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MOBILE VIRTUAL NETWORK OPERATOR (MVNO) IN INDONESIA: COMPETITIVE

BUSINESS ANALYSIS USING PORTER 5 FORCES MODEL

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 MOBILE VIRTUAL NETWORK OPERATOR (MVNO) IN
INDONESIA: COMPETITIVE BUSINESS ANALYSIS USING
PORTER 5 FORCES MODEL

Sirat, D., Asvial, M., and , and Adyawardhani, L

Telecommunication Regulation Research Center
Electrical Engineering, University of Indonesia
Kampus UI Depok, Indonesia
asvial@ee.ui.ac.id

ABSTRACT

In this paper, the competitive business analysis of MVNO implementation in

Indonesia using Porter 5 Forces Model is proposed. Porter 5 forces model is one of
the most often used as business strategy tools and has proven its usefullness on
numerous ocassione. The model of pure competition implies that risk-adjusted rates of
return should be constant across firms and industries. However, numerous economic
studies have affirmed that different industries can sustain different levels of
profitability; part of this difference is explained by industry structure. The analysis
consist of the intensity of rivalvy among existing player, threat of new entrant,
bargaining power of supplier, bargaining power of buyer and threat of substitution.
The analysis is needed in order to formulate strategy to face existing micro
environment condition within the mobile industries in Indonesia.

By using porter 5 forces analysis for MVNO implementation in Indonesia, the results
show that the competitive profit in MVNO business in Indonesia is low. Several
strategies need to be proposed in order to achieve the better competition positioning
for Indonesia’s telecommunication industry. The decreasing bargaining power and
subscribers of mobile network operator need to be proposed for MVNO developing in
Indonesia.

Keyword: Mobile Virtual Network Operator (MVNO), Porter 5 Forces Model,

Telecommunication Business

I. INTRODUCTION

A Mobile Virtual Network Operator (MVNO) is a mobile operator that does not own
its own spectrum and usually does not have its own network infrastructure [1]. And
now, MVNO is a new trend for mobile (celluler) business model. Many are familiar
with simple resellers of telecom services such as long distance, local exchange, and
mobile network services. In contrast, MVNO's typically add value such as brand

1
appeal, distribution channels, and other affinities to the resale of mobile services [2].
Successful MVNO's are those that position their operations so that customers do not
distinguish any significant differences in service or network performance yet offer
some special affinity to their customers.

The major benefit to traditional mobile operators cooperating with MVNO's is to

broaden the customer base at a zero cost of acquisition. It is likely that incumbent
mobile operators will continue to embrace MVNO's as a means of deriving revenue to
offset the enormous cost of building 3G networks. As more MNVO's expand in the
marketplace, they are likely to first target prepaid customers as a means of low cost
market entry themselves. Most regulating bodies are in favor of MVNO's as a means
of encouraging competition, which would ultimately lead to greater choice and lower
prices. With the advent of the MVNO, many incumbent mobile operators will
evaluate the opportunity to offer supplementary MVNO services of their own. To do
so, exiting mobile operators will use their established branding, service knowledge,
and supplier relationships to complete against independent MVNO's [3]. In Indonesia,
MVNO is not implemented yet [4].

Competitive Strategy is the basis for much of modern business strategy [5]. In this
classic work, Michael Porter in his book presents his five forces and generic strategies,
then discusses how to recognize and act on market signals and how to forecast the
evolution of industry structure. He then discusses competitive strategy for emerging,
mature, declining, and fragmented industries. The covers strategic decisions related to
vertical integration, capacity expansion, and entry into an industry. The book
concludes with an appendix on how to conduct an industry analysis [6].

In this paper, the competitive business analysis of MVNO implementation in

Indonesia using Porter 5 Forces Model is proposed. The model of pure competition
implies that risk-adjusted rates of return should be constant across firms and industries.
However, numerous economic studies have affirmed that different industries can
sustain different levels of profitability; part of this difference is explained by industry
structure. The analysis consist of the intensity of rivalvy among existing player, threat
of new entrant, bargaining power of supplier, bargaining power of buyer and threat of
substitution. The analysis is needed in order to formulate strategy to face existing
micro environment condition within the mobile industries in Indonesia.

By using porter 5 forces analysis for MVNO implementation in Indonesia, the results
show that the competitive profit in MVNO business in Indonesia is low. Several
strategies need to be proposed in order to achieve the better competition positioning

2
for Indonesia’s telecommunication industry. The decreasing bargaining power and
subscribers of mobile network operator need to be proposed for MVNO developing in
Indonesia.

II. MOBILE VIRTUAL NETWORK OPERATOR (MVNO)

A mobile virtual network operator (MVNO) is a company that provides mobile

phone service but does not have its own frequency allocation of the radio spectrum,
nor does it have all of the infrastructure required to provide mobile telephone service
[1]. A company that does have frequency allocation(s) and infrastructure is known
simply as a Mobile Network Operator (MNO). MVNOs are roughly equivalent to the
switchless resellers of the traditional landline telephone market. Switchless resellers
buy minutes wholesale from the large long distance companies and retail them to their
customers. MVNOs can operate using any of the mobile technologies MNOs use,
such as Code Division Multiple Access (CDMA), GSM and the Universal Mobile
Telecommunications System (UMTS).

An example for MVNO is Virgin Mobile. Virgin Mobile plc is a mobile phone service
provider operating in the UK, Australia and Canada, and the US. The company was
the world's first Mobile Virtual Network Operator, launched in the UK in 1999. It
does not maintain its own network, and instead has contracts to use the existing
network(s) of other providers. In the UK, Virgin Mobile uses the T-Mobile network.
In the US, the Sprint network is the carrier. In Australia, Virgin Mobile operates on
the Optus network. In Canada, it uses the Bell Mobility network. These networks use
different technology (GSM in the UK and Australia and CDMA in the US and
Canada). Its success was replicated in the US, but ventures in Australia have not been
so successful, and failed in Singapore, albeit with a different strategy.

An MVNO's roles and relationship to the MNO vary by market, country and the
individual situations of the MNO and MVNO. In general, an MVNO is an entity or
company that works independently of the mobile network operator and can set its own
pricing structures, subject to the rates agreed with the MNO. Usually, the MVNO does
not own any GSM, CDMA or other core mobile network related infrastructure, such
as Mobile Switching Centers (MSCs), or a radio access network. Some may own their
own Home Location Register, or HLR, which allows more flexibility and ownership
of the subscriber's mobile phone number (MSISDN) - in this case, the MVNO appears
as a roaming partner to other networks abroad, and as a "network" within its own
region. Some MVNOs run their own Billing and Customer Care solutions known as
BSS (Business Support Systems).

3
There are three primary motivations for mobile operators to allow MVNOs on the
networks. These are generally:

• Segmentation-Driven Strategies – mobile operators often find it difficult to

succeed in all customer segments. MVNOs are a way to implement a more
specific marketing mix, whether alone or with partners and they can help
attack specific, targeted segments.

• Network Utilisation-Driven Strategies – Many mobile operators have

capacity, product and segment needs – especially in new areas like 3G. An
MVNO strategy can generate economies of scale for better network utilisation.

• Product-Driven Strategies – MVNOs can help mobile operators target

customers with specialised service requirements and get to customer niches
that mobile operators cannot get to.

MVNO models mean lower operational costs for mobile operators (billing, sales,
customer service, marketing), help fight churn, grow average revenue per user by
providing new applications and tariff plans and also can help with difficult issues like
how to deal with fixed-mobile convergence by allowing MVNOs to try out more
experimental projects and applications. The opportunity for mobile operators to take
advantage of MVNOs generally outweighs the competitive threat.

There are currently approximately 360 planned or operational MVNOs world-wide

such as Algeria, The Netherlands, France, Denmark, United Kingdom, Finland,
Belgium, Australia and United States. In these countries the MVNO marketplace is
stabilizing and there are some well-known MVNO successes. Other countries, such as
Portugal, Spain, Italy, Croatia, the Baltics, India, Chile and Austria are just beginning
to launch MVNO business models. Where there are many MVNOs in a single country,
it is difficult for new entrants as the overall marketplace is highly saturated. But in
Indonesia, MVNO is not implemented yet.

Presently many companies and regulatory bodies are strongly in favour of MVNOs.
For example, in 2003, the European Commission issued a recommendation to national
telecom regulators (NRAs) to examine the competitiveness of the market for
wholesale access and call origination on public mobile telephone networks. The study
resulted in new legislation from NRAs in countries like Ireland and France that forces
operators to open up their network to MVNOs. There are certainly regulatory issues,
as yet unresolved, to ensure that competition in mobile markets is maximised – just
like in the local loop unbundling saga in the fixed network.

4
In fact, from a competitive viewpoint it is not really any different to a fixed line
network operator offering backbone services to ISPs competing against its own
service provider – it sells minutes on the network and if one operator won’t do it,
there are many others that will. As an operator, the MNO needs to utilise its spectrum
and get some cashflow, which it gets from having MVNOs as paying customers.

There are arguments from both sides as to whether the MVNO model will bring
otherwise unreachable revenue or unwelcome competition to the MNOs. For instance,
the GSM Association, which represents more than 500 GSM operators and key
mobile vendors around the world, is cautious about regulation surrounding the
MVNO model. It is keen to see legislation that helps companies provide and take
advantage of the financial potential of MVNOs, but it is equally keen that network
operators should not be legally required to open their networks to anyone wanting
access. At the same time, some UMTS licence-holders, particularly in Germany, are
fighting the regulatory authorities for the right to share their spectrum.

Usually MVNO's do not have their own infrastructure, some providers are actually
deploying their own Mobile Switching Centers (MSC) and even Service Control
Points (SCP) in some cases. Some MVNO's deploy their own mobile Intelligent
Network (IN) infrastructure in order to facilitate the means to offer value-added
services. In this way, MNVO's can treat incumbent infrastructure such as radio
equipment as a commodity, while the MVNO offers its own advanced and
differentiated services based on exploitation of their own IN infrastructure. The goal
of offering value-added services is to differentiate versus the incumbent mobile
operator, allowing for customer acquisition and preventing the MVNO from needing
to compete on the basis of price alone.

MVNO's have full control over the SIM card, branding, marketing, billing, and
customer care operations. While sometimes offering operational support systems
(OSS) and business support systems (BSS) to support the MVNO, the incumbent
mobile operators most keep their own OSS/BSS processes and procedures separate
and distinct from those of the MVNO.

For now MVNO services have been limited, but analysts from EMC Research have
predicted that as wireless services grow, so will the availability of niche MVNO
applications. For instance, in the future a cell phone user may be able to subscribe to a
network operator plus multiple MVNOs for specific data services over the same
phone. One MVNO could provide sports news, another weather and traffic and still
another could provide instant messaging capabilities. In this way, each MVNO and
the network operator could focus on their own niche markets and form customized

5
detailed services that would expand their customer reach and brand.

So far MVNOs have not been regulated in any country. The ITU has received several
requests to study the issue, specifically to provide input on whether government
intervention is necessary to allow MVNOs to offer services and applications at a
lower price to consumers. This would help to ensure a more efficient use of the
spectrum but some incumbent providers argue that the market is already competitive
and intervention is not necessary.

The word 'virtual' in MVNO refers to the fact that they do not own radio spectrum,
but lease it from existing mobile operators. Spectrum is the mobile equivalent of the
last mile of the local loop in fixed networks, and the leasing of mobile spectrum to
MVNOs is analogous to the leasing of unbundled local loop copper wire to
competitive broadband providers in the fixed line market.

What distinguishes a virtual operator then? It is certainly not that they issue a SIM
card – the small slot-in card that defines the unique identity of a mobile handset.
Some companies issue a SIM card with the active support of a mobile operator, but all
they gain from doing so is the ability to display their brand name on the mobile
handset. No, the factor that makes an operator truly virtual is the ability to control
both outbound and inbound calls. Essentially, this means at least owning its own
switch. This means it then has control over the cost of calls coming in to and going
out from its subscribers. It also means it controls its own service creation rather than
relying on one operator to provide it with services. Although this is not a rigid
definition, there has been some confusion caused by service providers referring to
themselves as virtual operators when in fact they are really just resellers.

Different brands appeal to specific groups of users with different calling patterns
throughout the day. A network operator who primarily has business customers should
look for an MVNO with a focus on the youth market, for example. The network
operator that has a mix of complementary MVNOs is therefore in a strong position,
but there are clearly risks involved. The first and most obvious one is that the network
operator may lose its direct relationship with the customer. The network will always
make money, but the customer base can be even more valuable. Without a direct
relationship, control over customer acquisition and customer relations becomes
difficult and can ultimately have an impact on profits.

The relationship between MVNO with another business sectors is shown in the Fig. 1.

6
 Figure 1. MVNO and other business sector

III. PORTER FIVE FORCES MODEL FOR MVNO IN INDONESIA

The model of pure competition implies that risk-adjusted rates of return should be
constant across firms and industries. However, numerous economic studies have
affirmed that different industries can sustain different levels of profitability; part of
this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced by

five forces. The strategic business manager seeking to develop an edge over rival
firms can use this model to better understand the industry context in which the firm
operates.

7
 Figure 2. Diagram of Porter 5 Forces [6]

A. Rivalry

In the traditional economic model, competition among rival firms drives profits to
zero. But competition is not perfect and firms are not unsophisticated passive price
takers. Rather, firms strive for a competitive advantage over their rivals. The intensity
of rivalry among firms varies across industries, and strategic analysts are interested in
these differences.

Economists measure rivalry by indicators of industry concentration. The

Concentration Ratio (CR) is one such measure. The Bureau of Census periodically
reports the CR for major Standard Industrial Classifications (SIC's). The CR indicates
the percent of market share held by the four largest firms (CR's for the largest 8, 25,
and 50 firms in an industry also are available). A high concentration ratio indicates
that a high concentration of market share is held by the largest firms - the industry is
concentrated. With only a few firms holding a large market share, the competitive
landscape is less competitive (closer to a monopoly). A low concentration ratio
indicates that the industry is characterized by many rivals, none of which has a
significant market share. These fragmented markets are said to be competitive. The
concentration ratio is not the only available measure; the trend is to define industries
in terms that convey more information than distribution of market share.

If rivalry among firms in an industry is low, the industry is considered to be

disciplined. This discipline may result from the industry's history of competition, the

8
role of a leading firm, or informal compliance with a generally understood code of
conduct. Explicit collusion generally is illegal and not an option; in low-rivalry
industries competitive moves must be constrained informally. However, a maverick
firm seeking a competitive advantage can displace the otherwise disciplined market.

When a rival acts in a way that elicits a counter-response by other firms, rivalry
intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense,
moderate, or weak, based on the firms' aggressiveness in attempting to gain an
advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitive
moves:

• Changing prices - raising or lowering prices to gain a temporary advantage.

• Improving product differentiation - improving features, implementing
innovations in the manufacturing process and in the product itself.
• Creatively using channels of distribution - using vertical integration or using a
distribution channel that is novel to the industry. For example, with high-end
jewelry stores reluctant to carry its watches, Timex moved into drugstores and
other non-traditional outlets and cornered the low to mid-price watch market.
• Exploiting relationships with suppliers - for example, from the 1950's to the
1970's Sears, Roebuck and Co. dominated the retail household appliance
market. Sears set high quality standards and required suppliers to meet its
demands for product specifications and price.

The intensity of rivalry is influenced by the following industry characteristics:

• A larger number of firms increases rivalry because more firms must compete
for the same customers and resources. The rivalry intensifies if the firms have
similar market share, leading to a struggle for market leadership.
• Slow market growth causes firms to fight for market share. In a growing
market, firms are able to improve revenues simply because of the expanding
market.
• High fixed costs result in an economy of scale effect that increases rivalry.
When total costs are mostly fixed costs, the firm must produce near capacity to
attain the lowest unit costs. Since the firm must sell this large quantity of
product, high levels of production lead to a fight for market share and results
in increased rivalry.
• High storage costs or highly perishable products cause a producer to sell
goods as soon as possible. If other producers are attempting to unload at the

9
 same time, competition for customers intensifies.
• Low switching costs increases rivalry. When a customer can freely switch
from one product to another there is a greater struggle to capture customers.
• Low levels of product differentiation is associated with higher levels of
rivalry. Brand identification, on the other hand, tends to constrain rivalry.
• Strategic stakes are high when a firm is losing market position or has
potential for great gains. This intensifies rivalry.
• High exit barriers place a high cost on abandoning the product. The firm
must compete. High exit barriers cause a firm to remain in an industry, even
when the venture is not profitable. A common exit barrier is asset specificity.
When the plant and equipment required for manufacturing a product is highly
specialized, these assets cannot easily be sold to other buyers in another
industry. Litton Industries' acquisition of Ingalls Shipbuilding facilities
illustrates this concept. Litton was successful in the 1960's with its contracts to
build Navy ships. But when the Vietnam war ended, defense spending
declined and Litton saw a sudden decline in its earnings. As the firm
restructured, divesting from the shipbuilding plant was not feasible since such
a large and highly specialized investment could not be sold easily, and Litton
was forced to stay in a declining shipbuilding market.
• A diversity of rivals with different cultures, histories, and philosophies make
an industry unstable. There is greater possibility for mavericks and for
misjudging rival's moves. Rivalry is volatile and can be intense. The hospital
industry, for example, is populated by hospitals that historically are
community or charitable institutions, by hospitals that are associated with
religious organizations or universities, and by hospitals that are for-profit
enterprises. This mix of philosophies about mission has lead occasionally to
fierce local struggles by hospitals over who will get expensive diagnostic and
therapeutic services. At other times, local hospitals are highly cooperative with
one another on issues such as community disaster planning.
• Industry Shakeout. A growing market and the potential for high profits
induces new firms to enter a market and incumbent firms to increase
production. A point is reached where the industry becomes crowded with
competitors, and demand cannot support the new entrants and the resulting
increased supply. The industry may become crowded if its growth rate slows
and the market becomes saturated, creating a situation of excess capacity with
too many goods chasing too few buyers. A shakeout ensues, with intense
competition, price wars, and company failures.

10
BCG founder Bruce Henderson generalized this observation as the Rule of Three and
Four: a stable market will not have more than three significant competitors, and the
largest competitor will have no more than four times the market share of the smallest.
If this rule is true, it implies that:

• If there is a larger number of competitors, a shakeout is inevitable

• Surviving rivals will have to grow faster than the market
• Eventual losers will have a negative cash flow if they attempt to grow
• All except the two largest rivals will be losers
• The definition of what constitutes the "market" is strategically important.

Whatever the merits of this rule for stable markets, it is clear that market stability and
changes in supply and demand affect rivalry. Cyclical demand tends to create
cutthroat competition. This is true in the disposable diaper industry in which demand
fluctuates with birth rates, and in the greeting card industry in which there are more
predictable business cycles.

B. Threat Of Substitutes

In Porter's model, substitute products refer to products in other industries. To the

economist, a threat of substitutes exists when a product's demand is affected by the
price change of a substitute product. A product's price elasticity is affected by
substitute products - as more substitutes become available, the demand becomes more
elastic since customers have more alternatives. A close substitute product constrains
the ability of firms in an industry to raise prices.

The competition engendered by a Threat of Substitute comes from products outside

the industry. The price of aluminum beverage cans is constrained by the price of glass
bottles, steel cans, and plastic containers. These containers are substitutes, yet they are
not rivals in the aluminum can industry. To the manufacturer of automobile tires, tire
retreads are a substitute. Today, new tires are not so expensive that car owners give
much consideration to retreading old tires. But in the trucking industry new tires are
expensive and tires must be replaced often. In the truck tire market, retreading
remains a viable substitute industry. In the disposable diaper industry, cloth diapers
are a substitute and their prices constrain the price of disposables. While the treat of
substitutes typically impacts an industry through price competition, there can be other
concerns in assessing the threat of substitutes.

11
C. Buyer Power

The power of buyers is the impact that customers have on a producing industry. In
general, when buyer power is strong, the relationship to the producing industry is near
to what an economist terms a monopsony - a market in which there are many
suppliers and one buyer. Under such market conditions, the buyer sets the price. In
reality few pure monopsonies exist, but frequently there is some asymmetry between
a producing industry and buyers. The following tables outline some factors that
determine buyer power.

Table I. Factors to determine buyer power

Buyers are Powerful if: Example
Buyers are concentrated - there are a few buyers
DOD purchases from defense contractors
with significant market share
Buyers purchase a significant proportion of output -
Circuit City and Sears' large retail market provides
distribution of purchases or if the product is
power over appliance manufacturers
standardized
Buyers possess a credible backward integration
Large auto manufacturers' purchases of tires
threat - can threaten to buy producing firm or rival

Buyers are Weak if: Example

Producers threaten forward integration - producer Movie-producing companies have integrated
can take over own distribution/retailing forward to acquire theaters
Significant buyer switching costs - products not
standardized and buyer cannot easily switch to IBM's 360 system strategy in the 1960's
another product
Buyers are fragmented (many, different) - no buyer
Most consumer products
has any particular influence on product or price
Producers supply critical portions of buyers' input -
Intel's relationship with PC manufacturers
distribution of purchases

D. Supplier Power
A producing industry requires raw materials - labor, components, and other supplies.
This requirement leads to buyer-supplier relationships between the industry and the
firms that provide it the raw materials used to create products. Suppliers, if powerful,
can exert an influence on the producing industry, such as selling raw materials at a
high price to capture some of the industry's profits. The following tables outline some
factors that determine supplier power.

12
 Table II. Factors to determine supplier power

Suppliers are Powerful if: Example

Baxter International, manufacturer of hospital
Credible forward integration threat by suppliers supplies, acquired American Hospital Supply, a
distributor
Suppliers concentrated Drug industry's relationship to hospitals
Significant cost to switch suppliers Microsoft's relationship with PC manufacturers
Boycott of grocery stores selling non-union picked
Customers Powerful
grapes

Suppliers are Weak if: Example

Many competitive suppliers - product is Tire industry relationship to automobile
standardized manufacturers
Purchase commodity products Grocery store brand label products
Credible backward integration threat by purchasers Timber producers relationship to paper companies
Garment industry relationship to major department
Concentrated purchasers
stores
Customers Weak Travel agents' relationship to airlines

E. Barriers to Entry / Threat of Entry

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility
that new firms may enter the industry also affects competition. In theory, any firm
should be able to enter and exit a market, and if free entry and exit exists, then profits
always should be nominal. In reality, however, industries possess characteristics that
protect the high profit levels of firms in the market and inhibit additional rivals from
entering the market. These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that markets
typically make. For example, when industry profits increase, we would expect
additional firms to enter the market to take advantage of the high profit levels, over
time driving down profits for all firms in the industry. When profits decrease, we
would expect some firms to exit the market thus restoring a market equilibrium.
Falling prices, or the expectation that future prices will fall, deters rivals from
entering a market. Firms also may be reluctant to enter markets that are extremely
uncertain, especially if entering involves expensive start-up costs. These are normal
accommodations to market conditions. But if firms individually (collective action
would be illegal collusion) keep prices artificially low as a strategy to prevent
potential entrants from entering the market, such entry-deterring pricing establishes

13
a barrier.

Barriers to entry are unique industry characteristics that define the industry. Barriers
reduce the rate of entry of new firms, thus maintaining a level of profits for those
already in the industry. From a strategic perspective, barriers can be created or
exploited to enhance a firm's competitive advantage. Barriers to entry arise from
several sources:

Government creates barriers. Although the principal role of the government in a

market is to preserve competition through anti-trust actions, government also restricts
competition through the granting of monopolies and through regulation. Industries
such as utilities are considered natural monopolies because it has been more efficient
to have one electric company provide power to a locality than to permit many electric
companies to compete in a local market. To restrain utilities from exploiting this
advantage, government permits a monopoly, but regulates the industry. Illustrative of
this kind of barrier to entry is the local cable company. The franchise to a cable
provider may be granted by competitive bidding, but once the franchise is awarded by
a community a monopoly is created. Local governments were not effective in
monitoring price gouging by cable operators, so the federal government has enacted
legislation to review and restrict prices.

The regulatory authority of the government in restricting competition is historically

evident in the banking industry. Until the 1970's, the markets that banks could enter
were limited by state governments. As a result, most banks were local commercial and
retail banking facilities. Banks competed through strategies that emphasized simple
marketing devices such as awarding toasters to new customers for opening a checking
account. When banks were deregulated, banks were permitted to cross state
boundaries and expand their markets. Deregulation of banks intensified rivalry and
created uncertainty for banks as they attempted to maintain market share. In the late
1970's, the strategy of banks shifted from simple marketing tactics to mergers and
geographic expansion as rivals attempted to expand markets.

Patents and proprietary knowledge serve to restrict entry into an industry. Ideas
and knowledge that provide competitive advantages are treated as private property
when patented, preventing others from using the knowledge and thus creating a
barrier to entry. Edwin Land introduced the Polaroid camera in 1947 and held a
monopoly in the instant photography industry. In 1975, Kodak attempted to enter the
instant camera market and sold a comparable camera. Polaroid sued for patent
infringement and won, keeping Kodak out of the instant camera industry.

14
Asset specificity inhibits entry into an industry. Asset specificity is the extent to
which the firm's assets can be utilized to produce a different product. When an
industry requires highly specialized technology or plants and equipment, potential
entrants are reluctant to commit to acquiring specialized assets that cannot be sold or
converted into other uses if the venture fails. Asset specificity provides a barrier to
entry for two reasons: First, when firms already hold specialized assets they fiercely
resist efforts by others from taking their market share. New entrants can anticipate
aggressive rivalry. For example, Kodak had much capital invested in its photographic
equipment business and aggressively resisted efforts by Fuji to intrude in its market.
These assets are both large and industry specific. The second reason is that potential
entrants are reluctant to make investments in highly specialized assets.

Organizational (Internal) Economies of Scale. The most cost efficient level of

production is termed Minimum Efficient Scale (MES). This is the point at which unit
costs for production are at minimum - i.e., the most cost efficient level of production.
If MES for firms in an industry is known, then we can determine the amount of
market share necessary for low cost entry or cost parity with rivals. For example, in
long distance communications roughly 10% of the market is necessary for MES. If
sales for a long distance operator fail to reach 10% of the market, the firm is not
competitive.

The existence of such an economy of scale creates a barrier to entry. The greater the
difference between industry MES and entry unit costs, the greater the barrier to entry.
So industries with high MES deter entry of small, start-up businesses. To operate at
less than MES there must be a consideration that permits the firm to sell at a premium
price - such as product differentiation or local monopoly.

Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a
firm to leave the market and can exacerbate rivalry - unable to leave the industry, a
firm must compete.

F. DYNAMIC NATURE OF INDUSTRY RIVALRY

Our descriptive and analytic models of industry tend to examine the industry at a
given state. The nature and fascination of business is that it is not static. While we are
prone to generalize, for example, list GM, Ford, and Chrysler as the "Big 3" and
assume their dominance, we also have seen the automobile industry change. Currently,
the entertainment and communications industries are in flux. Phone companies,
computer firms, and entertainment are merging and forming strategic alliances that

15
re-map the information terrain. Schumpeter and, more recently, Porter have attempted
to move the understanding of industry competition from a static economic or industry
organization model to an emphasis on the interdependence of forces as dynamic, or
punctuated equilibrium, as Porter terms it. In Schumpeter's and Porter's view the
dynamism of markets is driven by innovation.

Strategy to counter the five forces can be formulated on three lever, they are:
corporate level, business unit level and functional or departmental level. The business
unit level is the primary context of industry rivalry. Michael Porter identified three
generic strategies (cost leadership, differentiation, and focus) that can be implemented
at the business unit level to create a competitive advantage. The proper generic
strategy will position the firm to leverage its strengths and defend against the adverse
effects of the five forces.

Based on the above explanation, the Implementation of this model for MVNO
Competition Business in Indonesia is explained in the following paragraph.

Some variables in Porter 5 Forces model is developed to become some specific

indicators to MVNO, where strongly effects from some resources are enhanced. Some
indicators that used in this analysis are:

1. Indicators to make pressure from the factor of threat of new entrants:

a. The lower of the beginning cost
b. Shortly time to get the posistive cashflow
c. Subscriber is not loyal only the existing brand
d. Government permits to the new entarnce
e. Government supports the new entrance to develop his business
f. Easier to find the main supplier
g. Distribution path to subscriber is easier
h. Technology is stacnant
i. The increasing of capacity is the same for all time

2. Indicators to make pressure from bargaining power of supplier:

a. High margin of supplier
b. Strongly network of supplier
c. Supplier product is very intersting for company
d. Supplier can sale his product directly to the customer
e. MVNO market is the same supplier market
f. MVNO buyed in small number or small amount
g. Investation cost of supplier is lower

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 h. Specific product from supplier
i. High switching cost

3. Indicator to make pressure from bargaining power of buyer:

a. Standar of product
b. MVNO is not support for full mobility
c. Activation cost of card is low, lower than ARPU
d. Subscriber lock is empity
e. Mobile Number Portability is exist
f. Product has small portion in output cost of subscriber
g. Easier in term of tarrif comparison that done by subscriber
h. Easier to understand of operator services and products

4. Indicator to make pressure from threat of product substitution:

a. Another product is already as changeable product
b. Changeable product is cheaper
c. Product supports end user mobility
d. Product to become main identity
e. Activation product is easier and faster
f. Installation cost is cheaper
g. Loyality end user (subscriber) to product is low

5. Indicator yo make pressure from rivalvy among existing competitor:

a. Market leader is not exist
b. The number of player is high
c. Competitor is as a dominant player for interconnection
d. Penetration rate and the number of subscriber is relatively constant
e. Standar of product
f. Mayority of competitors have the same strategy with MVNO
g. Mayority of competitors have the same market with MVNO

By using the existing data, the analysis is proposed for the matching condition with
indicators. The results are detemined as follow:
• “1” if the condition is match with indicator
• “0” if the condition is match with indicator
Percentage of the number “1” relatively to all is used as quantitative value from the
pressure to one of pressure resource and then the results is proposed into 3 three)
indicator as follow:

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 • 0 – 33,3% for low pressure = LOW
• 33,34% - 66,66% for medium pressure = MEDIUM
• 66,67% - 100% for high pressure = HIGH
Based on this condition, the high mayority is determined if the average condition of
pressure is high. And the low mayority is determined if the average condition of
pressure is low.

IV. RESULTS AND DISCUSSIONS

Ideal competition is determined if the competition gave benefit to all players and all
stakeholders. Final determination from a business is to find the position where the
company can survive from other competitors. By using the Porter 5 Forces model for
competition business in MVNO in Indonesia, some remarks from different parameter
are explained as the following paragraph.

• Threat from new entrance.

o The low beginning cost for MVNO is to become indicator to support
appearing threath from new entrance. In this case, 2 (two) investation cost
would be increasing; they are spectrum licency cost and radio access
network infrastructure development. MVNO could change this cost to
operational cost. By using the low investation cost, the business
oppoutinity in cellular would become biger. N addition, by changing the
invitation cost to operational cost as network least line cost, MVNO have
opportunity to get the faster cash flow.
o Also, in term of this condition for Porter Five Forces, subscriber loyality
for trademark of the product and existing operator is not too high. This
condition is shown from the high churn level.
o Government permission is become key point for new entrance, and also
contributes to increase the threath from new entrance. From government
regulation for telecommunciation in Indoensia, it is UU no. 36, 1999, has
some statements related to telecommunication business in service and
network. In this regulation, both of them is separated. But in this
regulation, the statement to support MVNO is not already. Coverment is
not support yet for new entrance in MVNO format.

• Supplier power
o By using least line model from MNO, MVNO can produce and sale his
services. Increasing new subscribers of MVNO, indirectly can increase the
revenue of MNO.

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 o The high supplier margin is one reason for MVNO. The bigger coverage
could be increasing MNO to MVNO. The incrreasing of interesting of a
company to supplier product, so that the hiher supplier power to this
company. The product in this term is the least of the radio access network
by MVNO so that MVNO can sale mobile services. Because the MVNO
don’t have the frequency licency, the network capacity is one nput
parameter for MVNO.
o MVNO is not only one buyer for MNO, because especially in Indonesia
MNO is also as service provider besides network provider. MVNO has the
same market with MNO, so that the opportunity MVNO to make
collaboration with MNO is difficult.
o The high cost for investation will effect to MVNO or MVNO has big
opportunity; The reason for this condition is that MNO need the high
funding to return his invitation cost.

• Buyer Power
o Full mobility is one factor for robusnest position of operator. The
capability of operator to get subscriber is one factor and opportunity for
MVNO.
o Switching cost and MNP is also one point for sucscriber to bargain to use
MVNO services.

• Threat of Subtitutes

o Substitue product for MVNO is PSTN (Public Servcie Telephone

Network).
o Competition in term of tariffing , the easier and faster of servcies should
be affected for MVNO model.

• Benefit of Competition

o MVNO is a competitor for MNO esecially to get subscriber. Based on data

for competition in business cellular in Indonesia, some results are shown
as follow:
ƒ Intensity of rivalvy among existing player is HIGH
ƒ Threat of new entrance is MEDIUM
ƒ Bargaining power of buyer is HIGH
ƒ Threat of product substitution is Low.
The conclusin form the above is the pressure for cellular competition in
Indonesia is HIGH.

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 V. CONCLUSION

1. The competitive profit in MVNO business in Indonesia is low.

2. Several strategies need to be proposed in order to achieve the better competition
positioning for Indonesia’s telecommunication industry.
3. The decreasing bargaining power and subscribers of mobile network operator
need to be proposed for MVNO developing in Indonesia.

AKNOWLEDGEMENT

This research was partly supported by the Hibah B Program, Electrical Engineering
Dept., University of Indonesia.

REFERENCES

[1] Justus Haucap, June 2006, “Competition Policy and MVNOs”, ITU/BnetzA Joint
Workshop Mainz
[2] Malcolm Alder and Dominic P Arena, January 2006, “Jumping on the MVNO
brandwagon : How niche can you get?”, KPMG Whitepaper
[3] Peter Falshaw, December 2006, “MVNO Business Model and Market
Opportunities”, presented in 3G World Congress, Singapore.
[4] Telkom, May 2006, “Laporan Tahunan 2005”, Jakarta
[5] BPS, February 2006, “Konsumsi Rumah Tangga, Susenas 2005”, Jakarta.
[6] Porter Michael E, 1980, ”Competitive Strategy, Techniques for Analyzing Industries
and Competitors”, The Free Press, New York.
[7] UU no 36 tahun 1999, tentang Telekomunikasi, Republic of Indonesia.
[8] Telkomsel, May 2007, “2006 Annual Report”, Jakarta.
[9] Indosat, May 2007, “Laporan Tahunan 2006”, Jakarta
[10] Excelcomindo, May 2007,”Laporan Tahunan 2006”, PT. Excelcomindo Pratama
Tbk., Jakarta.
[11] Bakrie Telecom, May 2007, “Laporan Tahunan 2006”, Jakarta

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