The History Of Information Systems Innovation

Published Date: 02 Nov 2017

Definitions, comparative contexts, and cognitive models

Applied on the case of mobile service innovation in Japan and Europe, 1999-2006

Abstract:

This paper develops a comparative framework for analysing mobile service innovations

in Japan and Europe between 2000 and 2006. Concepts of Information System (IS)

service innovation are defined and the dynamic capabilities model together with three

perspectives on context is used to discuss the fundament for the firm’s business models.

We also discuss how this study lens could generate contrasting views (sociologic,

economic, organisational) on IS innovation.

Examples from ongoing research in the mobile music and gaming industries are used. We

conclude that different markets for technology and structures of organisations and

networks have supported different types of service innovations in Japan and Europe.

Business models and offerings have been significantly different as a result.

This research is built on extensive industry contacts in Japan and Europe during two

periods, 1999-2001 and 2002-2007, when the author spent most of his time in Japan.

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Introduction

This paper focus on the innovation system for mobile data services and deploys a

comparative framework to analyse dynamic capabilities utilised among Japanese and

European focal actors. First IS service innovation according to Swanson (1994),

Teece/Pisano (1994), and Lyytinen/Rose (2002) is introduced. Teece and Pisano’s

dynamic capability model is touched upon: market (national) and positions, technological

paths, and organizational processes. We discuss how business models are based on

assessments (which is a function of the perceived positions, paths, and processes of the

firm (Teece/Pisano, 1994) and how these are affected by the three contextual views

provided by our study lens. We also discuss how this study lens could generate

contrasting views (sociologic, economic, organisational) on the perceived value of IS

innovation in different cultural settings.

This conceptual framework and discussion is then applied to the mobile service

innovation for delivery of music and games in Japan and Europe between year 2000 and

2006, focusing on the related payment systems.

Mobile telephony is an industry with a history of agreeing on industry-wide standards

which spurred sales and induced economies of scale for equipment cost and distribution.

Consumer entertainment services are chosen as indicator due to its central role in driving

demand and explore new technologies. Among entertainment services, examples are

taken from premium (charged) music and game download services. Even though plain

messaging (SMS and email) have attracted most users and the highest volumes of sales,

we focus on premium services, as these services have attracted significant resources from

content providers, enablers, and carriers alike. During the period of study, 2000-2006,

premium SMS and charged mobile Internet downloads provided the bulk of revenues for

service providers. Carriers on the other hand have reaped most of their profits from bulk

SMS and email. In this paper mobile services could be divided into two components:

1) The service delivery mechanism (starting from its origination with a content

holder and terminating on the mobile phone)

2) The actual intellectual property object (the file or "content"),

Due to the limited scope of this paper we focus the analysis of the service delivery

mechanism on billing, or so called micro payments. The analysis of the content part will

mostly be limited to music and games. A conceptual model of the full service delivery

mechanism is provided (Figure 1).

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Definitions and character of IS service innovation

This paper attempts to combine the systemic nature of innovation in a macro level

perspective from an industry study with elements of micro scale indicators on managerial

level. Why is innovation important to firms? Firstly, research implies that new products

(or services) help capture and retain market share and increase profitability. Secondly,

new product development is important as the environment is constantly changing,

creating new opportunities and constraints. The following types of strategic advantages

can be obtained through innovation according to Tidd, Bessant, Pavitt (1999):

[Table 1]

Swanson (1994) develops concepts to differentiate theory of IS innovation from

organisational innovation theory. He recognises that innovators are frequently assumed to

motivate imitative behaviour by others. Channels of communication is of central concern

for the adoption process, and Swanson argue that these channels are significantly

differentiated according to IS innovation type. Innovations can be typed, e.g. new

products (or services), administrative innovation (improving internal control,

coordination, and structure), and technical innovations (changes to technology or work

processes).

Lyytinen and Rose (2003) extend Swanson’s definition and define IT base innovations in

terms of disruptive IT innovation as an architectural innovation originating in what they

call the "information technology base", referring to Teece, Christensen, and Swanson

(1986; 1997; 1994). They distinguish between these three types of IT innovations and

their interactions in what they call the "three-set model of IT innovation".

[Figure 1]

Lyytinen/Rose (2003) further defines the effects of disruptive IT innovation as pervasive

in that it simultaneously and necessarily spans new services, and new types of

development processes. According to Lyytinen and Rose, the packet based

telecommunication networks of the 1990s is a base IT innovation that spurred subsequent

innovations in system development and services. Lyytinen and Rose’s further categorise

service innovations in the following table:

[Figure 2]

In this paper mobile entertainment services innovations are mainly referred to as

"technological service innovations", as in the table above. The influential dynamic

capabilities view (Teece/Pisano, 1994) connects Lyytinen/Rose’s definitions in

classifying how an organisation can align with an ever changing environment. In this

view, firm-specific capabilities are being renewed and embedded in its processes, market

positions, and expansion paths. Dynamic capabilities are strategic and they cannot be

homogenous assets. These are e.g. internal competences such as values, organisational

experiences, and culture that cannot be bought on the factor market.

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Replication and transmission of knowledge can only take place when information is

codified, specified and it is understood that replication takes place. The two main values

of replication (Teece/Pisano, 1994) are to support geographic and product line expansion,

and the spread of valuable capabilities to customers. As will be discussed later, it is

crucial for technology licensing firms to decode its technical assets in order to offer it to

customers. To understand process improvements is the source of incremental service

innovation. Strategic change is costly in the dynamic capability view and therefore

gaining opportunities for competition through diversification are costly. It can be made

easier when an efficient market of technology exists.

Three contextual views on innovation

In the following section three contexts for service innovation are presented with its

relation to organisational dynamic capabilities and the concept of business models.

1) The economic context:

Arora et al (2001 claim evidence exist that barriers for market transaction of technologies

in many markets have decreased to the degree that they significantly affect the strategy

space for companies through either licensing in of technology instead of developing inhouse;

or license out technology instead of investing in assets for manufacturing and

marketing. The demands on management could be summarised in: proactive management

of intellectual property, greater attention to externally monitoring of technologies,

organisational change to support technology licensing, joint ventures, and acquisition of

external technology.

Arora et al (2001) claim that for entrepreneurial start-ups, markets for technology make a

focused business model more attractive. At industry level, markets for technology may

lower barriers to entry and increase competition. Entrepreneurial start-ups may be able to

focus more narrowly on developing technology rather than on its application, by relying

on licensing and other arrangements to get returns on their innovative efforts. Markets for

technology are also critical for the existence of many small and medium sized enterprises

(SMEs) in the telecom industry. Therefore the monitoring of externally available

technologies becomes a strategic activity. Markets for technology can also undermine

privileged access to technology that incumbents enjoy.

Larger firms have to balance the revenues of royalty against the lower price-cost margins

and reduced market share that the increased competition from the licensee implies. In

general, licensing is more attractive when the licensee operates in a different market.

Smaller firms typically have to acquire complimentary assets should they choose to

exploit their innovation by commercializing it themselves. When licensing their

technology they don’t control their own fate, as licensees have to invest in

complementary assets to commercialise the technology. Another issue is the longevity of

complementary assets compared to the technology itself: by investing in downstream

facilities, the firm needs to feed these resources with continued innovation in order to be

successful. Firms divide attention and resources between two broad types of activities:

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exploitation and exploration. Acquisition of complementary assets affects the culture of

the firm and induces changes to the speed and fluidity of information flows (Arora et al,

2002).

2) The organisational context:

In the following Jens Christensen’s article from 2002 is used to address the comparative

long-term dynamics of two different types of technology-based companies: the ‘related

diversifier’ pursuing ‘synergistic economies’ and the ‘vertical integrator’ pursuing

vertical economies Organisational design for managing innovation, according to

Christensen, is contingent on both the overall strategy-structure profile and dynamics of

the companies, and on key characteristics of their particular innovation and technology

strategies.

He illustrates the difficulties of many diversified companies in creating efficient internal

capital markets for longer-term R&D, especially under corporate governance dominated

by financial control rather than strategic planning style. The related diversifier tends to

impose an organisation on management of R&D that severely constrains the strategic

scope for innovation and technology strategy. Christensen also points to the challenge for

incumbents that are diversified that they have problems keeping up with innovation, in

spite access to financial and technology assets. The organisation’s decision to develop

into related diversifiers or vertical integrators are affected by the nature of the underlying

technologies and innovations in the organisation. When compared to many of its

European counter parts, NTT DoCoMo in Japan had a relatively new and vertical

organisation focusing only on mobile telephony already in the latter half of the 1990s,

whereas most other carriers in Europe stream-lined their mobile operations at a later stage.

Clayton Christensen et al (2002) discuss an industry’s vertical integration and horizontal

stratification with the notion of "structured dialogue". When structured dialogue takes

place between two actors, markets are the most efficient coordination mechanism

between firms (as in contrary to vertical integration of functions within the same

company). Three conditions must be met for a "structured dialogue" to take place:

1) The customer that procures must be able to specify which attributes and

parameters that must be provided

2) Metrics for those attributes must exist, and the technology to provide those

metrics must be readily available

3) The procuring company must understand the interactions or interdependencies

between the attributes of what is provided and the performance of the system in

which the procurer will use it.

3) The network context:

A basic assumption in the network model is that the individual organisation is dependent

on resources controlled by other organisations. Because of the interdependencies of firms,

the use of an asset in one firm is dependent on the use of other firms' assets (Johanson &

Mattsson, 1987). Ruef (2002) argues that tie strength (weak or strong) for innovation

could be analysed with the help of two underlying dimensions of social relationships:

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information and influence. Innovation in Schumpeterian tradition requires that corporate

actors have access to information on various ideas and routines from which elements can

be combined.

The tendency of entrepreneurs and SMEs to engage in innovation relate to structural and

cultural embeddedness, according to Ruef (2002). Capacity of creative action is seen to

be a function of the ability of entrepreneurs to i) obtain non-redundant information from

their social networks; ii) avoid pressures for conformity; and iii) sustain trust in

developing novel (and potentially profitable) innovations. Ruef presents and tries

(successfully in his own paper, 2002) amongst others the following hypothesises: team

size (large teams of entrepreneurs are more likely to be innovative than smaller teams),

strong ties versus weak ties (actors relying on strong ties as sources of ideas are less

likely to be innovative than actors relying on weak ties), and the most powerful: network

diversity (actors embedded in a diverse set of network ties are more likely to be

innovative than actors relying on homogenous ties).

In the dynamic capabilities view these network capabilities of the innovative organisation

would affect current processes, as well as future paths. Ruef attempts firstly to answer

how in the micro-level context – both structural and cultural – entrepreneurs contribute to

the tendency to deviate from established ways of thinking and introduce new innovations.

Secondly, Ruef devotes attention to how innovation is tied to the emergence of novel

organisations and organisational forms. The reproduction of existing ideas is seen to be a

junction of the types of social relationships those entrepreneurs are embedded within.

From cognitive awareness to business models

In previous sections we have discussed the nature of IS service innovation and connected

it to dynamic capabilities and a study lens of three context types. In the following we will

merge these aspects of innovation into a discussion of strategy and business model

formulation.

The inherent value of a technology remains latent until it is commercialised, and it is

crucial for technology managers to find the "architecture of the revenue" early on in the

development process according to Chesbrough and Rosenbloom (2002). The business

model can be said to be a situational cognitive model of value creation, being incremental

and divisional rather than rational and corporate in order to support the firm’s adaptation

process to changes in external environment. Building alliances are important to ignite

positive feed-back during the development process and Shapiro/Varian describe three

types of alliances: Special interest groups (cross-licensing of patents), alliances where

members can access standards, and alliance around a central actor who collects royalties.

Partners in such alliances would negotiate over control of the existing installed base,

technical superiority, and intellectual property rights.

The positioning and planning of products relies on the firm’s cognitive models of the

external environment aided by information gathering through its external network.

Service innovations could be positioned in two dimensions: novelty of technology; and

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novelty of markets (which is a variation on previous definitions of service innovation).

However, assessing the maturity of a market is challenging, due to difficulties in defining

the boundaries of a particular market, as our case involving mobile services will illustrate.

By gathering information on the real growth rate of a market, a firm can estimate the

stage in the product life cycle and the maturity of the market: High growth rates would

typically be associated with high R&D costs, high marketing costs and rising investments

in capacity (Tidd et al, 1999). To gather this kind of information in an emerging market

calls for active usage of the firm’s human networking capabilities.

[Figure 3]

Consistent failure to interpret possibilities in the environment of the firm (the

marketplace) and commercialise technology may force the corporation to reduce or

withdraw from its technology development. In the literature, the business model could be

set in contrast to strategy in at least three aspects (Chesbrough and Rosenbloom, 2002):

The business model assumes that knowledge is cognitively limited, whereas

strategy formation assumes access to reliable information

The business model focuses on value for customers, and less on competitive

threats to returns.

A business model focuses on value for the business, whereas strategy focuses

more on shareholder and financial value.

The logic of an established and successful business model could also constrain an

organisation’s search for new alternative business models, described in the literature as

establishment of a "dominant logic" (Pralahad and Bettis, 1986; Chesbrough/Rosenbloom,

2002). Habits of established routines and dominant logic confines the firm in various

ways: local search relying on basic routines (Nelson/Winter, 1982), learning processes

being local and path dependent (Teece, 1986; Mitchie, 1998), bounded visions among

managers meaning firms may differ greatly in their perception of new opportunities

(Fransman, 1990), or innovators loosing out to imitators due to lack of complementary

assets (Teece, 1986). Established business models become embedded in the organisation,

which is described as the `success breeds failure syndrome’ (Starbuck, Greve and

Hedberg, 1978), that disadvantages established industry leaders when challenged by startups

with new and transformative technology (Christensen/Rosenbloom, 1995). It could

also affect the firm’s absorptive capacity negatively (Cohen/Levinthal, 1990).

To overcome limited information and bounded visions in new technology development

some scholars propose firms to invest in: integrative capabilities (Henderson, 1994),

complimentary assets (Tripsas, 1997), and manage disruptive technologies outside the

main business (Christensen, 1997). Integrative capabilities are competences spanning

organisations, which takes time to establish, as they are the product of many individual

management decisions over time. ‘Related diversifiers’ as described by Ruef in the

previous section would typically aim at this. Complimentary assets could be external

integrative capacity, and the maintenance of geographically dispersed research centres.

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Managing of transformative (and disruptive) technologies keeps the organisation

involved in alternative value networks.

Limitations in a firm’s ability to autonomously evaluate business information could lead

to ‘strategic convergence’ (Hamel, 2000), i.e. firms imitate each other. Successful

business models get imitated by firms that do not understand that the strategic process

involves designing a custom strategy or business model for the specifics of each situation

that involves dynamic capabilities. Firms involved in strategic convergence typically

underestimate the difficulty of replication and imitation of dynamic capabilities.

Mobile service innovation in music and games

In a previous paper (Kärrberg/Liebenau, 2006) it is discussed how similar and converging

technologies were used in Japan and Western Europe for mobile service delivery between

2000 and 2005. A general convergence in the global market of PC Internet and mobile

phone Internet file formats is a major reason for this. Hence, the technical infrastructure

itself doesn’t explain major differences in service provision of new and innovative

service offerings. Due to strategic convergence, the business models and service

innovation landscape for mobile services was interconnected and pretty much similar in

Western Europe (generalised as ‘Europe’ in this paper) differentiated mainly by

technological and market maturity in the various countries.

By applying the contextual framework from the previous section, we attempt to analyse

social dynamic effects on business models used in Japan and Europe through three

perspectives: Markets of technology, organisation of in-house R&D (and payment

models), and the nature of industry network ties. Differences in the institutional settings

of regulation, and other historic aspects of the telecommunications sector in Japan and

European countries should not be underestimated. However, the limited scope of this

paper keeps us from discussing institutional factors in detail.

Indicators of the influence of each contextual perspective are singled out after an

introduction to the game and music markets:

Markets of technology: Licenses and rights for music and games

Organisational forms of in-house R&D and payment models: Related diversification

and vertical integration among focal actors (carriers, music publishers, game publishers).

Network aspects: Value chain integration and industry overlap (telecom, music, games)

Our focus lies on Japan with a comparative discussion of Europe. The first mobile

Internet services in 1999 focused on information services both in Japan and the EU, as

carriers believed business users would drive revenues. High coordination costs in Europe

kept content providers from expanding cross-boarder sales, as incumbents all had

different billing systems, portal policies and regulations. So initially the larger size of the

EU market didn’t have any positive effects for mobile services sales compared to Japan

(Kärrberg/Liebenau, 2006).

The music content sales got off to a head-start in both Europe and Japan. Traditional music

sales were saturated or decreasing in both Japan and Europe around 2000. In the

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beginning, ringing melodies were manually input by users before the development of the

mobile Internet enabled distribution of ready-made melody files. New technologies made it

possible to distribute parts of original songs and, ultimately, full-track music. The process

was not technologically determined, but rather socially and business-wise constructed.

Initially ring signal services in Japan were dominated by karaoke providers were successful,

while recording companies and content creators dominated the subsequent real-tone and fulltrack

music download services (Takeishi/Yoo, 2006). In Japan markets of technology for

music didn’t take off for monophonic and polyphonic ringtones (1999-2003) as karaoke

providers re-created original songs and marketed them mainly by themselves. But gradually,

popular service providers bought the rights to songs from music companies and marketed

them on their own portals. Between 1999 and 2006 consumer and entertainment contents

have totally dominated over business applications in terms of sales volume in both Japan and

Europe. As Funk (2004) points out, the mobile Internet acted as a disruptive technology

for existing and advanced Internet applications (business usage), whereas (simple)

entertainment content (consumers) were much easier to enable and sell.

In 2003 Europe and Asia (foremost Japan) were together leading the way for ringtones. The

Economist (2004) reports that ringtone sales were $3.5 billion worldwide in 2003, up by

40% from 2002. According to the Digital Contents Association Japan the ringtone sales

in Japan were USD 900m in 2003, some 25% of the global market. Europe and Asia were

the leading markets, with only USD 50m to USD 80m generated in the US. Sales of

ringtones had already overtaken CD singles and outstripped legal internet download

services, such as Apple's iTunes, which generated less than USD 100m in 2003

worldwide.

The mobile gaming industry in Europe was bogged down by lacking handset and billing

capabilities until 2003-2004. However, in Japan the demand for mobile entertainment

services attracted traditional game software companies early on from 2001 when the first

java phones were released. Even before the introduction of java, a few game providers

(like Dwango’s ‘Tsuribaka’ game) attracted 100s of thousands of users paying USD 3 or

more per month. A general downturn for game centres Japan at the end of the 1990s

started simultaneously with the introduction of mobile Internet services. Especially

SEGA, market leader in game centres, were already looking for new sources of revenues.

Investments to develop a new java application are rather high (USD25k-50k for an initial

prototype working on 3-5 handset families, own source), so the early connection and

collaboration between networks of Japanese game publishers and the telecom carriers

was crucial. The fact that handset specifications were coordinated by the carriers in Japan,

further decreased coordination costs for the game publishers when offering end users

their products.

[Figure 4]

In Japan companies like Namco, SEGA, and Konami offer most of their popular game

services in the entertainment category on NTT DoCoMo’s i-mode portal. These

companies have a long experience of developing games for home consoles and computers.

Like character licensing, game software is a huge industry in Japan, concentrated to

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Tokyo. The figure below illustrates the major game software companies in Japan and

their business areas.

[Figure 5]

But also new entrants (such as Dwango and G-mode) got on the carrier portals in 2001

with their games, often staffed by ex-employees of larger game publishers. All of the

gaming companies entered the mobile Internet gradually from 1999 and with force in

January 2001 when java handsets were released. They all saw it as crucial in order to

regain sales from a declining game centre market. The wireless games market in Japan

was estimated to USD 230m in 2005. Wireless world forum reports (2006): "Japanese

play more mobile games than their counterparts in the US and Europe. In 2006 over 70%

of i-mode users are expected to have played a mobile game more than once a week, with

38.4% playing almost every day. By comparison, only 16% of UK mobile phone owners

say they play mobile games regularly". Therefore anecdotal evidence points to a higher

usage and expected higher innovative activity within the mobile gaming industry in Japan.

Further, a gaming cluster exists in Tokyo according to Tokyo University researchers

(Baba, 2001), adding to the innovative capability of companies located there.

Mobile payments for games and music

Currently, a large majority of mobile payments in Japan and the UK for mobile data

services are triggered via end user action and terminated in the billing systems of the

carriers. The carrier billing systems either accept SMS or some form of browser mediated

billing (strings of unique URLs). A growing number of payments are triggered via a PC,

but very few payments are mediated via alternative methods, such as credit card billing,

bank transfer, or other e-payments (Paypal etc). Below is a categorisation of a general

value network, enabling various business models, for delivering entertainment mobile

content (video, audio, graphics, applications):

[Figure 6]

A company can take more than one role in above chart. In most cases two types of billing

systems connect a) carrier with billing mediator and b) service delivery provider with

billing mediator. There are three exchange flows of interest to our analysis of these firms:

digital content delivery, monetary transactions, and business interaction between staff to

enable the previous two.

Contents in indirect billing systems are generally not charged to the end-user, but paid by

advertisers or other information providers. Offers combining indirect and direct payment

systems are common. An example would be a mobile site where advertisers (who don’t

charge the end-user) and content providers (who charge for content downloads via micro

billing) display their offerings side by side. Another more intricate example is a mobile

portal, provided by a carrier that includes search engine functionality, where users search

for content (e.g. "Tetris"). Behind the scene content providers bid for popular key words

(such as game, girl, gambling etc) in weekly auctions (arranged by the search engine

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provider) in order to be on top of the resulting list that the end-user sees upon his key

word search. In Japan, pricing of mobile games used to be offered only as monthly

subscription for a single game or a game pack initially, but later on also as one-off charge.

In Europe the opposite development with initially only pay per download existed, due to

limitations in the billing software used by carriers and service providers. From 2005 and

on, search engines (mainly provided by Overture and Motionbridge) became commonly

used by carriers in Europe. Content providers bid for key words (in on-line auctions) used

by these search engines, generating revenue streams for operators both from service

providers and end-users. Technical glitches and high bids from inexperienced service

providers often meant that over-all profitability for service providers have been

challenged. It can be argued that this has further accelerated industry-wide merger and

acquisition trends among service providers in Europe.

Discussion and conclusions

Micro payments in mobile services have remained more or less proprietary, unique to

each carrier, up until recently. Products in which there is little or no value to the first

users due to the existence of strong direct (e.g., telephone) or indirect (complementary

products such as mobile commerce) network effects face a significant start-up problem

(Economides, 1996). According to Funk (2006) the Japanese and to a lesser extent

Korean service providers early on solved the start-up problem of direct network effects

with entertainment content that was supported by a micro-payment system (service

providers collect and pass on content fees to content providers) and custom phones that

displayed this content in a consistent manner.

Markets of technology for music and games:

Sony Music in Japan initially lost out to fast-moving karaoke companies in the ringtone

business, but revived its influence and sales when full music downloads became available.

Europe had a similar situation with large record companies missing out on the first wave

of monophonic and polyphonic ringtones, due to lack of copyright protection and

ambiguous IPR legislation. As most music files now are sold in MP3 or other standard

file formats, the only remaining trick to protect from piracy and copyright infringement

are digital rights management (DRM), in which third party providers assist record

companies. For games, early on a significant license trade developed in Europe, as simple

PC games from the 80s (Atari, Amiga) initially were popular. In 2006, even 3D games

(such as Vijay Sing 3D Golf by Gameloft) were released for more advanced handsets,

costing up to USD 7 to download. In Japan, the established game producers have chosen

to produce mobile versions by themselves.

Organisational forms of R&D and payment models:

Sega created a related diversification strategy when splitting their game developing

organisation into smaller independent units, each with a certain market focus, some of

them targeting the mobile segment. None of these early moves were seen in Europe

around 2000, where not even GPRS or micro billing were widely spread. NTT DoCoMo

created a special department (the Gateway department) dealing with the approval of new

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services for its i-mode portal already in 1998. Corresponding moves in Europe didn’t

happen until Vodafone Live was launched in October 2002. Prior to that experiments

with circuit switched WAP (Wireless Application Protocol) services had failed mainly

due to lacking value chain integration and clear business models in Europe. European

users could finally turn to their carriers for a mobile Internet shop from 2002, what imode

had offered the Japanese since March 1999. In Europe carriers early lost the

initiative on delivering wallpaper and ringtone business to premium SMS providers, but

these still had to pay high revenue share fees to the carriers. According to Takeishi/Yoo

(2006), an integrated analysis is needed of the business ecosystem of the mobile music in

Japan (and Korea) to understand the interplay of copyright institutions and business

models of dominant actors. Due to weaker copyright institutions in Korea, carriers could

dominate the music industry (through buying major record labels e.g.), which wasn’t the

case in Japan and Europe. The business model of Japanese carriers early on focused on

packet charges for data combined with premium content fees. Content providers could

keep up to 91% of premium content fees, but the bulk of revenues was generated by

packet fees. Most packet fees originated from email traffic and pier to pier messaging.

Perhaps as much as 90% of total revenues from i-mode were content fees and only 10%

stemming from premium content fees in 2001 in Japan (Kärrberg/Marnung, 2001), which

made carriers the absolute winners from the success of mobile services.

Network aspects:

Kärrberg/Liebenau (2006) summarise the main differences between the corporate

networks around mobile Internet in Japan and Europe:

"When comparing the EU and Japan the first major difference is in the usage of

GSM versus PDC as the network standard. At a first look, it would seem as the

EU had a head-start as GSM is a global standard and PDC is not. There are many

similarities when looking back in time: Both markets were pioneering the mobile

Internet, and WAP even had a head start over i-mode (and WAP was adopted by

KDDI, the second carrier) as a mark-up language. Handsets had black and white

screens and no ring tones or java games were available in Japan or the EU during

launch in 1999. Messaging, the "killer application", took off already back in the

mid-90s as the first data application in both markets, and still in 2005 provide

most of the non-voice revenues".

It is also clear that the focal role of carriers in Japan enabled an early incentive for

investments in marketing and product improvements in order to grow the market through

feed-back processes with the users. This feed-back process was early on recognised by

NTT DoCoMo as crucial in order to grow the market. Similar investments in long-term

product development was lacking in most European markets until GPRS and Vodafone

Live became available in 2002. Feed-back processes in Japan early on produced a few

profitable content providers, that inspired other content providers, more users signed up,

and carriers (NTT DoCoMo mainly) expanded its content departments. An existing

world-class cluster of entertainment service companies in Tokyo (gaming, animations,

karaoke) also contributed to a rapid mobilisation of production resources into the new

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mobile Internet distribution channel (Kärrberg & Marnung, 2001). There are also clear

structural differences: The market fragmentation and power struggle that took place in

Europe between handset makers and carriers didn’t take place in Japan. The "always-on"

packet networks (GPRS) in Japan were not available until 2002 in most EU markets.

Another major difference was the clear value proposition that Japanese carriers offered

compared to EU carriers.

Discussion

Lacking cultivation of ties between carriers and the new content providers in Europe

meant a severe lack of trust between the parties on grudges against low revenue shares on

one hand (content providers) and complaints regarding lack of quality control on the

other (carriers). NTT DoCoMo’s Gateway Department originally spent a majority of the

time convincing the banks to offer mobile banking sites, but realised quickly that ringtone

signals were more important, when the first i-mode handsets had gone on sale. As a

contrast, the low replacement rate of handsets and lacking customer relationship

management from carriers towards service providers in Scandinavia (the leading GSM

market at the time) exemplify how network effects were kept back from work in 1999 to

2002 at the time when Vodafone Live was launched in the EU (Kärrberg & Sigurdson,

2002).

Islands of directed ties (Ruef, 2002) could also explain the higher success rate for new

services in Japan in the initial stages of the mobile Internet, when the game and music

industries connected to the mobile carriers. European services were mostly offered

through specialised mobile content houses, who seem to have suffered from collective

business models (strategic convergence) that weren’t aligned with the focal players, the

carriers, and too much of isolated islands, with a focus on both in-house conceptual and

technical design. Bounded visions could be seen to have developed among European

carriers and services providers, with focus on GSM technology, and eyes on the carrierhandset

power struggle. WAP forum, dominated by technology enablers (browser and

handset makers) defined mark-up language and delivery methods without great

interaction with carriers. Many service providers developed their own business models to

deliver their content. One could argue that such insular positions would free actors from

pressures of conformity, but such argumentation fail to acknowledge the importance of

information flows as inputs to innovation (Ruef, 2002). Most content providers who

didn’t fail immediately became technology enablers instead, trying to sell their solutions

to carriers.

Carriers using third party technology in their delivery systems took the first step towards

markets of technology on the mobile Internet in Europe. One of the most crucial

innovation areas in Europe were micro billing systems, which in Japan was controlled by

the carriers. The difference in billing systems is perhaps the single largest reason for the

different business models applied in Europe and Japan. In Japan it’s not possible to

charge for contents off-carrier portal (for physical products it is possible though!). In

Europe most mobile content houses provided games initially, but even in 2006 most

games in Europe are provided by mobile content providers either on license from major

14

game companies or stemming from their own game development. The gaming industry is

dominated by the Japanese and Western game publishers like Electronic Arts, but only in

Japan (and Korea) has mobile gaming attracted the game publishers to invest

significantly in end-to-end interaction with the consumers.

We note the fundamental difficulty for organisations to formulate strategy in an industry

in change, and argue backed by anecdotal evidence from our field research, that actions

based on well communicated cognitive views of how complex technologies interact, have

provided competitive advantage and profits to innovative actors in Europe and Japan

(represented by providers of micro billing systems and carriers in Europe; content

providers and carriers in Japan). An overview and summary of the changing business

strategies and a pointer to where resources for innovation in Japan and Europe have been

directed among these actors are given in the following:

[Table 3]

15

Figures and tables:

Type of innovation Strategic advantage

Novelty Offering something which no one else can

Competence-shifting Rewriting the rules of the competitive

game

Complexity Difficulty of learning about technology

keeps entry barriers high

Robust design Basic model product or process can be

stretched over an extended life, reducing

overall cost

Continuous incremental innovation Continuous movement of the

cost/performance frontier

Table 1: Strategic advantages of innovation (Tidd, Bessant, Pavitt, 1999)

Content

ownership

Service

Delivery

Billing Content

Approval,

NW access

Portal

Management

Content

aggregation

Technology

Choices

Ingestion

Compression

encoding

Metadata

capture

On-the-fly

Transcoding

Digital Rights

Management

Site Builder

Content Man

System

3 Party Man.

system

Device

Discovery

Download

Manager

Billing

mediation

Media Player

Where...

= widely used

= rarely used

= hardly used at all

Japan

EU

Search

Engine

Figure 1: Kärrberg/Liebenau (2006)

16

IT Base

Innovations

Systems

Development

Innovations

Service

Innovations

Figure 2: The three-set model of IT innovation (Lyytinen/Rose, 2003)

IT service

innovation sets

Description Examples

Services (S) Administrative process

innovation (S1)

Accounting systems, EIS

Technological process

innovation (S2)

MRP, computer integrated manufacturing

Technological service

innovation (S3)

Remote customer order entry and follow-on

customer service systems

Technological integration

innovation (S4)

Interorganisational information systems,

EDI

Table 2: Service innovation sets (Lyytinen/Rose, 2003)

Architectural:

novel combinations of

existing technologies

Differentiated:

compete on quality

and features

Complex:

technology and

markets co-evolve

Technological:

new solutions to

existing problems

High

Low High

Novelty of markets

Novelty of

technology

Figure 3: Service innovations seen in the context of technological and market maturity (Tidd, Bessant,

Pavitt, 1999)

17

MMCA: White P aper 200 0

0

10

20

30

40

50

60

70

1998 1999 2000

Mobile Contents

Game Centers

Music Contents

Billion Yen

Figure 4: Japan entertainment trends 1998-2000: Mobile contents up, game centres down (MMCA, 2000)

Namco

SW

Amusement

Park

Taito

Capcon

PC

SW

Konami

SW Enix

SW

Square

SW

Arcade

Home

Consoles

Games SW

Dwango

Network

SW

Mobile

Atlus

SW

HW

Sega

Biggest Arcade holder

Dream Cast

SW Sony

PS

SW

Nintendo

Nintendo 64

Gameboy

SW Bandai

Wonder swan

SW

Figure 5: Overview of the Japanese software gaming industry (Kärrberg/Marnung, 2001)

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Service

delivery

provider

Content Carrier

aggregator

Consumer

with handset

Content

provider

Billing

mediator

1) Content delivery 2) Payment

confirmation

3) Revenue share

Fig 6: Payment value network

Carrier Content

Provider

Service delivery

platform

provider

Retail Brands

Japan 2000 Portal

management,

value chain

coordination,

billing

systems

Carrier biz

relations,

service

creation

Systems

innovation for

CP

Distributing

raw content to

content

provider

EU 2000 Content

aggregation,

service

delivery

technologies

Content

creation

Systems

innovation for

carrier

Distribute to

carrier, own

portals

Japan 2006 Portal mgm,

coordinate

handset

releases

Carrier

business

relation, cost

cutting and

volume

solutions

Cost cutting for

CP

Use carrier

portal for

revenues, offportal

for

customer

interaction

EU 2006 Portal

management,

brand

aggregation,

billing

models

SMS solutions

for off-portal

and advanced

video services

and store

fronts for

carrier portals

Technology infra

for carriers, CP,

and brands.

Using off-portal

storefronts for

advertising and

user interaction

(TV voting etc)

Table 3: Service innovation in Japan and Europe, 2000-2006

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