Problems in Launching the Mobile Internet: Evidence From a Pricing Experiment

• Author: Ari Hyytinen,Maija Gao,Otto Toivanen
• Date: 01 September 2014
• Published date: 01 September 2014
• DOI: http://doi.org/10.1111/jems.12062

Problems in Launching the Mobile Internet: Evidence

From a Pricing Experiment

MAIJA GAO

Independent

maija.gao@nokia.com

ARI HYYTINEN

University of Jyv¨

askyl¨

a and Yrj¨

o Jahnsson Foundation

ari.hyytinen@jyu.fi

OTTO TOIVANEN

Katholieke Universiteit Leuven and The Research Institute of the Finnish Economy (ETLA)

otto.toivanen@econ.kuleuven.be

Commercialization of innovations frequently stumbles. A prominent recent example are the

early (i.e., pre-3G) mobile phone-enabled Internet services, whose European take-up was slower

than expected. To determine why, we build a structural model of demand for such services and

estimate it using consumer-level panel data from a pricing experiment. The experiment allows a

decomposition of the number of wireless connections into the number of needs—instances where

a consumer would establish a connection if the price were zero—and the conditional probability

of establishing a connection. We find that needs were plenty and potential consumer surplus

several magnitudes higher than that attained. We find that pricing reduced usage substantially

and explore potential reasons for the high prices.

1. Introduction

Most of the existing empirical literature on new goods analyzes products that can be

claimed successful (see, e.g., Trajtenberg, 1989; Hausman, 1997; Petrin, 2002), at least in

some respects. A stylized fact is, however, that the commercialization of product and

service innovations is difficult and that the launches of new goods frequently stumble

and often fail (e.g., Scherer and Harhoff, 2000). Quantitative analyses of such failures are

rare, but potentially important in furthering our understanding of what can go wrong.

The objective of this paper is to provide such an analysis by studying the demand for

and pricing of the first wireless Internet services that were introduced in Europe at the

We would like to thank a coeditor and two referees for extremely helpful and detailed comments. Colin

Cameron, Helen Weeds,Glenn A. Woroch and seminar participants at Department of Economics at University

of California, Berkeley, Haas School of Business, the Nordic ICT workshop in Helsinki, EARIE 2004 Berlin,

the CEPR conference on economics of electronic communication markets at IDEI, Toulouse,London School of

Economics, University of Bern, and KU Leuven also provided helpful comments for which we are thankful.

We also thank the individuals who generously gave their time and shared their views either in interviews

and/or in the survey we carried out. This research is part of the wireless communication research program

of ETLA, the Research Institute of the Finnish Economy.Financial support from Nokia and Tekes is gratefully

acknowledged. Hyytinen and Toivanen also gratefully acknowledge financial support by the Yrj¨

o Jahnsson

Foundation. Much of this research was completed while Hyytinen and Toivanen were visiting University

of California, Berkeley, whose hospitality is gratefully acknowledged. The views expressed are those of the

authors and do not necessarily reflect the views of the organizations the authors are affiliated with.

C2014 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume23, Number 3, Fall 2014, 483–506

484 Journal of Economics & Management Strategy

end of the 1990s using an early wireless Internet technology, the Wireless Application

Protocol (WAP).1

Wireless Internet generated high expectations that materialized in the hundreds

of million euros of fees paid by mobile phone operators for the third-generation (3G)

European mobile phone licenses (Klemperer, 2002). The take-up of the first (i.e., pre-3G)

wireless services enabled by WAPwas however not as rapid as expected.2Soon after its

launch, some commentators announced WAP a failure.3Although the current views of

WAP clearly challenge the most critical accounts,4the question of why the early take-up

stumbled still remains. This question has more than historical relevance as any new

product launch faces these same problems.

The first step in addressing the puzzle of why the launch of a particular new good

or service fails to take off is to understand its demand: Is there no latent demand (i.e.,

no demand at a zero-price) for it, or is the quantity demanded low because of prices?

Conditional on the latent demand being there, the second step in addressing the puzzle

is to understand the impact of prices: Can high prices explain the slow take-off? We

follow these steps in our search for an explanation for the slow take-up of the early

European wireless services.

Tounderstand whether there was insufficient demand for the new wireless services

at any price (no latent demand), we use data from a pricing experiment5targeting actual

customers of a mobile phone operator, implemented in Fall 2001, and a structural model

of demand. Owing to the experiment, we observe the prices charged and the quantity

demanded (i.e., the number and average length of connections) for a panel of consumers

both during four nonexperimental and three experimental two-week periods. Prior to

and after the experiment, prices were at their normal (equilibrium) levels of the time.

During the experiment, both the per-minute price and the fixed connection fee were set to

zero. Our structural model of demand decomposes the number of wireless connections

into the number of needs that arise during a two-week period, and the conditional

probability of establishing a connection, given a need. We think of a need as being, for

example, a need to check the weather forecast before embarking on a long drive, and

define a need as an instance where a consumer would establish a connection of strictly

1. The wireless technologies currently in use are much moreadvanced than the first version of WAP: WAP

was a first-generation technical standard to provide wireless services that was introduced in Europein 1999.

2. The European take-up of the WAPenabled services was slow for example compared to wireless Internet

in Japan, where i-mode, a service brand of NTT DoCoMo, took off rapidly after its introduction in February

1999. At that time, the emphasis in the United States was perhaps more on laptops and PDAs, but wireless

internet services using mobile phones (e.g., AT&T’smMode), on which Europe and Asia initially concentrated,

were also introduced subsequently in the United States.

3. For example, the Nielsen Norman Group published a “WAP Usability Report” in December 2000. The

report was based on a field study of WAPusers in London and had a section titled “WAP Doesn’t Work”in the

executive summary.It concluded that “When users were asked whether they were likely to use a WAP phone

within one year, a resounding 70% answered no. WAP is not ready for prime time yet, nor do users expect it

to be usable any time soon”. See also an analyst report titled “WAP in Europe:Has It Missed the Boat?” (by

Lonergan, D. from the YankeeGroup, published in 2000). Ph.D. Jacob Nilsen, cited at the time by the Business

Week to be “one of the world’s foremost experts in Web usability” and by Stuttgarter Zeitung, Germany

“the world’s leading expert on user-friendly design”, called WAPthe “Wrong Approach to Portability” in his

October 1999 Alertbox -article (October 31, 1999, http://www.useit.com/alertbox/991031.html, accessed 30

May 2004).

4. Many see WAP as a technological standard that developed over time and that provided a bridge to

newer generations of wireless technologies. It was upgraded (to WAP2.0) in 2002, which resulted in resurgence

around 2003–2004, especially in Europe. For example, the number of WAP page impressions viewed in the

United Kingdom more than doubled during the nine months prior to May 2003 (the Mobile Data Association,

the United Kingdom). In Finland, usage grew at the time similarly.

5. The pricing experiment was based on a promotional campaign. Therefore, it was not a natural field

experiment.