly should mobile operators compete in the
four areas in which they have a competitive advantage? Given the likely
competition, operators should consider placing their big bets in no more
than two areas, depending on where they have the strongest advantages as

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measured by knowledge, skills, or the absence of competition. Elsewhere,

they should seek to dilute their level of risk by forming strategic partnerships
or joint ventures.
It is important to remember that m-commerce is developing fast and that
mobile operators need to establish an early lead to capture maximum longterm value. Focus is one of the surest ways to build on what is already their
strong starting position in this market.

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