first mover advantages in the mobile telecommunications industry. a consumer-centric perspective...

8/6/2019 First Mover Advantages in the Mobile Telecommunications Industry. a Consumer-Centric Perspective (2011)

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ESMT Working Paper

ESMT | European School of Management and Technology

ISSN 1866-3494

1103 March 30, 2011

FIRST MOVER ADVANTAGESIN THE MOBILETELECOMMUNICATIONSINDUSTRYA CONSUMERCENTRIC PERSPECTIVEJ.P. EGGERS, NYU STERN SCHOOL OF BUSINESS

MICHA GRAJEK, ESMT

TOBIAS KRETSCHMER, LMU MUNICH


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* Contact: Micha Grajek, ESMT, Schlossplatz 1, 10178 Berlin,

Phone: +49 (0) 30 21231-1047, [email protected].

Copyright 2011 by ESMT European School of Management and Technology, Berlin, Germany,

www.esmt.org.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval

system, used in a spreadsheet, or transmitted in any form or by any means - electronic,

mechanical, photocopying, recording, or otherwise - without the permission of ESMT.

AbstractFirst mover advantages in the mobile telecommunications industry:A consumercentric perspective

Author(s):* J.P. Eggers, NYU Stern School of Business

Micha Grajek, ESMT

Tobias Kretschmer, LMU Munich

This study offers a consumer-centric view of entry order advantages and the role offirm-level capabilities. Specifically, we consider the fact that early adopting

consumers will be different from late adopting ones. We suggest that early

entering firms will attract higher-profitability customers, and that this will be a key

source of first-mover advantages. Additionally, this effect will be stronger for firms

with strong technological capabilities as early adopters are generally more

technology-oriented than late adopters. Conversely, firms with existing marketing

and branding resources in the country will do better at attracting a high volume of

less-profitable customers standard late adopters that are swayed by brand

effects. Our empirical results, drawn from data on the global mobile

telecommunications industry, support our assertions and help us offer important

depth to the discussion about first-mover advantages and the contingent role of

firm capabilities.

Keywords: firstmover advantage, mobile telecommunications, consumer

centric, preentry experience, firm capabilities

JEL Classification: C51, L10, O33


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INTRODUCTION

Despitetheattentiondedicatedtofirstmoveradvantageresearchinthefieldsofeconomics,

marketingandstrategy,theroleofconsumersintheeffectofentrytimingandindustry

evolutionthathasbeenconspicuouslyabsent.Specifically,whilesomeresearchdiscusses

howswitchingcostslimitingconsumermobilityimproveearlyentrantperformance

(LiebermanandMontgomery1988;Makadok1998;Robinson1988),littleattentionhas

beenpaidtotheheterogeneityamongdifferentconsumergroupsinanemergingindustry.

Thisissurprisingastheheterogeneityofadoptersplaysacentralroleinarelated,butlargely

parallelstreamofresearchthatalsodealswiththeemergenceofnewproductsandmarkets,

specificallyworkonthediffusionofinnovation.There,consumersegmentationandthe

characteristicsofdifferentconsumersdependingonwhentheyadoptaninnovationplaya

centralroleintheresearchtradition(Mahajan,MullerandSrivastava1990;Rogers

1962/1995).Thisliteraturesuggeststhatconsumersavailabletoearlyenteringfirmswillbe

systematicallydifferentfromthosereachedbyfirmsenteringlater,andyettheimplications

ofthisperspectiveforourunderstandingoffirstmoveradvantageshavenotbeenexplored.

Inthisstudyweofferanintegratedviewofwhichtypesoffirmsshouldbeabletocreate

advantagesinanewmarketbasedonimportantdifferencesinconsumersegments,and

theninvestigatetheseargumentsempirically.Webuildonrecentresearchsuggestingthe

contingentnatureoffirstmoveradvantages(SuarezandLanzolla2007)basedinpartonthe

fitbetweenthecapabilitiesofthefirmandtheneedsoftheexternalenvironment(Franco,

Sarkar,AgarwalandEchambadi2009).Thisconsumercentricviewofadvantagescreatedby

entrantssuggeststhatsomefirmswillappealmosttohighlyprofitableearlyadopterswhile

otherswillbesuccessfulinattractingmore,butnotnecessarilythemostprofitableadopters,

andthegranularityofourdataallowsustodemonstratethisrelationship.Thesefindings


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contributetoresearchoncapabilitydevelopmentandpreentryexperience(Bayusand

Agarwal2007;HelfatandLieberman2002;KlepperandSimons2000)byconsideringthefit

betweencapabilitiesandconsumerneeds,andtotheliteratureonthemechanismsbehind

firstmoveradvantages(Kerin,VaradarajanandPeterson1992;LiebermanandMontgomery

1988;Robinson1988)byfocusingonconsumerdrivenmeansofadvantagecreation.

Toassessthefitbetweencapabilitiesandconsumers,weusedataontheemergenceof

secondgenerationmobilephonemarketsacrossthirtycountries.Ourexceptionallydetailed

andcomprehensivedataallowustoshowhowanestablishedbrandnamehelpsfirms

attractmassmarketconsumers,whilethereputationdevelopedbyearlyentryandthe

possessionofpriortechnologicalcapabilitieshelpfirmsattractmoreprofitable

technologicallysavvyandbusinessconsumers.Wealsoaddressacommonbutoften

unaddressedissueinfirstmoveradvantagestudiestheendogeneityofentrytiming

throughmultiplemethodsbasedonthestandardizednatureoftheindustryandthemethod

ofawardingmobilephonelicenses.

Theremainderofthepaperisorganizedasfollows.Wefirstfocusonintegratingresearchon

capabilitiesandfirstmoveradvantageswithworkontheheterogeneityofconsumergroups

adoptingnewinnovationstoframethespecificresearchquestionsontheconsumercentric

natureofentryorderadvantages.Wethenintroducetheempiricalcontextandthedatawe

use.Wethenlookfirstathighlevelfirmprofitabilityeffectsofexperienceandentrytiming,

andthendecomposethoseadvantagesintovolume,consumerlevelprofitability,andcost

advantages.Wethendiscussimplicationsofourresultsforfutureresearch.


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THEORETICALFRAMEWORK

Followingsomeinconclusiveandconflictingfindingsonfirstmoveradvantages(Boulding

andChristen2003;GolderandTellis1993;LilienandYoon1990),recentresearchhas

focusedontheroleofmacro (SuarezandLanzolla2007)andmicro (Francoetal.2009)

contingenciesthatenablefirstmoveradvantages.Thelatterperspectivesuggeststhatfirm

levelpreentrycapabilities,typicallybuiltthroughpriorexperience(HelfatandLieberman

2002;KingandTucci2002;KlepperandSimons2000),areimportantfortheabilityoffirms

tocreateandsustainfirstmoveradvantages.Forexample,Francoetal.(2009)focusonhow

advancedtechnologicalcapabilitiesallowearlyentrantstobesuccessfulinthehightechdisk

driveindustry.Theprimarytypesofcapabilitiesbydiversifyingfirmsaremarketingand

technicalcapabilities(Sosa2009).However,forpreentrycapabilitiestobeusefulinanew

marketorindustry,theymustbevaluedandtransferablefromonemarkettothenext

(Danneels2007;Tripsas1997).Thus,thefitbetweentheorganizationalcapabilities

possessedbyafirmandtherequirementsofthemarketareofutmostimportanceto

generatingcompetitiveadvantage.Whilerequirementscertainlyvaryacrossmarkets,within

anygivenmarkettheywillalsovaryovertimeandconsumergroups.

Researchoninnovationdiffusionsuggeststhatadopterscanbedividedintocategories

basedonwhentheyadopttheinnovation,andthatthereareimportantdifferences

betweenadoptercategories.Rogers(1962/1995),forexample,highlightshowearly

adoptersaremorelikelytobetechnologicallysavvyandconcernedwiththefunctionality

offeredbyanewinnovation,whilelateradoptersmaybemoredrivenbythebehaviorof

otheradopters.Researchontheadoptionofinnovationswithnetworkeffectspointsout

thatthefirstadoptersofanewtechnologyarelikelytobethosewiththehighestwillingness

topayfortheinnovation,astheyarewillingtopurchasewithouttheclearbenefitsofthe


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networkeffects(Cabral1990;Cabral,SalantandWoroch1999,FarrellandSaloner1986).

Rogers(1962/1995,pp.269270)implicitlyagrees,citingearlyadoptersashavingmore

education,aswellagreatersocialstatusandmobilityallfactorsrelatedtowealth(and

implicitlytowillingnesstopay).Jointly,thissuggeststhatearlyadoptershavethepotential

tobemoreprofitableforthefirmsthatsupplythem.Thisalignswithsuggestionsfrom

marketingpractitionersthatsomeconsumerswillbemuchmoreprofitablethanothersfor

firms,andthatconsumersthathavebeenwiththefirmlongestaregenerallythemost

profitable(ReichheldandSasser1990;Zeithaml,RustandLemon2001).

Takentogether,theseperspectivesonfirstmoveradvantages,firmcapabilitiesandthe

characteristicsofearlyandlateadoptersofferthreeareasforfurtherempirical

investigation.First,thepointthatearlyadopterswillhaveahigherwillingnesstopayforthe

serviceorproductthanlateadopterssuggestsaspecificavenueforfirstmoveradvantages.

Earlyentrantstoanewindustryormarketwillbemoreprofitableiftheyareabletoutilize

switchingcoststopreservetheirearlyconsumers(FarrellandKlemperer2007;Regibeauand

Rockett1996;Schilling2002),andthisprofitabilityadvantagewillbebuiltonthequalityof

theconsumersthefirmservesandnotonmarketshareoroveralllevelofpenetration.These

moreprofitableconsumerswilllikelybetheonesthatutilizethefirmsservicesandproducts

moreregularly,thusgeneratingmorerevenueforthefirm.Inshort,weexpectearly

entrantstocaptureconsumersthataremoreprofitableperperson.

Second,thequestofearlyentrantstoattractandmaintainmoreprofitableconsumerswill

beaidedbytheirpossessionofcapabilitiesthathelpthemappealtoearlyadopter

consumers.Specifically,technologicalcapabilitiesandatechnologyfocusedbrandwill

improvetheperformanceofearlyentrantswithhighlyprofitableconsumers,asthistypeof

firmwillbemorelikelytooffertheproductorservicetheyvalue.Thisleadstothe


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expectationthatthepositiveeffectofpriortechnologicalexperienceisstrongerforearly

entrants,andthatthiswillprimarilyhelpinattractinghighlyprofitableconsumers.Thatis,

technologicallyexperiencedfirmswillbeablegainmorefromawindowofopportunity.

Finally,lateradoptingconsumersofthenewtechnologywillbemoredrivenbytheadoption

behaviorofothersandmarketingmessagessuchasfamiliarbrandnames.Theseconsumers

arelesstechnologicallysavvythanearlyadopters,andsoatrustedbrandnameisamore

comfortablechoice.Thus,weexpectthatanestablishedbrandnameanddistribution

networkprovidesabenefittofirms,butthebenefitwillbelargelytheoppositeofthe

benefitofearlyentrydiscussedabovebrandnameswillhelpfirmsattractmoreconsumers

overall,buttheconsumerswillbelessvaluableonaveragethanthoseattractedbyearly

entrants.Hence,establishedbrandnameswillhavehighermarketshare,butnotnecessarily

morehighvalueconsumers.

Thesethreeperspectivescombinedsuggestthattakingaconsumercentricperspectiveand

explicitlyconsideringtheimplicationsofconsumerheterogeneityforentrantfirmscanhelp

advanceresearchonfirstmoveradvantages.Differentconsumersdrivedifferentpathsto

profitability,andtheabilityoffirmstoattractthoseconsumersiscontingentonentry

timing,preentryexperienceandthefitnessbetweenthetwo.Inthisstudyandbasedonthe

theoreticalperspectivesofferedabove,wefocusonthreecharacteristicsoffirmsentry

timing,technicalexperience,andexistingbrandnameandtwocharacteristicsof

consumerstheextentoftheirusageoftheproductorserviceandtheextenttowhichany

givenfirmcapturesmarketsharetoinvestigatetheimplicationsforfirmprofitability.


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THEMOBILETELECOMMUNICATIONSINDUSTRY

Mobiletelecommunications,andspecificallythelaunchofsecondgeneration(2G)

networks,1hasbeenoneofthemostsuccessfultechnologyintroductionsinthepast

decades.Inadditiontoitseconomicsignificance,itisremarkablethatfirmswenttogreat

lengthstoestablishaninstalledbaseofusers,presumablyinthehopeofrecoupingrevenues

later,i.e.throughphonecallsmadeandreceived.Strategieslikepenetrationpricingand

handsetsubsidieswereofferedinconjunctionwithlongtermcontracts,andconsumerswith

identicalcontractsmaydifferintheirattractivenesstooperatorsastheymaybeheavyor

lightusers.Priorresearchshowsthatearlyadoptingconsumerstendtobeheavyusers

(GrajekandKretschmer2009,Cabral2006),sothatbuildinganinstalledbaseearlymay

increasefirmrevenuesbyaddingmoreconsumersandattractingmoreprofitable

consumers.Studiesonfirstmoveradvantagestypicallyonlyconsiderthefirstadvantage.

Themobiletelecommunicationsindustryisafruitfulsettingforourunderstandingoffirst

moveradvantagesforfourreasons:

First,thetypicalindustrystructureallowsforaverycleardefinitionoffirstmovers.Market

structureinmobilemarketswastypicallydeterminedbygrantinglicensestoalimited

numberofoperators(EarlyEntrants).Later,additionalfirmsweregrantedalicenseto

operate,whichprovidesacleardistinctionbetweenfirstmoversandlatecomers.

Second,

the

mobile

phone

industry

has

significant

switching

costs

for

consumers,

especially

beforesomecountriesmandatedthatconsumerscouldtaketheirphonenumberswith

themwhentheyswitched.Switchingcostsareanimportantsourceoffirstmover

1FirstGeneration(1G)networksweregenerallyunsuccessfulatattractingadopterscomparedtotheirsetup

costs.


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advantages(LiebermanandMontgomery1989,Mueller1997;Bijwaardetal.2008).Early

entrantscancaptureconsumersearlyonandkeepthemfromjoiningcompetingnetworks.

Withswitchingcosts,itisdifficultfornewentrantstocatchup.

Third,mobilephoneusersmaketwodecisions:First,theydecidetoadoptamobilephoneor

not,andsecond,theymake(moreorless)continuoususagedecisions.Thisopensupatleast

twochannelsforfirstmoveradvantages:earlymoversmaybegoodatattracting

subscribers,and/ortheymaybesuccessfulatattractingheavyusers.Webelieve

distinguishingbetweenthesetwodimensionsisimportantforidentifyingconsumer

heterogeneityasadriveroffirstmoveradvantages.Forexample,lockinofearlyadoptersis

likelytomanifestviahigherpenetrationcoupledwithhigherusageintensity,whilebrand

recognitionislikelytoleadtohigherpenetration,butlesslikelytohigherintensityofuse.

Finally,coordinationonastandardandlicensingasameansofregulatingentryintomobile

telecomsareimportantforthediscussiononendogeneityofentrytiming(Boulding&

Christensen,2003;Bayus&Agarwal,2007).Moststandardsettingorganizationsgrant

accesstotheirstandardonanondiscriminatorybasis,rulingouttechnologybased

differencesinefficiencythatmayaffectbothentrytimingandsubsequentsuccess.Themain

differencesbetweenfirmsinthemobileindustrythenstemfromtheircapabilitiesinsales

andmarketing.Forexample,iftherehadbeenseveral(commercially)similarmobile

generationsalready,apreviousincumbentmighthavegatheredexperienceandknowledge

abouttherolloutprocess,enablingincumbentstolaunchearlierandmoreefficiently.Firms

withpreviousincountryexperiencemayhavestrongexistingbrandnames,andfirmswith

2Gmobileexperienceelsewheremaybeseenastechnologyleadersbyconsumers.Given

fixedlinetelephonywasrolledoutseveraldecadesagoand1Gmobilewasaniche

technology,webelievethistobeanunlikelycausefortheendogeneityofearlymovers.


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DATAANDDESCRIPTIVEANALYSIS

Wedrawourdatapredominantlyfromtwosourcesusedinpreviousstudies(Genakosand

Valletti2010,KoskiandKretschmer2005,GrajekandKretschmer2009):TheInforma

Telecoms&MediaWorldCellularGSMDatapack(InformaT&M)andMerrillLynchsGlobal

WirelessMatrix.TheInformaT&Mdatacoversthenumberofsubscribersforindividual

mobileoperators,averagepricesandtechnologicalstandardsinconsiderabledetail.Informa

T&Misaproviderofmarketandbusinessintelligencetocommercialentitiesinthemobile

andmediaindustries.Buyersofthisdatabasecommercialdecisionsonthedata,ensuringa

highlevelofaccuracy.MerrillLynchpublishesaquarterlyreportonthedevelopmentofthe

globalcellulartelephonymarketasaservicetoclientsandindustryobservers.MerrillLynch

reports,amongotherdata,thetotalnumberofcalledminutesperoperator,whichweuse

toconstructtheaverageusageperconsumer.2

Tocomplementourmaindata,weuseIMFsInternationalFinancialStatistics(forGDP)and

WorldBanksWorldDevelopmentIndicators(forpopulation,telephonemainlines,and

averagecostofalocalcall).ThedisadvantageoftheWDIdatabaseisthatitonlyprovides

yearlytimeseries.Toarriveatquarterlydatawelinearlyinterpolatedthevariables.3Wealso

gatherdataonfirmstructureandownershiptoassesswhetherfirmshadaccessto

knowledgefrompreviousentriesorincumbencythroughmajorshareholders.Thesedata

weredrawnfromcompanyhistories,newsreports,andpriorresearchontheevolutionof

themobiletelecommunicationsindustry(e.g.Noam&Singhal,1996).Theauthorsanda

2Wetriangulatedtheabovedatawithavailablepublicdatasources(OECDsCommunicationsOutlook,ITUs

TelecommunicationsIndicators)andfoundthatthevariablescommontobothprivateandpublicdatawere

comparable.Wearethereforeconfidentthatourdataisaccurate.

3Experimentingwithotherinterpolationsdoesnotchangetheresults.


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researchassistantcollecteddataonfirmexperience,andresolvedanyuncertaintybygroup

evaluation.Inthecaseoffirmswithmultipleinvestors,weconsideredaninvestorsprior

experiencerelevantiftheinvestorowned25%ormoreofthefirm,whichisgenerally

consideredtothecutoffbetweenafinancialversusastrategicinvestment.

Oursamplecovers90mobilephonenetworkoperatorsin30countriesfromthefourth

quarterof1998throughthesecondquarterof2004.Weobserveaverageusageoneach

operatorsnetwork(Minutesofuse,MoU)aswellasthenumberofsubscribers(CellSubs)

includingprepaidcardusers(Prepay)andthepricetheypayfortheservicemeasuredas

averagerevenueperminute(CellP).Further,wehaveinformationonthenumberof

subscriberstoandthepriceofthefixedlinetelephoneserviceineachcountry(FixedSubs

andFixedP),thecountrysGDPandwhetherthecountrywasamongthefirsttoadoptthe

2Gtechnology(EarlyCountry).Finally,weconstructasetofdummyvariablesindicatingifa

firmhadpriorexperiencewith2Ginothercountries,prior1Gexperienceinthefocal

countryorifitwasafixedlineincumbent.Weexpectprior2Gexperiencetobring

technologicalcapabilities(Tech),whichmightenablesuperiorperformancedirectlyorvia

enhancingfirstmoveradvantages.Moreover,priorengagementinfixedlineand1Gmobile

servicescanbeexpectedtogiveoperatorssalescapabilitiesandbrandimage(Brand)inthe

focalcountry.Variabledefinitionsincludingthoseforadditionalcontrolvariablesnot

discussedinthissectionanddescriptivestatisticsarereportedinTable1.

INSERTTABLE1ABOUTHERE

Afirstlookdescriptivestatisticsforthedatasuggeststhattwoofourthreeprimary

independentvariablesEarlyEntrant,BrandandTecharerelatedtofirmprofitability(as


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measuredbyEBITDAmargins).ThedatainTable2indicatethatearlyentrantsdemonstrate

highermarginsthanlaterentrants,andthatfirmswithpriorincountrybrandexperience

alsodemonstratehighermarginsthanthosewithoutsuchexperience.Thosefirmswithout

ofcountry2Gexperiencebeforeentryshowslightlylowerprofitsonaverage.Whilethese

observationsarebasedsolelyondescriptivestatistics,theyareatleastsuggestivethatthese

threemeasurescaptureimportantvariationbetweenfirms.


RESULTS

Theobservationsaboveaboutprofitdifferencesbetweendifferenttypesoffirmsarebased

solelyonthedescriptivestatistics.Inordertoprovideamorerigorousanalysisoftheeffects

ofentrytimingandpriorexperience,wefirstlinkthesemeasurestotwocoremeasuresof

performanceinthemobilenetworkindustryminutesofusageperuser(MoU)andoverall

penetration(CellSubs).Wethenassesstherelationshipwithfirmlevelprofitabilityinthe

followingsubsection.

EntryTimingandMobileNetworks:AModelofUsageandSubscriptions

Weproposethefollowingsimultaneousequationmodeltoinvestigatethenatureof

performancebasedonentrytimingandpreentrycapabilities:

MoUijt= ij+ 0*MoUij(t1)+ 1*CellPijt+ 2*CellPi(j)t+ 3*FixedPit+ 4*CellSubsijt+

+ 5*CellSubsi(j)t+ 6*FixedSubsit+ 7*GDPit+ 8*Prepayijt+ ijt, (1)


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CellSubsijt= ij+ 0*CellSubsij(t1)+ 1*CellPijt+ 2*CellPi(j)t+ 3*FixedPit+ 4*MoUijt+

+ 5*CellSubsi(j)t+ 6*FixedSubsit+ 7*GDPit+ 8*Prepayijt+ ijt, (2)

wherei,j,andtrefertocountry,cellphoneoperator,andtime,respectively.Equation(1)

seekstoexplaintheaverageusageintensityofasubscribertoagivenoperatorbyanumber

offactorsincludingcellphoneandfixedlineprices,networksizesandothercovariates

relevantforusage.Inparticular,weconsiderownprice(CellPijt),theaveragepriceofother

cellphoneoperatorsinthecountry(CellPi(j)t),andthepriceoflocalfixedlineconnection

(FixedPit)aswell,asoperatorsownnetworkofsubscribers(CellSubsijt),subscriberstoother

cellphoneoperators(CellSubsi(j)t),andfixedlinesubscribers(FixedSubsit).Moreover,we

controlforGDPpercapita(GDPit)andtheshareofprepaidconsumersinownsubscriber

base(Prepayijt).Finally,wealsoincludelaggedusage(MoUij(t1))tocontrolforconsumer

inertiaandlearningandoperatorspecificeffects(ij),whichcapturetheunobserved

heterogeneityamongoperators.4Equation(2),whichexplainsthenumberofsubscribersto

agivenoperatorasafractionoftotalpopulationinthecountry,isspecifiedanalogously.We

allowtheerrortermsijtandijttobeheterogenousandpossiblycorrelated.Thus,weallow

thesubscriptionandusageofcellphonebyconsumerstobeajointdecisionthatmaybe

influencedbythesamemissingfactorsinbothequations.

Sinceequations(1)and(2)containbothlaggeddependentvariablesandoperatorspecific

fixedeffectsweapplytheestimationmethodproposedbyArellanoandBond(1991),which

deliversconsistentestimatesundertheassumptionofnoserialcorrelationintheerrorterm

andisroutinelyusedforthisclassofmodels.Weuseinstrumentalvariablesforprices,

networksizes,andtheprepayshare,astheyarepotentiallyendogenousinbothequations.

4Theseeffectsareoftenreferredtoasfixedeffects,astheyareinvariantacrosstime.


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Thegoaloftheseequationsistoobtainoperatorspecificeffects,whichwewillthenregress

onourmeasuresofentrytimingandpreentryexperience.

Table3presentsregressionresultsofmobilephoneusageandpenetrationequations(1)and

(2).TheteststatisticsofboththeArellanoBondAR(2)testandtheHansenJtestof

overidentifyingrestrictionsarenotsignificant,givingusconfidenceintheinstrumental

variablesusedtoestimatethemodel.5


WhiletheresultsinTable3arenotthefocalpartofthisstudy,asweusethisregressionto

obtainfirmleveloperatorspecificeffectsfurtherinvestigatedbelow,itisworthbriefly

lookingattheresultsastheylargelyagreewithpriorresearchinthisindustry.Lagged

dependentvariablesarestrongpredictorsinbothequationsconfirmingstronginertiain

bothusageandsubscriptionchoices.Moreover,ownpriceandnetworksizearenegative

andsignificantintheusageequation,asexpected.Thiseffectcanbeexplainedbylessheavy

usersjoininginasthenetworkgrows,whichisconsistentwithGrajekandKretschmer

(2009).PrepayshareandGDParealsosignificantandhavetheexpectedsignsnegativeand

positive,respectivelyintheusageequation.Incontrast,GDPandownpricearenot

statisticallysignificantinthepenetrationequation.Oneexplanationisthatsincethe

operatorspecificeffectsaccountforalargepartofcrosssectionalvariationinthedata,the

timeseriesvariationinGDPandpricesisnotenoughtoestimatetheireffectontopofthe

strongselfperpetuatingpenetrationgrowth.Usageisalsoinsignificantinthepenetration

5Adetaileddescriptionofinstrumental variablesusedintheestimationisintheAppendix.


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equation,whichisconsistentwithourexpectations.Interestingly,penetrationofother

cellphoneoperatorsinthemarketisestimatedtobepositivesuggestingsomespillovers

acrossoperators.Grajek(2010)reportssimilarfindingsandattributesthemtonetwork

effectsoperatingatthecellphoneindustrylevel,whichare,however,muchweakerthanthe

effectsoperatingattheoperatorlevel.

Wethenregresstheoperatorspecificeffectsfromequations(1)and(2)onoursetoffirst

moverandfirmcapabilityvariablesandreporttheresultsinTable4.Ingeneral,the

interactiontermstestingthecontingentnatureoffirstmoveradvantagesarenotsignificant,

sowefocusourattentiononthebaselineregressions(1and4)andtheonemodelwitha

significantinteraction(3).Thefirstusageequation(1)showsthatEarlyEntrantispositiveand

significant,suggestingthatfirstmoversdoindeedattractmoreattractivecustomers(those

thatusemoreminutes)andkeepthemafterentrybylaterentrants.Thisagreeswithour

firsthypothesizedrelationshipbetweenentrytimingandcustomertypes.Meanwhile,the

coefficientonTechisnotsignificantinanyoftheusagemodels(13),buttheinteraction

betweenEarlyEntrantandTechispositiveandsignificantinModel3.Thissupportsour

secondtheoreticalpoint,namelythatpossessionofpreentrytechnologicalexperienceand

areputationfortechnologicalabilitywillaccentuateanearlyentrantsabilitytoaccumulate

attractiveandtechnologicallysavvyearlyadopters.Ourthirdvariableofinterest,Brand,

doesnotindicateanyadvantagesintermsofusageintensity.


Inthepenetrationequation(4),however,weseethatbrandoperatorsenjoyahigher

advantagethanfirmswithoutsuchimportantassets.Earlyentrantsalsohavehigher


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penetrationratesthanlateentrantsceterisparibus,buttheiradvantageissmallerin

magnitudethanthatofbrandoperators(thoughthedifferenceisnotstatistically

significant).Additionally,weseethatpreentrytechnologicalexperienceisactuallycostlyin

termsofpenetration,asthesefirmsattractfewerusersthanthosefirmswithoutsuchpre

entryexperience.

ThemagnitudesoftheadvantagesidentifiedinTable4mayseemsmall:theyrangefrom

nullto19.43intermsofminutesofuseandfrom1.204to1.469intermsofpenetrationrate

approximately10%oftheaveragevaluesshownintable1.Tofullyappreciatethe

estimatedmagnitudes,however,oneneedstotakeintoaccountthedynamicstructure(i.e.

thelaggeddependentvariables)andtheinterdependenceoftheestimatedequations.

Intuitively,thefixedeffectsalonedonotreflectthefactthatfirstmoveradvantagesare

carriedoverfromoneperiodtothenextbythelaggeddependentvariablesandaccumulate

asaresult.Onewaytodoitistocalculatetheusageandpenetrationadvantagesinthelong

runwhenthesystemofequations(1)and(2)reachesasteadystate,i.e.MoUij(t)=MoUij(t1)

andCellSubsij(t)=CellSubsij(t1).Calculatedthisway,theusageandthepenetrationadvantages

associatedwithEarlyEntrant(Brand)amountto48.9minutes(75.8minutes)and7.5%

(9.1%),respectively,allelseequal.6Themagnitudesarethusmuchlargerinthelongrun.

Moreover,Brandyieldsausagedisadvantageof75.8minutesinthelongrunwhiletheshort

termeffectinTable8isinsignificant.Thisdisadvantageisdrivenbyhighpenetration

advantage

of

9.1%,

which

puts

a

downward

pressure

on

average

usage

later

adopters

are

6WeshowthederivationoflongrunadvantagesintheAppendix.


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lessintensiveusers,asindicatedbythenegativecoefficientonownsubscribersintheusage

equationinTable3.7

Anotherimportantquestiontoaskwithregardtotheresultsaboveistowhichextentthey

canbeexplainedbytheendogenousentrytiming.Ifmoreefficientfirmsarefirsttoenter

newmarkets,thenourresultscouldsimplyreflectthissuperiorefficiencyofearlyentrants

ratherthanagenuinefirstmoveradvantage.Inordertotesttheeffectsofendogenous

entryweuseadditionaldataonthemethodofawardingthemobilephonelicensesandthe

technicalstandardizationineachmarket.Ourfirsttestseekswhetherearlymovers,who

receivedthelicenseinamoretransparentawardingprocess,performbetterthanother

earlymovers.Theunderlyinghypothesisisthatthemoretransparenttheawardingprocess

is,themoreefficientwillbelicenseholder.Forinstance,wearguethatitismorelikelythat

themostefficientcontesterwinsalicenseinanauction,thaninacomparativeselection

(knownalsoasabeautycontest)orbyadirectawardinanadministrativeprocess.A

findingthattherevealedthroughanauctionearlymoversperformbetterthanotherearly

moverswouldthensuggestanendogeneityprobleminouranalysis.

Oursecondtestcomparestheperformanceofearlymoversingeographicmarkets,which

operatedunderacommontechnologicalstandard(forinstanceGSMinEurope),andnon

standardizedmarkets.Here,theunderlyinghypothesisisthatthefirms,whichsupportthe

moreefficienttechnology,enterfirst.8Standardizedmarkets,ontheotherhand,constitute

amorelevelplayingfield.Afindingthanearlymoversperformbetterinnonstandardized

7ThisisalsoevidentinthediscussiononstagnantorevenfallingvoiceARPU(AverageRevenueperUser)for

mostmatureeconomies.Seehttp://www.3g.co.uk/PR/Sept2007/5122.htm .

8Onecouldalsoarguethatthesearethelaterentrants,whodeploythemoreefficientstandard,astheycan

learnfromtheirpredecessorsexperience.Inthiscase,theendogeneitybiaswouldbereversed,i.e.ouroriginal

analysiswouldunderestimatethegenuineearlymoveradvantage.


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16

marketswouldthenagainpointtoapossibleendogeneitybias.Theresultsofbothtests

revealnostatisticallysignificantdifferencesbetweenearlymoversdependingonthelicense

awardingmethodandstandardization.9Thismakesusbelievethatourestimatesofthefirst

moveradvantagesarenotdrivenbytheendogenousentrytiming.

Takentogether,theresultsofourusageandpenetrationregressionssuggestmultifaceted

firstmoveradvantagesinthecellphoneindustry:whereasbeingfirsttothemarketallows

operatorstosecureahigherqualityinstalledbase,establishedbrandandsaleschannels

(Brand)securethehighestpenetrationandhencemarketshare.10

Additionally,whileprior

technologicalexperienceallowsearlyentrantstoincreasetheirabilitytoattracthighvalue

customers,suchexperienceactuallydecreasesoverallmarketpenetration.Inthefollowing

section,weinvestigatetheseeffectsmorecloselybylinkingentrytimingandpreentry

experiencewithfirmprofits,bothdirectlyandthroughusageandpenetration.

EntryTimingandMobileNetworks:FromUsageandSubscriptionstoProfits

Themodelsabovelinkentrytimingandpreentryexperiencewithusageandpenetration.In

thissection,weinvestigatethetiesbetweenallofthesefactorsandprofitsinthemobile

networkindustry.Todothis,Table5showstheresultsofaseriesofregressionswithEBITDA

asthedependentvariable.InTable5,thecontrolvariablesgenerallyperformasexpected

profitsgoupastheoperatorhasmoretimeonair(OnAir),godownasmorecompetitors

enterthemarket(OperatorsCount),andincreaseasthefirmattractsmoreprepaid

customers(Prepay).Interestingly,firmsincountrieswhoadopted2Gtechnologyearlier

9ThedetailedresultsofbothtestsandadescriptionofthedatausedareintheAppendix.

10NotethatthetwocategoriesBrandandEarlyentrantarenotmutuallyexclusiveinthesemodels.

Consequently,incumbentoperatorsthatwerefirsttoenterthemarketenjoythebenefitsofbothcategories,

i.e.therelevantcoefficientequalstothesumofthecoefficientsonthevariablesBrandandEarlyentrant.


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17

(EarlyCountry)generatefewerprofitsthanthoseincountriesthatadoptedthetechnology

later.Thismayindicatetheexistenceoflearningspillovers,whichhelpfirmstolearnfrom

themistakesofthetechnologyspioneers.Anotherexplanationisthatearlyadopting

countriestendtoimplycostdisadvantagethroughhighercostsoflaborandrealestate.


Intermsofentrytiminginaspecificmarket,theEarlyEntrantvariableinModel(1)clearly

showsthatearlyentrantsaremoreprofitablethanlaterentrants.Interestingly,whilewe

demonstratedearlierthatearlyentryisassociatedwithbothmoreandmoreattractive

customers(inthesubsectionabove),theinclusionofMoUandCellSubsinModels(2)and(3)

hadaminimalimpactonthesizeofthecoefficientforEarlyEntrant.Thisshowsthatwhile

earlyentrantsdogainadvantagesinusageandpenetration,andthesetwofactorsdrive

profitability,earlyentrantspossessadditionaladvantages.Asusageandpenetration(aswell

asprice,whichiscontrolledforwithCellP)explainpracticallyallrevenuesforthefirm,the

advantagemustlieonthecostsideoftheledger.Whileourdatadonotallowustoclearly

statethesourceofthisadvantage,possibleideasincludefirstmoverrealestateadvantages

(bothforcelltowersandretailoperations)andgoingdownthetechnologyspecificlearning

curve.Thus,earlyentryappearstohavebothadirecteffectoncostsandanindirecton

revenues

through

usage

and

penetration

rates.

Theeffectofentrytimingisaugmentedwhenconsideringtheroleofpreentrytechnological

experience(Tech).Model(1)suggeststhatTechhas,ifanything,anegativeeffecton

profitabilitywhenconsideredalone.Thisisinlinewiththenegativerelationshipbetween

Techandpenetrationshownearlier,andthenegativeeffectofTechdisappearsinModel(2)


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18

whenCellSubsisaddedtotheprofitabilitymodel.WhenTechisinteractedwithEarlyEntrant

inModel(5),theresultsagainshowthatearlyentrantfirmswithprior2Gexperienceshow

significantlygreaterprofitsthanearlyentrantswithoutthisexperience.Thus,aswe

discussedearlier,thefitbetweentheneedsofearlyadoptingcustomers(whoaremainly

businessesandtechnologicallysavvyindividuals)andthefirm(basedonitsprior

technologicalexperienceanditsperceptionasatechnologicalleader)increasesthe

profitabilityofthefirms.Thissupportstheideathatearlyentrycanprovideacontingent

advantage,inthiscasecontingentonthefitbetweenthefirmanditscustomers.

Finally,Brandcapturestheeffectofpriorincountrymarketingexperience.Thisvariableis

positiveandsignificantintheinitialmodel(1)buttheeffectdiminishesasCellSubsisadded

inModel(2)anddisappearsonceMoUisaddedinModel(3).Thissuggeststhatthe

advantageofhavinganexistingtelecommunicationsbrandisfullymediatedbythemarket

shareofthefirm.Brandshelpfirmsattractalargevolumeofcustomers,butdonotappear

toprovideanycostadvantages(asdiscussedearlierforEarlyEntrant).Additionally,inModel

(4)weaddtheinteractionbetweenBrandandEarlyEntrant.Thisinteractionisnegativeand

significant,andisapproximatelythesamesizeastheBranddummyaloneinthatmodel.The

suggestionisthat,forearlyentrantfirms,thepossessionofapreexisting

telecommunicationsbrandhaslittleimpactonprofitability.Butforlaterenteringfirms,the

effectofabrandnameisstillpositiveandsignificant.Thus,thebrandnamehelpslate

entering

firms

compensate

for

coming

late,

specifically

(as

shown

earlier)

by

helping

them

attractahighervolumeof(admittedlylessattractive)customers.


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19

DISCUSSION

Ourresultssuggestintricatepatternsoffirstmoveradvantagesintheglobalmobile

telephonyindustry.Thetheoreticalframingofthisstudyfocusesonthreetypesoffirms

thosethatentertheindustry(2Gmobilenetworkservice)earlierthanotherfirms,those

thatenterwithpreentryexperiencein2Ginanothercountry,andthosethatenterwith

priorincountryexperience(eitherin1Gorfixedwireline).Eachofthesethreetypesof

firmsexhibitssomeformofadvantageinthisindustry,andtheseadvantagescanbetiedto

ourconsumercentricviewofentrytimingandfirmadvantage.Wediscusstheresultsin

greaterdetailbelow,withafocusontheunderlyingdriversofadvantage.

Westartwithfirmswithincountryexperience,modeledasfirmsthatwereeitherfixedline

incumbentsand/orwereactivein1Gmobiletelephony.Ourregressionsshowthatpotential

adoptersacrossallconsumergroupsaremorelikelytochooseanincountryincumbentas

mobileoperator,otherthingsremainingequal(Table8).Thispointsattwosourcesoffirst

moveradvantagesacrosstechnologicalgenerations:First,thereisthepossibilitythat

existingfixedlineand1Gconsumersareencouragedtosubscribeto2Gservicesfromthe

samesupplierthroughdirectadvertising,discounts,etc.Specificallythinkingaboutfirms

with1Gexperience,thesefirmscouldeasilytransfer1Gsubscriberstotheir2Gnetworks,for

instancebyallowingforexitingthelongterm1Gcontractwithoutpenalties.Asecond

possibleexplanationisthatincumbentsenjoyhigherreputationorawarenessacrossall

consumergroups,leadingtoahigherproportionofsubscriptionsevenwithoutpricingor

otherincentives.Whileitisdifficulttounambiguouslydisentanglethesetwodrivers,our

evidencesuggeststhatfirmswithpreviousincountryexperiencegainanadvantagebecause

theyareabletoattractalargermassoflow tomoderateusageconsumers,whichincreases

profitsinafixedcostbusinesslikemobiletelephonenetworks.


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20

Forearlyentrantsintothecurrentgeneration(2G),thenatureoffirstmoveradvantages

differs.Ourresultsshowthatenteringamarketearlyleadstoasubscriberbasethatconsists

ofrelativelymoreheavyusers(Table8).Thissuggestsatimewindowargument:Early

entrygrantsoperatorssometimetobuildupaninstalledbase.Intheearlyphases,most

adoptersconsistofpioneersorearlyadopters(Rogers2005)whotendtousetheirphones

moreintensively(Cabral2006,GrajekandKretschmer2009).Consequently,thistime

windowisespeciallyvaluableasfirmscansignupheavyusersonlongtermcontracts,which

createssignificantswitchingcosts.Indeed,preliminaryresultsonthelongevityoffirstmover

advantages(availablefromtheauthors)suggestthatchurnisfairlylowandthatontopof

themonetaryswitchingcostsofbreakingalongtermcontractorwaitinguntilitrunsout,

therearealsosignificantnonpecuniaryswitchingcostthatextendbeyondtheaverage

durationofacontract.Inanycase,earlyentrantsappeartobenefitfromclassicalfirst

moveradvantagescreatedbyswitchingcostswithinasingletechnologicalgeneration.The

noveltyofthisstudywithrespecttoearlyentryandswitchingcostsistoshowhowearly

entryadvantageisdrivenprimarilybytheabilitytoattractthemostprofitableconsumers.

Thethirdclassoffirmsisthosewithprior(2G)technologicalexperienceinanothercountry.

Ourexpectationwasthatfirmswouldbeabletouseboththeirtechnologicalexperienceand

theirperceivedtechnologicalsuperioritytomaketheirofferingsevenmoreattractiveto

technologyorientedearlyadoptingconsumers.Ourresultsshowthatthereisnouniversal

advantage

of

technological

experience

(Table

6),

but

that

early

entrants,

i.e.

firms

that

enter

inthetimewindowtolockuptechnologysavvyconsumers,benefitfromtheirexternal

technologicalexperience,especiallyintermsofattractingmoreprofitableusers(Table9).

Thisfindingalignswithrecentworkontheconditionalnatureoffirstmoveradvantages

(Francoetal,2009).Thebetterthefitbetweenthecapabilities(orperceivedcapabilities)of


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21

thefirmandthepreferencesoftherelevantconsumergroupatthetimeofentry,the

greatertheadvantage.Interestingly,whilethisadvantageclearlymanifestsintermsofusage

intensity,theprofitadvantageofbeingatechnologicallyexperienceearlyentrantdoesnot

disappearintheprofitregressionsevenafterwecontrolforusageandpenetration.This

suggeststhattheremaybeanadditional,costbasedadvantageforthesefirms,but

additionalworkisneededtoassessandunderstandthisclaim.

Thereisoneadditionalclassofearlyentrantstoconsiderbasedonthemodels,namely

firmsinearlyadoptingcountriesfor2G.Theseoperatorsdisplaysignificantdisadvantagesin

termsofprofitability,whichisnotdrivenbysubscriptionsandusagepatterns.Thisis

consistentwithEggers(2010),whoshowsthatearlytechnologicalcommitmentmaybe

detrimentaltofirmperformance.Laterentrantscanlearnfromtheexperienceoftheearly

onesandavoidmistakesinthecommercializationoftechnology.Anotherexplanationofthe

lowerprofitabilityofoperatorsinearlyadoptingnationsishighercostsduetofeaturesof

earlyenteringcountries,forinstancelowpopulationdensityintheNordiccountries.

CONCLUSION

Inthispaper,wetakeaconsumercentricperspectivetowardsfirstmoveradvantagesinthe

globalmobiletelephonyindustry.Ourdataallowustodistinguishbetweendifferentfirm

typesbasedontheirpreentryexperienceandentrytiming,andtoinvestigatetheir

profitabilityandthecharacteristicsoftheirsubscriberbase.Wefindthatfirstmover

advantagesexistforearlyentrantsthroughtheirabilitytocapturethemostattractive(i.e.

highestusage)consumers,thatthisadvantageisamplifiedifthefirmpossessespreentry

experiencethatfitswiththepresumedpreferencesofearlyadopters,andthatearlycountry


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22

entrants(thosewithexperienceinpriortelephonetechnologies)haveanadvantagebased

ontheabilitytoattractabroadswathofadopters.

Theprimarycontributionforourstudyistothestrategy,marketingandeconomics

literaturesonfirstmoveradvantagesbyemphasizingtheimportanceconsumer

heterogeneityforstudyingentrytimingadvantages.Focusingonconsumersallowsusto

showthatfirstmoveradvantagesaremultifacetedandthatresearchersshouldtakeinto

accountdifferentmeasuresofsuccess,asourinitialanalysisoffirstmoveradvantagesin

profitsshow.Thisimpliesthatmeasuringfirstmoveradvantagesintermsof(persistent)

marketsharedifferencesorprofitsmaybeincompleteforcomplextechnologies.Thetheory

anddataallowustorefineourunderstandingoftheunderlyingmechanismsforfirstmover

advantages(Lieberman&Montgomery,1988),andwesuggestthatfutureresearchonfirst

moveradvantageswouldbenefitfromincorporatingconsumersmoreexplicitly.

Thisresearchalsocontributestoresearchonfirstmoveradvantagebyextendingtheview

firmlevelheterogeneitytiedtofirmlevelcapabilities.Thesepreentrycapabilitiescanboth

driveorganizationaladvantagedirectly(Helfat&Lieberman,2002;Klepper&Simmons,

2000)andintermsofconditionallyaffectingfirstmoveradvantages(Francoetal,2009).Our

findingthatincumbentsofaprevioustechnologicalgenerationmayenjoyanadvantage

eveniftheydonotenterthenewgenerationstraightawaysuggeststhatfutureworkon

earlymover(orentryorder)effectshastoconsidermarketpositionsinearliergenerations.

Distinguishingbetweenprevious andcurrentgenerationmarketpositionsmayalsohelp

differentiatebetweensourcesoffirstmoveradvantages:Iftheyaccruemainlyfrombeing

firstinforthecurrentgeneration,acompetitiveadvantagewoulderodewithtechnological

change,andresourcesaretechnologyspecific.Ontheotherhand,ifadvantagesaccruefrom


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23

havingheldaprominentpositioninpreviousproductgenerations,competitiveadvantage

maybebuiltonreputationthatislargelyindependentoftheactivetechnologyatanytime.

Wealsocontributetothelimitedliteratureontheevolvingnatureoffirmleveladvantages

inthemobiletelephonyindustry.Focusingonthisglobalandeconomicallyimportant

industry,ouranalysesshowthatdifferenttypesofexperiencehavehelpedfirmsimprove

theirprofitability,thoughindifferentways,andthatentrytiminginthisindustry(giventhe

significantlyhigherprofitabilityofearlyadoptingconsumersandthepresenceofswitching

costs)playsavitalroleinunderstandingfirmprofitability.Thesefindingshaveimportant

implicationsformanagersinthisindustryspecifically,butalsoforothertechnologydriven

andcomplexindustries.Specifically,maximizingmarketsharebyenteringearlymayinvolve

atradeoffasadoptersattractedthroughintroductoryoffersmaynotbecommercially

attractiveastheyarelessintensiveusersofthesecondarygoodorservice.

Ourstudyhasseverallimitationsandcouldbeextendedinseveralways.First,westudya

specificindustryataspecifictime.Whilewebelievethattheglobaltelecommunications

industryisausefultestinggroundformorerefinedconceptsoffirstmoveradvantage,the

validityofusageintensityasameasureofsuccessaswellasthedifferencesbetween

previousgenerationincumbentsandearlycurrentgenerationentrantshavetobeidentified

inotherindustries.However,webelievethatindustrieswithsimilarproductcharacteristics

(i.e.adurablebaselineproductorserviceandrepeatedpurchasesofauxiliaryservices)and

similartechnologicaldynamismandtheassociatedgenerationchangeswouldbenefitfroma

similarlyextendedanalysisoffirstmoveradvantages.

Further,wedonothaveenoughinformationtounambiguouslyidentifytruedriversoffirst

moveradvantages.Ourdifferentdefinitionsofearlymovers,however,canbehelpfulin


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24

identifyingthelikelysourcesoffirstmoveradvantages,andinparticulartheirlongevityin

technologicallydynamicmarkets.Ourresultssuggestthatwithinatechnologicalgeneration

theearlystagesdeterminefirmsuccessforthisgeneration,butthatthereisalsoadegreeof

transferabilityofadvantagesacrossgenerations,asindicatedbythepositiveeffectof

previousgenerationincumbents.Thisisconsistentwithatleasttwodistinctdriversoffirst

moveradvantages.First,earlymoversbenefitmostfromconsumerinertiaduetoswitching

costs.Combinedwiththefindingthatthefirstconsumerstosubscribetothetechnology

tendtobeheavyusers,itallowsearlyentrantstolockinthemostprofitableconsumer

group.Second,incumbents,i.e.earlyentrantsinthepreviousgenerationofthetechnology,

seemtobenefitfromtransferringsubscribersacrosstechnologicalgenerationsorreputation

effects.Thisisconsistentwithourfindingthatincumbentsadvantagemanifestsinmarket

penetrationratherthanconsumerprofilebecausebothreputationandtransferring

subscribersacrossgenerationsarelikelytoaffectallconsumergroups.Finally,ourresults

alsosuggestthatearlytechnologicalcommitmentmaybedetrimentaltoperformance,as

evidencedbylowerprofitabilityofoperatorsintheearlyadoptingnations.Thisgivessome

indicativeevidenceofwheretosearchforfurtherinformationonthenatureoffirstmover

advantagesinfutureresearch.

Thisstudyoffersaconsumercentricviewofentryorderadvantagesandtheroleoffirm

levelcapabilities.Wespecificallyconsiderthefactthatearlyadoptingconsumerswillbe

different

from

late

adopting

ones.

We

suggest

that

early

entering

firms

will

attract

higher

profitabilitycustomers,whichwillbeakeysourceoffirstmoveradvantages.Additionally,

thiseffectwillbestrongerforfirmswithstrongtechnologicalcapabilitiesasearlyadopters

aregenerallymoretechnologyorientedthanlateadopters.Conversely,firmswithexisting

marketingandbrandingresourcesinaparticularcountrywilldobetteratattractingahigh


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25

volumeoflessprofitablecustomersstandardlateadoptersinfluencedbybrandeffects

andawareness.Ourempiricalresultsontheglobalmobiletelecommunicationsindustry

confirmourexpectationsandhelpusofferimportantdepthtothediscussionaboutfirst

moveradvantagesandthecontingentroleoffirmcapabilities.


28/44

26

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Tab.1.Variabledefinitionsanddescriptivestatistics

Variable Definition Obs. Mean Std.Dev. Min Max

MoUAveragemonthlyminutesofuse

(number

of

minutes)

1044

172.82

102.91

56

660

CellSubs(j)Subscriberstoagivenoperatoras

population'sshare(%) 1044 16.80 11.89 0.10 51.90

CellSubs(j)

Subscriberstocompeting

operatorsaspopulation'sshare

(%) 1044 34.11 17.61 1.10 83.41

FixedSubsFixedlinesubscribersas

population'sshare(%) 1044 48.05 16.56 10.49 75.67

CellP(j) Average

revenue

per

minute

of

a

givenoperator(UScents) 1044 20.87 8.59 0 53.68

CellP(j)Averagerevenueperminuteof

competingoperators(UScents) 1044 20.72 7.96 3.38 53.68

FixedPPriceofalocalfixedline

connection(UScents) 1044 8.46 5.45 0 19

GDP GDPpercapita(000'sUSdollars) 1044 20.37 10.53 0.89 47.84

PrepayShareofprepayusersamong

givenoperators subscribers(%) 1044 43.11 28.07 0 95.20

EarlyEntrantFirst2Gcellphoneoperatorina

givenmarket(dummy) 1044 0.47 0.50 0 1

Brand

Incumbentfixedlineoperatoror

or1Gserviceoperatorinagiven

marketorboth(dummy) 1044 0.59 0.49 0 1

Tech

Operatorthathaveprior

experienceinrollingout2G

serviceinanothermarket

(dummy) 1044 0.36 0.48 0 1

EarlyCountryCountrythatlaunched2Gcellular

telephonybefore1995(dummy) 1044 0.70 0.46 0 1


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30

Tab.2.DescriptivestatisticsofEBITDAbykeyindependentvariables

Variable

Variable=1 Variable=0

Obs Mean Std.Dev. Obs Mean Std.Dev.

EarlyEntrant 472 0.37 0.09 528 0.23 0.22

Brand 588 0.33 0.14 412 0.25 0.23

Tech 347 0.26 0.22 653 0.31 0.16


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31

Tab.3.Cellphoneusageandpenetrationregressionresults

EQUATION: MoU(t) CellSubs(j)(t)

(1) (2)

MoU(t1) 0.825***

(0.029)

CellSubs(j)(t1) 0.839***

(0.034)

CellP(j) 1.512*** 0.025

(0.483) (0.035)

CellP(j) 0.457 0.037

(0.327) (0.041)

FixedP 0.581 0.046

(1.156) (0.055)

MoU(t) 0.003

(0.003)

CellSubs(j)(t) 1.454***

(0.486)

CellSubs(j)(t) 0.196 0.039**

(0.222) (0.015)

FixedSubs 0.373 0.012

(0.558) (0.033)

Prepay 0.526** 0.049***

(0.250) (0.016)

GDP 2.095*** 0.018

(0.470) (0.024)

AR(2)test 1.18 1.34

HansenJstatistic 87.03(195) 74.59(195)

Observations 1044 1013

Clusters 90 90

*p


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32

Tab.4.Regressionofoperatorspecificeffectsoncapabilityindicators

EQUATION: MoU CellSubs(j)

(1) (2) (3) (4) (5) (6)

EarlyEntrant 19.430*** 24.273*** 11.465 1.204*** 1.687** 1.662***

(5.355) (8.661) (6.964) (0.428) (0.692) (0.562)

EarlyCountry 0.329 0.597 2.188 0.096 0.123 0.011

(6.030) (6.060) (6.050) (0.482) (0.484) (0.488)

Brand 2.653 0.618 0.549 1.469*** 1.795*** 1.348***

(5.476) (7.157) (5.540) (0.438) (0.571) (0.447)

Tech 2.129 1.430 5.696 1.182** 1.252*** 0.732

(5.613) (5.714) (7.109) (0.449) (0.456) (0.574)

EarlyEntrant*

Brand 7.922 0.791

(11.116) (0.888)

EarlyEntrant*

Tech 19.241* 1.106

(10.939) (0.883)

Constant 84.519*** 82.898*** 85.420*** 3.863*** 4.024*** 3.915***

(7.179) (7.551) (7.111) (0.574) (0.603) (0.574)

R2 0.139 0.145 0.170 0.292 0.299 0.305

Observations 90 90 90 90 90 90

*p


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33

Tab.5.Resultsofsimpleprofitregressionswithinteractionterms

Dependentvariable:EBITDA

(1) (2) (3) (4) (5)

Earlyentrant 0.034*** 0.031*** 0.033*** 0.058*** 0.003

(0.012) (0.011) (0.011) (0.017) (0.014)

Earlycountry 0.144*** 0.167*** 0.175*** 0.169*** 0.167***

(0.012) (0.012) (0.013) (0.013) (0.013)

Brand 0.047*** 0.020* 0.015 0.034** 0.020*

(0.011) (0.010) (0.011) (0.014) (0.011)

Tech 0.018* 0.004 0.011 0.007 0.020

(0.011) (0.010) (0.011) (0.011) (0.014)

OnAir 0.009*** 0.006*** 0.006*** 0.006*** 0.006***

(0.001) (0.001) (0.001) (0.001) (0.001)

Operatorscount 0.027*** 0.003 0.006 0.007 0.003

(0.005) (0.005) (0.005) (0.005) (0.005)

Prepay 0.003*** 0.004*** 0.005*** 0.005*** 0.005***

(0.001) (0.001) (0.001) (0.001) (0.001)

CellP 0.000 0.001 0.001* 0.001 0.002**

(0.001) (0.001) (0.001) (0.001) (0.001)

CellSubs 0.006*** 0.006*** 0.006*** 0.007***

(0.001) (0.001) (0.001) (0.001)

MoU 0.000** 0.000 0.000*

(0.000) (0.000) (0.000)

EarlyEntrant*Brand 0.040**

(0.020)

EarlyEntrant*Tech 0.077***

(0.020)

Constant 0.212*** 0.116*** 0.083** 0.092*** 0.074**

(0.027) (0.027) (0.032) (0.032) (0.032)

r2 0.376 0.440 0.442 0.445 0.450

N 1000 1000 1000 1000 1000

*p


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34

Tab.A1.Regressionofoperatorspecificeffectsoncapabilityindicators:Endogeneitytests

EQUATION: MoU CellSubs(j)

(1) (2) (3) (4) (5) (6)

EarlyEntrant 15.662** 24.459*** 18.207** 1.493*** 1.477*** 1.008

(6.996) (6.366) (7.974) (0.510) (0.460) (0.663)

EarlyCountry 0.171 1.043 4.681 0.033 0.013 0.097

(6.667) (6.786) (6.042) (0.486) (0.490) (0.502)

Brand 1.038 4.257 2.720 1.387*** 1.271*** 1.663***

(6.061) (6.193) (5.613) (0.442) (0.448) (0.467)

Tech 5.908 2.802 3.596 1.092** 1.364*** 1.122**

(6.356) (6.334) (5.423) (0.463) (0.458) (0.451)

Auction 18.927** 0.265

(8.066) (0.588)

EarlyEntrant*

Auction 9.592 1.037

(12.373) (0.902)

Admin 15.940 0.687

(12.326) (0.891)

EarlyEntrant*

Admin

31.568* 1.754

(16.842) (1.217)

Standard 17.112** 0.557

(7.465) (0.620)

EarlyEntrant*

Standard 0.339 0.237

(10.346) (0.860)

Constant 88.530*** 82.330*** 74.809*** 3.710*** 3.688*** 4.175***

(8.773)

(8.378)

(8.160)

(0.640)

(0.605)

(0.678)

R2 0.207 0.178 0.222 0.352 0.340 0.309

Observations 80 80 90 80 80 90

*p


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35

Appendix

A1.Instrumentsusedintheestimationofthemodel

OnesetofinstrumentalvariablesthatweusewasproposedinArellanoandBond(1991)andallows

ustoconsistentlyestimatecoefficientsonthelaggeddependentvariables.

Thesecondsetofinstrumentalvariablestacklespossibleendogeneityofcellphoneandfixedline

pricesinequations(1)and(2).Makinguseofthepanelnatureofthedata,weconstructthese

instrumentalvariablesbasedonthegeographicalproximitybetweencountries(seeHausman,1997).

Totheextentthattherearesomecommoncostelementsinthetelephoneserviceprovisionacross

regions(e,g,costsofequipmentandmaterials),wecaninstrumentforpricesinagivencountryby

averagepricesinallothercountriesoftheregion.Forinstance,pricesintheUKcanbeinstrumented

forwithacellularandafixedlinepriceindexfortherestofWesternEurope.Toarriveatan

operatorspecificinstrumentalvariableinthecaseofcellphones,wefurtherconditionitonthe

technologicalstandardsdeployedbyeachoperator.Forinstance,weinstrumentforpriceofa

ChineseoperatorusingtheGSMstandardwithpricesofGSMoperatorsfromotherAsianPacific

countries;thepriceofaChineseCDMAwithpricesofCDMAoperatorsfromotherAsianPacific

countries;andsoon.11

Togainonefficiency,weadditionallyincludelaggedvaluesofthese

geographybasedinstruments.

Thethirdsetofinstrumentalvariablesaddressespossibleendogeneityoftheprepayshareandthe

penetrationvariables.Forthesevariablesweusedvalueslaggedbytwoandthreeperiods.Notethat

wecannotusethevalueslaggedbyoneperiod,becausetheArrelanoBondestimationmethod

involvesfirstdifferencingoftheestimatedequation.

11TheclassificationofcountriesintoregionsweapplyfollowstheInformaT&Mclassification andincludes:

USA/Canada,WesternEurope,EasternEurope,Asia/Pacific,Africa,andAmericas.


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36

A2.Derivationofthelongrunadvantages

Westartbydefiningtheexpectedlongrunequilibriumlevelsofpenetrationandusageofan

operatorjas:

MoU*ij(t)=MoU

*ij(t1)and (3)

CellSubs*ij(t)=CellSubs

*ij(t1), (4)

respectively.Sincethelongrunequilibriumisbydefinitiontimeinvariant,wecanomitthe

timesubscriptsandrewrite(1)and(2)usingthedefinitions(3)and(4)toobtainformulasfor

theexpectedlongrunvaluesofusageandpenetration:

X

ij

*

ij4ij

0

*CellSubs

1

1MoU

ij

, (5)

X

ij

*

ij4ij

0

*MoU

1

1CellSubs

ij

, (6)

wherethehatstandsforestimatedvalue,thevectorXijcontainsallotherexplanatory

variablesinequations(1)and(2)besidesownusageandpenetration,and and are

vectorsoftheassociatedparameterestimates.Because 4 intable4issmall(0.003)andnot

statisticallysignificant,wesetitequaltozerointhecalculations.Thedifferencesbetweena

firstmover(k)andafollower(l)intheexpectedlongrunequlibriacontrollingforallother

thingsi.e.allvariablesinthevectorXijarethen:

*lj*kj4ljkj0

**CellSubsCellSubs

1

1MoUMoU

ljkj

and (7)

ljkj0

**

1

1CellSubsCellSubs

ljkj

. (8)


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37

Thus,tocalculateaveragelongrundifferencesbetweenthefirstmoversandthefollowers

inoursamplewesubstitutetheestimatesfromtables4and5forthetherespective

parametersin(7)and(8)andsolvetheequations.Forinstance,toarriveatthedifference

betweenearlymoversandfollowersusageof53.7minutesandpenetrationof6.7%,as

reportedinthetext,wesubstitute0.825, 1.454(table4)and19.094(table5)for 0 , 4

,

andljkj

in(7),respectively.Thenwesubstitute0.839(table4)and1.074(table5)for 0

and ljkj

in(8),respectively,andjointlysolve(7)and(8).

A3.Testingforendogeneityofentrytiming

Inordertotestfortheendogeneityofentrytimingwecollectedadditionaldataonthe

methodofawardingmobilephonelicensesandthetechnologicalstandardizationofthe2G

mobilephonesineachgeographicmarket. Bothmeasuresthemethodoflicenseawarding

andthestandardizationwereconstructedfromGlobalSpectrumDatabaseprovidedby

PolicyTrackeramarketintelligencecompany.TheinformationfromtheGlobalSpectrum

Databasewascrosscheckedandfurtherrefinedbycompanyhistories,newsreports,and

priorresearchonmobiletelecommunicationsindustry(e.g.KoskiandKretschmer,2005).As

aresultweclassifiedthefirstlicenseofeachoutof90operatorsinoursampleasawarded

throughauction(28.9%),comparativeselection(47.8%),directlyinanadministrative

decision(12.2%),orunclassified(11.1%).Moreover,wefoundthat58.9%oftheoperatorsin

oursamplecomefromstandardizedmarkets.Basedonthisclassificationweconstructeda

setofoperatorspecificdummyvariablesdescribinglicenseawardingmethod(Auction,

Admin)andstandardization(Standard).


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38

ResultsoftheregressionbasedtestsofentrytimingendogeneityarepresentedinTableA1.

Weincludedeachoftheabovedescribeddummyvariablesalsointeractedwith

EarlyEntrant intheusageandthepenetrationequationstoseeiftheyqualifyourresultson

firstmoveradvantages.Theinteractedtermissignificantlydifferentfromzeroonlyin

regression(2).Jointly,however,thecoefficientsonAdminandAdmin*EarlyEntrantin

regression(2),arenotsignificant.Thus,theusageadvantageofearlymoverswithadirectly

awardedlicenseisnotstatisticallydifferentthantheadvantageofotherearlyentrants,even

thoughthepointestimatesonAdminvariablessuggestthatthedifferenceamountsto15.9

31.6= 15.6minutespermonth.

Takentogether,theseresultsshowthatthefirstmoveradvantagesthatweidentifyremain

unchangedregardlessofthelicenseawardingmethodandtechnologicalstandardization.

Hence,itappearsthatsuperiorefficiencyofearlyentrantscannotexplainourfindings.


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