The mass market potential for wireless communications is huge, but intense competition and the obsession with subscriber growth has forced operators up the market penetration curve. What can a new operator do?
The average new customer spends less than an average existing one. Average revenue is declining in many cases faster than expected because of the faster adoption by the consumer sector and if costs for acquiring and supporting these new customers do not match the decline in spend, then inevitably, profit margins deteriorate even more significantly.
The UK provides an excellent example of how average revenues per customer are declining overall. In just four years, the UK industry average went from almost £60 per month down to £36 per month, and that was at only 10 per cent market penetration.
In parallel with this decline in revenues, churn and bad debt are increasing. Private consumers are not inherently less supplier loyal or especially worse at paying their bills. Yet, many operators experience higher rates of churn and bad debt as they begin to take on these customers.
Churn up, revenues down
There are operators whose churn rate has been as high as 40 per cent per annum, and 25 per cent is fairly typical in a competitive market. This is an issue of huge proportions, costing European operators and service providers $1-2 billion each year, and taking enormous value out of the industry and individual companies.
The main reasons for increased churn are a mis-match between customers' expectations of service quality and reality, fuelled by over-promotion, and a rather laissez-faire approach to credit and other customer checks. In addition, far too little attention is paid to pro-active customer monitoring and retention, especially of high value customers who are ready to migrate from analogue to digital service, of customers whose initial contract is ready to expire or whose handset is more than three years old.
There is substantial evidence to support the fact that the longer customers are retained the more profitable they become. A recent study indicated that each 1 per cent increase in customer retention has a three to six times multiplier effect on the company valuation. This would suggest that a GSM operator with half a million customers and a 30 per cent growth rate, who can maintain churn at just 1 per cent below market average, could save about $50 million in operating costs, while existing operators who have built their businesses in the higher growth phase of the market may also be at a disadvantage.
The impact of churn
As an example, in many cases, churn affects the incumbent operator to a disproportionately greater extent, causing a number of disadvantages when faced with the arrival of a new competitor. Most of these disadvantages are a result of the way in which their business has developed and the type of customers for which it was originally engineered. For example: they have been structured to service the early adopters in the market, and to meet the needs of satisfying the latent subscriber demand they typically have high distribution costs, exacerbated in many markets by the heavy subsidisation of handsets and the use of dedicated dealer networks.
Customer care costs too, are often disproportionately high. Providing human interactions for the resolution of all problems, at no cost, is a sensible decision if it keeps your $1000 a month subscriber on the air, but this becomes un-economic for subscribers with monthly revenues closer to one tenth of that figure.
Incumbents have also engineered their business with a commitment to price their service at a considerable premium to the PSTN. Even in highly competitive markets, mobile calls are accepted as costing a multiple of the PSTN rate.
Finally, in many countries incumbent operators are faced with the regulatory requirement to close their analogue networks and migrate the customers on to the digital networks. An opportunity for churn to increase still further.
GSM-1800 strategies
A new operator should not lose sight of the incumbent operators requirement to meet the revenue expectations of his shareholders. A new GSM 1800 operator needs a distinct market position to differentiate against the incumbent operators. Some examples of the options for such a distinct position are: building a network to provide coverage in a limited area where subscribers are most dense; challenging the fixed network operators, who still route 95 per cent of the traffic. Also, by providing coverage of a sufficiently high quality that from the users' perspective, the DCS service is as good as a fixed line service. Another option would be to target new market segments not currently addressed by the mobile operators. For example, the developing requirement to have a second line can be seen as an opportunity to encourage subscribers to consider whether this should be fixed or mobile. The development of targeted value added services also creates the opportunity to encourage particular market segments to subscribe to your service and to resist the temptation to churn.
In most cases this will need to be coupled with a creative approach to tariffing, in terms of both the core cost of the service and its presentation to the market.
An innovative and distinct market position means that a new GSM 1800 operator will need to develop a business plan which has a distinctive approach to each of the key business dimensions. Those members of the investment community will need to approach the analysis of these business plans with greatly altered expectations of the business compared with their experience from traditional cellular markets.
All the dimensions discussed earlier may be significantly different from those of a traditional cellular business. This does not mean that the business case will be poor, only that it will need to be considered with an open mind and from a new perspective.
The coverage question
The approach to the implementation of the DCS 1800 network offers strategic alternatives in a number of areas: although coverage will need to meet the licence criteria, it does not have to be universal, it should be remembered that both the European initiatives on equal access and the launch of satellites systems means that some coverage could effectively be outsourced to another supplier.
The services available through an Intelligent Network (IN) platform means that the new GSM network purchaser has more range of choice than ever before of value added services that could be offered on his new network. Grouping and linking together phone numbers increases minutes of use and the likelihood that the call recipient will generate at least one more call. Screening is also a tool which enables the subscriber to get the most out of his communications. By providing the subscriber with screening, the operator will increase usage because the subscriber is more able to use the handset effectively to manage his life.
Most existing mobile operators offer services differentiated with little more sophistication than high medium and low usage. In the age of mass customisation and with technical flexibility this is very unimaginative. Part of the challenge for new operators is to present to the market at many levels. On a macro level the operator's brand positioning and public perception should be one of trustworthiness and value for money. On a micro level, mass customisation tools can target increasingly smaller segments with genuinely useful and valuable offers which stimulate usage.
As ever more specific and tightly targeted bundles of products and services are created, brands will no longer represent a product but will represent companies, styles and types of relationships. New DCS operators should be expecting to build a strongly branded relationship with their customers and to develop services tightly targeted on the needs of many customer segments.
Differentiated distribution
Distribution strategies also give the opportunity to differentiate from the existing operators. The key will be to use channels that have ready, low-cost access to your target customers and then to give these channels 'hassle-free' service packages to sell, which reduce the sales costs for them, enabling savings to be made on commission charges. And while retail stores inevitably need to figure in the range of distribution channels used, as the market matures alternative channels can be explored such as credit card issuers, mail order firms, direct fulfilment off-the-page and affinity deals with any organisation with access to a good database of potential customers such as clubs, associations and airline frequent flier programmes. The broadening out of the distribution channel structure has a number of advantages, including getting the service in front of the potential customers more often and increasing the level of competition amongst all the channels. This increased competition reduces the operator's dependence on any one type of distributor and thus reduces their leverage over commission payments.
Tariffing offers many opportunities for differentiation and examples are readily available from within our industry, as well as beyond. Service collation is meant to increase overall billable traffic whilst increasing usefulness for the customer. One-2-One's 'All In One' box stimulated usage because the 'sunk cost' of a year's subscription meant that expenditure on airtime was perceived as low monthly outgoing. The scope for increasing wireless revenue is significant. Even in highly penetrated markets, traffic on the cellular networks is only about 5 per cent of PSTN traffic. The growth opportunity is currently being held back, however, by operators positioning their tariffs at levels which discourage usage, a reluctance by some operators to cannibalise their fixed networks, and by a lack of innovation in service packaging. The tendency towards maintaining high tariffs is partly because price elasticity is not well understood, leading to little tariff innovation. It is also partly because capacity constraints limit some operators' scope to encourage increased usage. However, capacity potential in GSM 1800 networks is considerably greater than for GSM-900 making capacity a design and deployment, rather than a spectrum, issue.
The PSTN cannibalisation issue is one that operators have to face up to, because if the incumbent with a fixed network isn't prepared to attract fixed network minutes onto their cellular networks, the new operators will. Indeed some mobile operators are beginning to offer packages of services which, for the corporate user, are a significant step on the road to fixed / mobile integration.
Profiting from customer care
For new operators customer care must support the customers in a manner which is highly cost efficient. The best way to reduce customer support costs is to prevent the need for it in the first place. This implies meeting all customers' service needs and expectations, investing up front in effective training and offering mechanisms, such as pre-paid SIMs, which eliminate some of the traditional customer support problems. On the basis that some level of customer service is required by all customers, it is then important to deliver against this need in ways that take into account customer profit potential. This means offering differentiated levels of customer service as part of the overall service and tariff package. For example, it would not be unreasonable to support low profit customers with greater levels of automation and to make charges for some customer services.
There is a growing recognition also that some companies are able to deliver customer services, including billing, more cost effectively than others. This is leading to a high level of interest in outsourcing some or all of the customer service operations to third party specialists. So, in conclusion new GSM-1800 operators will need to: develop distinctive strategies and implement those strategies from the start of their planning, building them into their network designs and business processes. They must also build perceived value into their business proposition through innovative brand development and ensure that the brand they build is supported and cherished by the actions of the whole organisation, including its distribution channels. A further challenge is to implement strategies, policies and processes which encourage the building of a relationship with each customer and discourage churn. Moreover, new operators should bundle packages of services or tariffs which give a low perceived cost and are focused on segmented markets. And perhaps most important, all groups of stakeholders need to approach the business model with an open mind, not with a desire to build me-too cellular businesses.
