Operators: service-pipes or bit-pipes ?
In the last five years, tier-1 mobile network operators (MNOs) have looked for strategic inspiration in many places, albeit with limited success: at the killer app, the killer brand, the killer supermarket, the killer segmentation, the killer branded handset, the killer content and the killer service. All have been results of the operator-is-king mentality, which followed from the astonishing revenue growth reaped by networks in the early years of mobile. All have come far short of expectations.
My thesis is that operators should re-evaluate their strategies, not in the context of the one-sided market, but in the context of a two-sided market, where value flows both from the left and right of the chain. In other words, rather than continue the one-firm-provides-all strategy, they should adopt a platform strategy, by linking users with content providers and advertisers. They should take lessons from Google, VISA, Microsoft, Shell, Monster and shopping malls. MNOs should focus on extracting value only where they can add value, i.e. through network, handset and retail enablers.
Let me explain, starting with a short history of how operators have tried to run the show so far.
The killer app
The buzzword of the telecoms-bubble era was the killer app. What was it? Email, chat, TV, IMS, mobile broadband (I still find the term amusing!) ? Nobody knew and nobody ever found out – the killer app turned out to be a bubble in itself.
The killer supermarket
Operators then tried the ‘killer supermarket’ recipe. The idea was that you could get customers to pay just for walking around the supermarket and browsing the shelves. Oh, and when you wanted to go across the street a guard at the door said: “Sorry, you can walk within our beautiful gardens, but you can’t go out. Don’t you remember ? You agreed to these terms when you walked in”. Within these gardens, operators dreamed that they could open up a bank, utility services and all the shops that the consumer would ever need. Tier-1 MNOs had to stop dreaming when the golden era of GSM growth started to dry and so was funding for blue sky projects. Walled gardens, too had to open after journalists did not spare any flattery with the whole garden business.
The killer brand
One of the most memorable milestones in mobile operator history was around 2002 when most tier-1 MNOs got jealous of Orange’s success and thought they should have national colours and buy lots of paint buckets to dress up their portals, handsets and everything else. Thus came Vodafone’s Red, O2’s Blue, T-mobile’s Magenta and Sprint’s Yellow. The colours did have a memorable effect on the consumer, but they lacked a memorable deliverable.
When the brand deliverables are not clear or relevant to the consumer (what does an MNO brand stand for?), there is little tangible differentiation to the eyes of the consumer, other than price. What does Vodafone Live! mean today to the average consumer ? Sergio Zyman (ex CMO, Coca Cola) wrote an entire book to express the point that marketing and promotion fails if it promotes the brand for the brand’s sake. As he puts it ‘in the absence of [brand] relevance, consumers always fall back on price’.
The killer segmentation
Since 2004, operators invested in building more and more sophisticated marketing segmentation plans. Most tier-1 MNOs today have about 10 segments (including business users), as shown in the case of T-Mobile below.
However, MNOs eventually had to realise that their organisations were built to run networks, not targeted marketing campaigns (the smartest MNOs like KPN moved into the wholesale business). The one-brand-fits-all approach was found to pale in comparison to the focused, niche segmentation of other manufacturers such as Nokia (with 50+ segments), SonyEricsson (see Cybershot and Walkman ranges) and 100s of high-street brands with niche and relevant brand propositions that enjoy loyal fan clubs. These companies built their brands through money, years of promotions and smart marketers.
The killer content
It was then that operators realised they needed Disney, MTV and Ferrari to get their users excited. However, content licensing turned out to be expensive (from 20M to license Disney content for a major operator, to nearly $100M to build ESPN Mobile, which as we all know went the way of the dodo).
The killer handset
What if operators could be making their own handsets ? Surely they would deliver the best handset for their own consumer segments, they thought. Vodafone decided to walk down this path and assembled a fine team to produce the Simply range. Vodafone’s Simply proposition, comprising of handsets, customer service and dedicated calling plan, was designed for a consumer segment the operator calls ‘adult personal users’. However, according to reliable sources, Vodafone country operations are today struggling to sell Simply handsets, because the range is competing unfavourably with other handsets in terms of price. Here’s another lesson: operators don’t know how to sell handset propositions, but manufacturers do. So much for the killer handset notion.
The killer service
We ‘ve heard it again and again. At 3GSM 04 the killer service was 3G. At 3GSM 05 it was HSDPA. At 3GSM 06 it was Mobile TV. All have come and gone, but still 80-90% of data revenues are driven by SMS in most western markets. In most cases, operators who have licensed DoCoMo’s i-mode solution have been able to convert at best 10% of their subscriber base. A new tariff and marketing plan stands to make much more revenue for the operator than x (insert a large number) billions spent on upgrading the network and handsets for next-generation services.
So where to next ?
From product to platform strategy
I would argue that tier-1 operators need to go back to square one and reconsider their long-term strategies. Starting from first principles, operators should extract value where they can add value. Beyond the voice and data transport network, there are two other things that operators do well: handset customisation and retail shops. However, these should be seen not as products, but as platforms.
My thesis is that MNOs should look into the mirror and realise that the market is not one-sided, as in the traditional manufacturing business, where revenue flows from right to left. MNOs should understand that they are part of a two-sided market, where buyers are on both sides of the value-chain equation and value flows from both the left and right. Two-sided markets have been successfully exploited by credit card companies (VISA, who links consumers to merchants), operating systems (Microsoft, who links PC users to application developers), internet search (Google, who links surfers to advertisers), recruitment (Monster, who links job hunters to employers), fuel(Shell, who links gas stations to car owners) and shopping malls (who link shoppers to retailers). Two-sided market concepts and strategies are the subject of the article “Strategies for Two-Sided Markets” by Eisenmann, Parker and Van Alstyne appearing in the October 06 issue of the Harvard Business Review (and well worth a read in my opinion).
In this context, operators should realise that they should act as the platform that links consumers with service providers and advertisers. This in essence is a three-sided market, where value flows from, and to, all three sides. Rather than try to be the manufacturing point for all goods, operators should extract value by adopting a platform strategy.
I have been thinking about this topic since my early strategy days at Orange. All in all, I believe MNOs should focus their platform strategies three pillars:
Pillar 1: Focus on Voice
Voice is the quintessential mobile service, revenue and profit-wise. Operators should own and manage voice services, but also provide peripheral data services related to voice. Examples are T-Mobile’s My Faves, Comverse’s visual voicemail, SnapIn’s self-service and SKT’s avatar-based videotelephony service).
Pillar 2: Develop Platform, not Product Strategies
Operators should realise that consumer service innovation most often comes from 3rd party service developers (and as Bill Joy says, the smartest guys work for someone else). Operators should develop platforms that link service providers with advertisers and consumers (and do it faster than Yahoo, Google and Nokia) – in other words be service pipes, to avoid being bit pipes.
MNOs can develop platforms that expose network, device customisation and retail enablers as follows:
– Network, location, subscription and device management APIs on the network side
– on-device portals and on-device electronic service guides that act as an accessibility/discoverablity portals for 3rd party services across all handsets.
– offer service promotion through retail stores – here operators win doubly by reselling services and selling retail space.
Operators should offer these platform constituents to all service providers (big and small), all advertisers and all consumers, and let the killer app, brand, supermarket, segmentation, branded handset, content and service be figured out by someone else.
Pillar 3: Develop brand deliverables that make sense to the consumer
If MNOs want to to be ranked more favourably within the list of handset purchase criteria, they should refocus on developing clear and sustainable brand deliverables that are relevant to the consumer, namely:
– offer choice. This can be choice of latest handsets, choice of home-screens or themes, choice of third party brand, service provider, etc
– offer peace of mind. Good examples are Orange’s Signature Premium package and Telefonica’s use of FOTA as an assurance of instant handset fix)
– offer convenience, i.e. allow users to visually check their balance, or how much a particular service will cost, check their voicemail, request upgrades, manage their subscription,etc.
In in all, operators should become platforms or service pipes, before they degrade to being bit pipes.
Thoughts and rants are welcome.