Re-packaging voice minutes to raise margins
The price of a marginal voice minute is falling all over the world. A basic access bundle of voice, messages and data is becoming the norm in many markets. That bundle offers an ever-larger, or even unlimited, amount of traffic. At the same time, there's a dramatic explosion of new kinds of voice going on -- embedded in games, mobile VoIP, IM clients growing a voice capability, web-based click-to-call, extensions to enterprise VoIP systems -- and none of them are by default inside the telco.
In case you missed it the first time, here are the results from our Broadband Business Models survey on this score:
The message is simple: non-operator voice-enabled application are going to grow very fast. That's not our opinion, but that of you and your peers. (Our opinion is that the numbers are a little aggressive, but not by much. It may take a 2-3 extra years. Still, contrast mobile in 2008 with 1998 to see how dramatically the world can change.)
If you're a phone company, and you're still on Plan A of selling large buckets of voice minutes, it doesn't look like a very attractive future. At the moment, telco voice is still just about growing in volume, although margins are often vanishingly tiny on fixed line, and falling fast on mobile.
So what could we do about that? The Telco 2.0 way is to divide up your bulk product, and re-package it and distribute it in new ways. We're going to use dating as an example of how to do it.
The danger of voice becoming a driver of cost, not profit
Mobile operators make a lot of money from lots of short phone calls. Even in heavy-user markets, such as Finland, the average call length is around two minutes; but even this is skewed by a small number of very long conversations. Many of these calls are simply manual transfers of context data, such as your location and availability. Telcos have usually been unwilling to look at rethinking the core voice proposition for fear of cannibalising their all-important voice minutes of use. But as you move towards unlimited buckets of use, the incentive switches to creating value and differentiation.
Voice uses more bandwidth than messaging, presence, availability, and the like. It also requires the use of equipment beyond basic IP routers, such as soft switches or SIP media servers, and skilled technicians to support them. Minutes are actually a cost; a measurement of activity rather than value to the user.
Different types of call have different values to the caller and callee - but telcos don't get this
Understanding the social meaning of telephony is crucial to saving telco voice. What that means is being able to at least differentiate between at least three crude categories of call:
- Unwanted calls that can be eliminated, because of negative value to the caller or callee.
- Calls that have high value to the caller and callee.
- Calls that have low or asymmetric value.
Cold-caller telemarketers are an example of the first type, as telephony as a negative-sum game. The recipient would probably pay to not receive calls. (Indeed, US carriers who charge for unlisted numbers effectively do charge to prevent unwanted calls.)
In contrast, the surge in international voice via Skype is an example of pure interpersonal telephony -- people are sociable monkeys and will talk unless you forcibly stop them. The operator 3 has cleverly re-packaged standard mobile voice minutes around the Skype calling community with its Skype phone.
Vodafone has likewise tried to put a crick in the neck of its voice pricing curve with its Stop The Clock promotion, where calls over 3 minutes become flat-rate. They are trying to segment out social calls from information and context transfer ones.
However, we think we can do better, since these offers probably do have a significant cannibalisation effect on standard mobile minutes. Could we indeed completely reverse it so that the revenue is completely incremental?
Understand the context of the call, and you can price accordingly
Consider online dating. It's a fast-growing market. Online dating in the US has been growing 50% per annum between 2002-2006, according to the analysts at Jupiter.
It's yet another example of a platform business; basically, you're facilitating matches between a lot of people who would otherwise face high search costs. The margins are low, but you can easily make it up on volume, which is handy because the value of such a business to the user displays increasing returns to scale. The more people use match.com, the more likely the right one for you is to be in there somewhere. The Web created a huge new opportunity for all these businesses, just as their forerunner the stock exchange benefited from the arrival of PCs and local-area networking in the 80s.
Doing it on the Web also had some special advantages; it perhaps got rid of the stigma that attached to old-fashioned dating agencies and increased the number and variety of people participating, to say nothing of speeding up the process (find a mate and get mating... NOW!). No wonder sites grew like mushrooms. Of course, the general rules that apply to these businesses worked themselves out. Eventually, when the shake-out hit, we saw the same self-reinforcing trend of traffic going to traffic. There are two strategies that usually work in this environment; hugeness, and hyper-specialisation. But they're taken.
Match.com is the market leader with the biggest pool of users, the Google of sex and seduction; and Craigslist caters for the more...specialised...business.
Pain and opportunity throughout the value chain
So to recap today's situation. Telcos aren't going to be launching winning dating services any time soon. The sales channel for voice service plans is limited to the operator's own and affiliate stores, call centres and web portal. They need to reach beyond these, and want to find ways to charge for minutes based on value, not just volume.
For service providers like match.com, they want to differentiate service from pure Web-only plays, particularly as the specialist dating sites (where there are low barriers to entry) nibble at the edges of the mass market ones. They do offer voice-based features today, such as voice mailboxes, but it's costly to implement "gateway" dialling services (e.g. where you dial an access number and then mailbox number and service carries cost of onward termination). They need to pay standard termination fees, which may be excessive for very chatty social uses. Premium rate numbers may be inappropriate on top of already premium dating service fee. Furthermore, they need to find ways to keep the subscriber engaged and paying membership fees even after they've found someone they like.
For the user, they'd like a predictable "all inclusive" price. The user wishes to protect privacy and not give out a phone number; there is a need for control. Ideally the user wants integration with voicemail, presence and other existing telco voice and messaging features. And PC-based VoIP solutions unsatisfactory due to low call quality, privacy issues in shared domestic setting, and a key use case is being mobile anyway.
So what can you possibly do to fight the voice and service innovation squeeze?
Find new channels and re-package your product
You can re-introduce value-based pricing by putting the tariff & contractual complexity away from the retail side of the telco, and onto the wholesale side. By tying access (including voice) into various applications, and selling them together as a package, telcos can improve their margins.
In our example, match.com now offers users unlimited inclusive calls to online dating partners as a bolt-on to its dating service. The fee is paid to match.com directly, and doesn't appear on your mobile bill. These are all "click to dial" from within PC or mobile browser/download application. Prices for 'standard' telephony can rise as these social price-sensitive uses are segmented out. Note this model only works when you have a rich wholesale market so that it doesn't matter which operator you're with. You can't just have a retail partnership with match.com that offers free calls and get the same effect, as the user isn't going to churn to you. What if Facebook had an exclusive deal with another operator, and the user simply won't move? Or they're simply locked into a contract?
Understanding the context and intention of the call is everything
What we need to understand here is that your users are willing to pay to receive calls; that's why they signed up, after all. And for one person to receive calls, someone else needs to make them. Offering direct click-to-call from anywhere on your site is a form of differentiation; because the only way you can use this is to sign up, you're in a position to charge for it. Essentially, this means that the social value of calls is being revealed by the context from which the call is being initiated. This valuation is likely to work because it's voluntary. No-one is likely to sign up to a pricey dating agency to get cheap phone calls to a limited pool of people -- and so what if they do? They're still paying for them.
The combination of online social networking and telco key assets means that there are more interesting things you can do; for example, you can authenticate the source of each call, and offer this as a trust factor. You don't need to disclose anybody's contacts, which is also useful. And these things are chargeable; for example, you could offer the ability to get in contact with someone whose LinkedIn profile isn't public for a small fee. People don't want to make their phone number public, because this creates a permanent option to communicate. In this case, you can offer the ability to get in touch without publishing a permanent number. The spam phenomenon exists because e-mail is free, effectively anonymous, and can be generated programmatically. VoIP could be all of these things; but charging a premium for calls which cross a privacy boundary could screen out the spam, and being able to authenticate the source could provide trust.
For the operator, of course, it's a source of revenue, but also a way of getting access to a new market. It's also a way of protecting yourself against the flipside of "all you can eat"; the fat guy who eats the lot, also known as the broadband incentive problem.