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Tackling the Bit Pipe Nightmare with a post-ARPU strategy

In October 2008 we took a trip to BSS specialists Martin Dawes Systems’ Customer Forum to learn about how telcos can get better at retail - and by extension, wholesale too. In the guest post below, the company’s Head of Solution Strategy Cato Rasmussen dreams of becoming a fly and wakes to find he’s become…a telco! Fortunately he got over it in time to participate in the Telco 2.0 braintorm next week.

It’s rather like a horror B-movie. You go to bed, fall asleep and have a frightening nightmare about turning into a fly. You wake up in a cold sweat relieved it’s all been a bad dream - only to look down at yourself and scream.

Of course the scenario is less colourful, but telco operators waking up one day and finding themselves a bit pipe is also a nightmare that won’t go away. It scares many CEOs senseless and could actually now become reality. What can telcos do? They need to accept a new reality - change the way they measure product value and accept that customers will be their ultimate judge.

The bit pipe nightmare has lurked in the industry’s sub-consciousness for many years now. The threat stemmed from how the Internet would merge with mobile communications, smashing down the traditional operator and subscriber relationships. So far this threat has been contained. Mobile operators adopted a walled garden approach where they aimed to hold on to an exclusive relationship with their customers and gauged their value by the money spent directly with them. And, despite the proliferation of viable mobile broadband, subscribers haven’t strayed very far from the walled garden. That is until now.

In July 2009 the Apple Apps Store will be a year old. Its effect on the operators’ relationships with their customers is profound. Already 500 million iPhone applications have been downloaded from the Apps Store. Other handset vendors like Nokia and RIM are re-modelling themselves as app and media service providers with varying success. As a result, these brands and businesses are developing a myriad of direct relationships with operators’ customers through these new app storefronts.

The attraction of apps comes from the clearly discernable value that they deliver. A good indicator of this is how my mobile communications experience has been transformed over the last year. I am a lucky owner of an iPhone on the O2 network in the UK. I work in the UK but live in another country with my family. Obviously I have lots of international private calls that should go through my operator. On my iPhone I have applications such as Skype, Truphone, iCall. Guess what? My wife has Skype and Truphone as well on her PC. My daughter has Skype on her iTouch, which connects to our WiFi at home.

Given this scenario, which is shared with many households other than mine, it is natural that the mobile operators are now keen to offer similar storefront offerings to their customers. But is this enough? And how can they re-capture the initiative?

Well, to make a start on their quest to discover where they provide value for their customers, operators do need to move beyond the old measure of success - average revenue per user. ARPU is becoming much less useful because carriers are no longer relied on by their users to gain exclusive access to the content that they value the most. The game has changed radically. Returning to my own personal experience, what telcos must accept about how customers value their service is:
  1. Convergence is not driven by operators on a network level, but by applications, and operators cannot do anything about this unless they join in.
  2. The expectation about my service is set by the device I have not by my pricing plan or my service provider’s brand value.
  3. Operators are still trying to tie me to a subscription for all my services when the new services that I like have nothing to do with the subscription I pay them.

So, how should telcos respond? Here’s my Three Point Plan for telcos to survive and thrive in a post-ARPU world:

  1. Make the mental switch and stop thinking of the network as mechanism for connections and embrace the concept of the network as a method of distribution for the new digital products (apps, music, games, video etc). Think more like HMV which is orientated to distribute content to customers using whatever mechanism they request - in store, over the phone, DHL, download - at the same price. Instead of thinking “we connect you to a game online”, think “we distribute a game to you”.
  2. The infrastructure that supports the traditional services (voice, data, SMS etc) remains valid but doesn’t build on it to deliver the new services. The right approach for the new services is to price these as items in isolation from the network codes and product catalogue. In other words price the item - a song, a game - in wholesale volumes rather than rate the code to arrive at a price. The reasoning behind this is quite clear: a network product code approach cannot deliver the volumes and frequency of new products expected. In fact, currently this approach constrains volume selling and means 2-3 new services come online a year. Item pricing means that telcos will have the volume to create the momentum for selling new services successfully.
  3. Having adopted the above steps, the operator then can price either on a contribution margin against overheads or pure profit margin and then measure and report on these criteria rather than ARPU. This is very different - a move from customer-focused revenue to one based on product lines
  4. Telcos that adopt these measures should re-capture the initiative on selling the new services and applications because their systems can retail new offerings in the volumes and frequencies expected. Whether they can beat Apple and other pretenders is another matter, but at least telcos will be competing in the same ball park.

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Did anyone understand point two of the three point plan?

I interpreted point two of the three point plan above to say that service providers should manage digital content for distribution (media, apps, etc.) in terms of "inventory," and somewhat independently from the telco products and services (IPTV, mobile broadband, etc.) that expose access to this inventory. Take iTunes and Amazon.com, each has over 35,000 titles in inventory for videos and applications respectively. That type of scale in retail product offerings won't fit in a traditional telco product catalog.

in answer to Morten, i *think* point 2 can be more simply stated as "sell content, not network features" and thus do not rely on existing billing and product systems to do that job sufficiently well. It's useless trying to use a system that sells/bills billions of SMS texts (for example) at a flat rate to sell/bill content where each content item (e.g a movie) has its own unique price and volume.

This is a nice add-on to the two sided business model Telco 2.0 has been preaching for awhile.

Sadly, this is advice the Telcos needed to heed 2 years ago. Current customer engagement from manufacturers like Apple, RIM and Google + the Telco supertanker needing to make a 180 degree turn on its view of the customer marketplace = future alongside the water, gas and electric services providers.

What is meant:
most telcos need several month to specify, design, implement, test and launch a new product. Even changing the price plans of existing product takes time e.g. Christmas campaigns are started now to be ready by end November. (not to mention retirement of products)

Can Amazon.com, iTunes, etc. live with such time frames, for launching products? For these companies filling the product catalogue is key. Product volumes in itself creates momentum. (Apples app store)

The way today's support systems are implemented simply do not cater for these volumes. Not to mention the difference in business models, financial measurment and differences in business processes needed to support the business models.

At the same time telcos have a significant asset base in existing solutions and it will, for many simply not be acceptable throw these environments out.

So, rather than trying to bolt on products and services aimed at being nomadically distributed to exisiting systems (read product catalogue and exisitng business model)make them co-exist and create synergy or an environment for cross product subsidy.

Paradigm shifts are tough, unless someone strategically comes along and turns the industry upside down. Then the shift becomes an imperative for survival. ARPU is a significant metric stock markets and share holders use to measure various competitors quarterly results. Giving up that particular measure can only be successful if all parties agree to the change. However gaining agreement on this front is akin to moving a substantial mountain. Not impossible, but certainly takes time not to mention effort. I wonder what the author had in mind to further the recommendation to abandon ARPU as a measure. It sounds interesting and has plenty of merit as their article implied. From concept to implementation would require real heavy lifting, unless I missed something obvious.

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