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Gold from straw: profiting from “low-value” customers

You may have come across the business book Blue Ocean Strategy. The central idea is to create a new uncontested space in which to compete, rather than (ahem) “leverage” competitive advantage to compete against existing players. I’m sure these folk won’t mind if we quote the their summary diagram here in return for some Google link-love:

In many ways it complements Christensen’s Innovator’s Dilemma, which suggests the optimal strategy is often to compete against non-consumption. You could argue that this was Skype’s forte, by enabling new forms of extended casual conversation that didn’t fit in with metered minute anxiety. (Skypers don’t use any less standard telephony — Skyping is incremental use.)

I’ve been challenged to come up with a telecom Blue Ocean strategy, so here goes. It takes our earlier effort at a differentiated MVNO strategy to the next level.

My under-served market would be people of low credit and low mobility. Rather than treating them as a sub-prime market with pre-paid and lousy phones, I’d give them a service which is critically superior in communications functions, highly differentiated in method of sale, but doesn’t include the nationwide coverage that isn’t really valued by people stuck in the ‘hood.

I’d take a city with a large immigrant community as my base, and/or one with significant relative poverty issues. It would be in a developed country, so there’s money about. Maybe Marseilles in France, or before it was demolished New Orleans would have been the ideal location.

My “Blue Ocean” strategy might look something like the following “value chart” that they suggest:

I would partner with an equipment supplier looking to commercialise a new IP-friendly network technology such as Flarion or WiMax and who would give me a great deal on the hardware side — ideally, they’d see it as a marketing expense, not a revenue source. I’d bide my time to get some unpopular slice of spectrum, such as the 450MHz — preferably anything below 2GHz. This stuff has to work in buildings. (The perfect case would be some new unlicensed spectrum from the reallocation of old analogue services — we can live in hope.)

Together with my partner, I’d build low-cost handsets that would draw inspiration from things like the Motophone. I’d cut out all the nonsense that nobody uses (Java, full-featured browser, etc.). Yet I’d still retain “style” and personalisation features like faceplates and polyphonic ringtones. There would be a “bling” element to the handsets.

The handset would be optimised for voice communications and “social” features:

  • Easy-to-use buddy navigation with simple presence features.
  • Wideband audio.
  • Exceptional handling of dropped calls (“We’re sorry, the connection has been lost. Hold to be re-connected, or press 1 to be called back when the other person comes back into coverage.”). We don’t want any support costs or customer dissatisfaction. Perception is everything — the Virgin Mobile MVNO brand scores better than Sprint and T-Mobile as hosts, despite identical coverage.
  • Voice messaging would be included as default and given prominence. (Some research would be done to test the relative preference between voice messaging and push-to-talk.)

I’d also support IM, preferably with interconnect to existing PC IM systems as long as there’s no fee. SMS would not be an out-of-the-box feature. I’m trying to wean the kids off metered digital narcotics: “get one of these and we can message for free!”. Oh, and I’d encourage peer-to-peer (“pre-mesh”) radio capabilities, so if you’re close enough, the cell tower and network don’t need to get involved. Most people are communicating within close proximity, like kids in class.

Now for the biggie differentiators:

  • No billing. On-net calls and messages are free, and no monthly charges. That’s right, I just fired Amdocs. Sorry, we love you, but this isn’t your game. Zero billing costs. No worries about change of address, fraud, etc.
  • No live support. You can leave a voice message, and we’ll call you back when we’re ready.
  • Handsets would come with embedded service for life. But lose it, and you have to buy another one. We’d have a password system to reclaim your old ID. Maybe even some kind of voice authentication. So our recurring revenue comes from carelessness and the need to be seen to have the latest handsets.
  • You’d still get an inbound E164 (i.e. ordinary) telephone number assigned. We like termination fees.
  • Off-net outbound calling would be entirely left to partners from the calling card industry. We’d have gateways to their 800 numbers (with some kick-backs from preferred partners), and would enable VoIP integration so that your caller ID was presented.

I’d anticipate the regulatory assault from incumbents, and throw in emergency calling as a feature.

Handsets would be sold via a mix of channels. The primary one would be small retail outlets and corner shops. I’d also work heavily with door-to-door loan salesmen. Whilst they have an external image as loan sharks, their customers see them as saviours: better to pay some short-term high interest rates rather than have your kid go to school without shoes or a uniform. Most customer would pay on credit — but the risk would be with the retailers and creditors, not me as a wholesaler. I’d also partner with cheque cashing stores, Western Union, etc. — anywhere that the credit-challenged (but often cashflow positive) hang out. I’d work out a mechanism for creditors to give online receipts for payment, and to be able to suspend outbound service for non-payment.

The first few thousand handsets would be given away free to kids. That’s the marketing budget done. Won’t take long before their parents buy a handset to stay in touch for “free”…

The geographic coverage would be the whole city plus some key gathering points around the periphery such as stadia, industrial areas and shopping/retail parks. But no further.

The handsets would feature advertising, and would have access to “sin” services such as lotto and gambling if enabled at the point of sale (where proof of age is required). This isn’t going to be part of your ethical investment portfolio, I’m afraid.

So, does it count as “Blue Ocean”? There are two sets of criteria. The first are very specific actions to take:

  • Raise. What factors should be raised well beyond the industry standard? Answer: Elimination of “tolled minute anxiety” and replacement with flat-rate.
  • Create. What factors should be created that the industry has never offered? Answer: Real-time communications service features such as wideband audio and presence, packaged into the standard product.
  • Reduce. What factors should be reduced well below the industry standard? Answer: Mobility outside the area in which the customer lives and works.
  • Eliminate. What factors should be eliminated that the industry has taken for granted? Answer: Billing and direct channels, and consequently most sales and support costs.

Looks like we’ve scored full marks there. And the second set:

  • Focussed. Absolutely — a narrow under-served segment, who are also conveniently geographically clustered.
  • Divergent. You bet — target market, product, payment and sales method are all differentiated.
  • Compelling Tagline. “Free calls for life” — sounds like a winner to me.

Like the idea? Well, if you want some creative strategic thinking, you know who to call.

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Fascinating. How about coming to wiki.laptop.org and talking about doing that in Brazil or Libya alongside One Laptop Per Child? They and and Uruguay have signed on so far, for a million laptops each starting in July 2007.

Makes a lot of sense. Sort of reminiscent of some of the PHS services in Asia. The peer-to-peer bit would be a headache in term of lawful intercept, though.

I also think "weaning off SMS" is a challenging strategy - maybe "free on-net SMS" is an alternative, as people seem to like the UI, counterintuitive though it is to some observers.

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