Vodafone: Too much da, not enough vo and fone?

As there's a change in leadership occurring at Vodafone, it's a good time to reflect on the direction of the large convoy of opcos and investments being led by the good ship Newbury. Arun Sarin has stepped out of his asbestos business suit, albeit scorched by the flames of investors and board members, safe in the knowledge that his mission to vanquish more timid enemies is won. Although they don't say it aloud, The Economist notes that the core of this success was clinging on to markets where vertical integration is turning a profit (USA, emerging markets), and exiting those where is isn't doing so well (Japan), whilst cost-cutting elsewhere the inevitable detritus of a decade of hyper-growth.

However, as the more acerbic tongues at The Register point out, rather choppy waters lie ahead. The business is rapidly maturing, cost cutting reaches its limits, and new revenue streams (entertainment content, advertising, data) are either slow to ramp up or come with significant supplier costs that dilute margins.

According to their corporate history website, the name Vodafone is derived from 'voice and data phone'. True or not, the conundrum of whether 'voice is just data' persists to this day. So as Vittorio Colao becomes fleet admiral, our burning question is: what to do about the stagnating core product? Along with its peers, Vodafone has conspicuously failed to significantly enhance its voice telephony offer, beyond offering better coverage. We don't think that's going to be a long-term winning position as access becomes hyper-abundant, and people's time does not. Rather than ask how data services can replace lost voice revenue, ask how data can be used to rejuvenate that voice business. And as the biggest player in the international scene, Vodafone is very well placed to do something about it.

Telephony is built on false assumptions

The chart below (from our recently published Consumer Voice & Messaging 2.0 Report) compares the cost of telephony and labour. We show the per minute cost in the USA of using a telephone (fixed or mobile), along with hiring someone (high school or college graduate). What it tells us is that the 'scarcity' used to be in the telephone network, and now it is in our time and attention.

Only a decade ago, it was worth paying a graduate for an hour if it would have saved you from making an hour's worth of mobile phone call.

Today, we barely factor in the cost of calling into our lives. Yet we are buried in voice messages, missed calls, emails and texts. Delivering ever more data to the user is not the same as creating ever more value. The value comes from brokering the right relationships, helping interactions occur at the right time and medium, eliminating unwanted intrusions, automating flows of information, and making users productive.

Not a new problem

Mobile telephony is built off the same product template as fixed telephony, with the same assumptions and problems baked in from the 19th century. From the very beginning, problems have been evident. When Bell called Watson in that first call, the result wasn't "oh, ****, he's gone out for an afternoon in the pub". No, Bell had pre-arranged for Watson's to be there ready at the other end. It was a bit of a fraud, to hide the absence of presence, availability or scheduling features.

We see these problems still today. You call me, but I just fail to answer in time, so you go to my voicemail. I see a missed call, and call you, not knowing your talking to my voicemail. As you're already in a call, speaking to my voicemail, I get your voicemail. Why on earth doesn't the phone network just connect us together?

This particular instance is an example of a failed rendezvous, and we examined the context and unfilled user needs in more depth in this previous post. Many of today's short phone calls are manual transfers of presence, location and availability data that should ideally be eliminated. Why can't I request a call from you, rather than only interrupt you? Why can't I tell you're calling me back about the message I left a week ago? Sadly, operators are too well rewarded for terminating calls of zero or negative value.

Voice: one product, many business models

As with all telcos, there are three inter-linked business models that Vodafone needs to support. These require very different features.

The first is its retail offer. This takes hardware from the network equipment providers, plus software from various innovators, and packages it up as the core bundle offer or as an add-on value-added service. This supply chain is slow, costly and inflexible today, and their Betavine effort is only a small step towards what's really needed.

There's still plenty of mileage though in selling conveniently packaged communications. We're not yet at the point where "if it's software, it must be given away for free". The users see the benefit to themselves, and are willing to pay for it. A good example at the moment is SpinVox, who offer a voicemail to text transcription service. Note how their own marketing copy says: "SpinVox has saved me at least two hours a week [our emphasis] of listening to often irrelevant voicemail." (And contrast this with the primary purpose of most mobile media content products, which is to fill dead time.) We'll dive into the challenges and opportunities for retail products a little more below.

Next up are the wholesale products of the operator. We feel there is a massive hole here in most operators' strategic approach, with a few honourable exceptions. Voice is already becoming just one facet of many applications and products, and operators aren't making it easy to embed it in. Wholesale products need to be broader in scope (e.g. to include voicemail, push to talk, and 3rd party network integration), as well as deeper in integration (e.g. simple 3rd party trouble ticketing, provisioning of offers sold through non-operator channels).

Finally, there are the two-sided markets, which we've written about here. The telephone remains a wonderful way of consumers and enterprises interacting -- think of it as 'v-commerce' -- but there is a huge amount of friction and inefficiency involved. Whilst so much effort is being expended on entering mobile advertising, hardly any is being lavished on building new revenues on top of freephone numbers, call centres and interactive messaging.

Voice as a platform, not a product

We promised to come back to that retail proposition. Ten years ago, mobile phone penetration was in the low single digits. Today, more than half of humanity has one. A decade hence, the experience will also be transformed again. For example, your address book or contact list will be dynamic: ordered by who you ought to be talking to, giving real-time presence and availability data, and probably infused with messages from companies with whom you have ongoing commercial relationships. Mobile will be the 'to go' portion of the PC experience, not some separate world.

However, there is unlikely to be a one-size-fits-all evolution of the public telephone service. Instead, we move from an era of mass production to one of mass customisation. There are too many innovative applications, too many niches and customer needs, for any one company to address them all. Instead, operators need to take a leaf out of the Telco 2.0 book and focus on two things: providing distribution for these services (and integration with the core offer), as well as enabling a bunch of high-margin value-added services that the upstream partners pay for, not the downstream end users. If someone is a Facebook fanatic, help that partner get their experience into the user's hands.

This requires synchronising a lot of moving parts of the puzzle: handsets, network, operational support, etc. The need for putting together a complete experience, rather than just piece parts, is becoming received wisdom, with the Apple iPod, iTunes PC client and music store trio being the canonical example. It's hard to do, and it's still early days. Apple have barely moved the needle with the iPhone -- the only concession to the voice service is visual voicemail. (And they've made a mess of the SMS client.) It does nothing to address the underlying issues of why people are sending those messages, and how to either eliminate them, or make them more effective. Nokia's Ovi is resolutely focused on the content side of the business, not communications.

As the biggest player, Vodafone has more leverage over handset suppliers and software platform vendors. Pick up the phone to Qualcomm. Whatever magic they've done for 3, ask for a bit to be sprinkled over the Vodafone handset range. We'd also expect an operator like Vodafone to produce handset and service offerings much more tightly coupled with the online services that users increasingly route their conversations through. On the corporate side, IBM, Microsoft and Avaya are obvious targets for closer integration.

One good sign is Vodafone's acquisition of Danish social media start-up Zyb. This is completely the right direction, and we'd like to see the gas pedal pressed hard to roll this kind of "address book 2.0" capability burned into as many handsets as possible.

This is also the time to make the most out of close relations with Verizon Wireless. Platforms need scale, new voice service features need scale, so why not become the de facto leader? Don't wait for the standards bodies, make it a fait accompli.

Immediate action required: group communication

Whilst these long-term changes unfold, there a re short-term problems with the voice and messaging products, most notably in the pricing of services that compete against Internet offerings. Vodafone UK have cleverly priced 'informational' chatter differently from 'social' chatter with the 'stop the clock' promotion. After 3 minutes, you don't rack up any more charges. This aligns value with pricing, and we like it.

The problem is that the online tools encourage users to communicate in groups, and to form conversations and communities. Voice and SMS pricing don't align well with this. Why should a three-way call cost more? The users don't see it that way. Why does sending an SMS to five people cost five times a much? Why does replying to a message cost the same an initiating the conversation? Why can't I send Twitter status updates (with no termination charges) for free, to encourage more texts and calls?

There are many ways in which the traditional pricing assumptions of telephony and messaging don't fit into our current communications landscape. Because Vodafone has shied away from being the price leader, it has more slack to play with here. You can afford to lose some money on termination fees to other operators if those charges have become illogical in the users' minds. Or take a leaf from GupShup and use adverts to make group communications have no extra charges.

Be proud to be the phone company

Sometimes it feels like being a phone company is like an embarrassing medical condition nobody wants to admit to having. Voice communication will remain central to the human condition for as long as we're around. Satisfying the need for people to collaborate, chatter, and communicate should be central to every operator strategy. Sadly, it too often ends up being delegated to the network equipment providers or handsets vendors, who tend to lack the skills or incentives to build complete services. If we had a shiny new R&D group, we'd be making the personal, social, human communications experience the top priority.

There are some carriers already making tentative moves towards a better telephony future. We like products like the H3G SkypePhone, but feel that there ought to be a lot more such examples. Embarq is making some useful moves with its eGo landline phone service. Verizon has made a good effort with iobi, but is utterly closed to outside innovation. Telekom Austria has some interesting softphone experiments on the go. Qwest has Q.Home on the launchpad. BT remains a bit of a dark horse here too.

Our own research found nearly 70 start-ups working on new voice and messaging services. (These are all documented in the report.) We're sure there are more. None are really integrated with the telco platform. The opportunity to exceed the users' expectations is there, and the business model -- retail, wholesale and 2-sided platform -- will bring in the cash to anyone who cares to execute on it.