Guest post: Nick Hutton, Backchannel - telco yield management
We recently met with Nick Hutton, CTO & Founder of BackChannel, a unique intelligence service on commercial buyers of telecom services. In a nutshell, they crawl public networks and perform traffic and routing analysis to see who is connected to whom, and thus who is buying what. We were fascinated by how they enable a more intelligent approach to acquiring and retaining customers. As such it represents a good example of how to go about creating a Telco 2.0 connectivity business. You get an opportunity to differentiate yourself on how the back office is run, rather than the product per se.
For the record, we at Telco 2.0 have no commercial interest in BackChannel.
Following the airlines, but a quarter-century behind
Telecommunications service providers are facing a number of significant challenges.
- Competition from traditional and non-traditional sources is increasing.
- Churn has risen sharply in both PSTN and now IP services.
- Long term debt, raised in the 1990's, is coming due.
Service providers are experiencing similar economic difficulties to those faced by carriers of the airline industry in the 1980's. Namely, an inability to generate promised economic profit from a fixed asset, paid for with long-term debt. In the case of the airlines that asset was their aircraft fleet; for telcos it's their network.
These challenges conspire to drive down shareholder value, shorten the careers of chief executives, and starve these companies of the capital they will need to deliver the next generation of network services. Their environment has changed.
Those airlines who minimised the empty seats flown, and maximised the economic profit from every passenger carried, became the sole survivors of the industry. They did so by the application of Yield Management (YM). YM attempts to answer the question "Given our operating constraints, what is the best mix of products and/or services for us to produce and sell in the period, to generate the greatest economic profit?"
With seemingly many similarities between the economics of the two industries, YM sounds like plausible way for maximising revenue from existing products, services, and infrastructure for telcos under pressure.
Not as easy as it looks
As is often is the case, the devil is in the detail. Straight application of airline-style YM practices have not been successful for telcos.
- Aggressive overbooking results in significant customer dissatisfaction when their traffic is congested or dropped. How would you feel about getting half your gas pressure when you are cooking? Customers expect their telecoms to perform like a utility.
- Prioritisation leads to resentment, particularly from long-standing customers who feel their service has been degraded for the benefit of newly signed "premium" customers. Particularly when the long-standing customer may be paying a higher price than the "premium" customer due to continuing price decline year on year. To paraphrase a TV advertising campaign for a major UK lender, "Sorry, premium customers only!".
- On-peak and off-peak pricing is familiar to most voice customers, but its practice has steadily declined in recent years and there seems to be little acceptance of that model for IP-based products and services, which are the industry's future.
- We are still waiting for the "space-filling" services that can be used to monetise otherwise empty bandwidth at a low priority. This is the network equivalent of the £1 flight deal where you take your chances with being bumped onto the next aircraft.
This is why YM has yet to work its magic on the telecoms industry.
Given undeniable benefits of YM and the obvious similarities between the telecom sector and many other sectors using it, we ask the burning question:
How can we bring this discipline to our industry in a way that generates higher returns for operators and their shareholders?
Our answer: create a custom market intelligence approach for telecom
At its core, YM is about finding the most profitable new customers for your services, and converting less profitable accounts into profitable ones by service them through lower cost channels or up-selling them value-added services with better margins. This is the financial services industry view of YM, where they think of their customer-base like a portfolio of stocks, some of which are star-performers and some of which need to be carefully managed into performing better. Some customers are never going to perform, and should be offloaded on the market before they destroy too much shareholder value.
BackChannel is developing software that enables IP Telecommunications Service Providers to do Yield Management. BackChannel's software knows:
- Which corporate customers are buying which IP products from which providers?
- How much are they buying (bandwidth size, number of hosted servers, sites)?
- How likely are they to churn to your particular service?
- How likely are they to stay with your service over the long term?
- Which are a natural fit for your service, because they can be served at a competitive cost to you without eroding margin?
By using this information it is possible to target your sales and marketing activities on only the most profitable customers, thereby increasing overall yield of your network resources and your reps.
This enabling technology allows IP carriers to employ a conservative, proven, and disciplined approach to increasing sales force efficiency in a way that already produces extraordinary returns for transportation, financial services, and hospitality industries worldwide.