January 31, 2008

rethinking wireless distribution

Clearly I’ve been spending too much time on airplanes and in airports. Last month I wrote about why, if the airlines don’t own their aircraft, wireless carriers must own redundant networks. Now a trip to the rental car counter, coupled with a recent announcement from Sprint, raises similar questions about wireless carriers’ retail distribution strategies.

Sprint announced plans to close eight percent of its over 1,500 company-owned retail outlets. Why stop there? Why does it make sense for wireless carriers to operate more stores than Sears and Macy’s combined?

I remember my first visit to a phone store in the early ‘90s. The industry had just passed the 10 million subscriber mark and was looking for a distribution method that was less expensive than the prevailing use of independent agents. I scratched my head a bit as the CEO of the company proudly showed off one of his new stores and explained its economic benefits. I wondered how well a network company could transform into a retailer. The idea succeeded beyond anyone’s wildest expectations.

Now the question becomes whether the strategy has continuing value. Is a retail strategy necessary when over 80 percent of all Americans have a wireless phone and the remaining non-subscribers (children, prisoners, etc.) are unlikely to walk into a retail outlet?

Today’s subscriber growth comes not from educating and signing up new users, but from stealing subscribers from another carrier. Sprint hemorrhaged over 800,000 pre and post-paid subscribers to other companies last quarter. Is a retail store critical to that migration? It’s not as though billions spent on advertising haven’t helped consumers understand their market choices. A recent discussion with one carrier store employee suggests the majority of store traffic is about operational issues (“how do I get my phone off call forward?”) and billing questions, not phone sales. Over 5,000 retail stores would seem to be an awfully inefficient and expensive way to handle “how do I?” and “what’s my?” kinds of queries.

Approximately half of all phones are sold in carrier-owned stores. Wal-Mart and Radio Shack account for over half of the remaining number, followed by other retailers. These outlets cost carriers more per gross add than do company stores while demonstrating, by selling competitive products next to each other, the potential for an even lower cost future. This raises the airport question. If rental companies can share overhead at the airport, why can’t wireless companies?

Wireless carriers increasingly offer a Chevy-like service of basically similar capabilities. If I can rent a Chevy from Hertz, Avis, National or Budget all within the same rental car pavilion, why shouldn’t I be able to buy a phone (or get questions answered and bills checked) in the same manner?

There’s a bigger issue here as well. The most cutting-edge 21st century information and services companies are wedded to a distribution and customer support model that hasn’t changed since the 19th century. They are not practicing the “anywhere, any time” attitude their advertising and the brochures flaunt. The future is in high-speed networks and untethered Net-access devices; by embracing that future, carriers could demonstrate why others should do so as well.

Distribution during the first decade of the wireless industry was through third-party agents. The second decade saw Starbucks-rivaling bricks and mortar. Now, in the third decade of wireless it’s time to think anew again.

January 4, 2008

as the world turns

In the New World wireless companies simply don’t need to own the network. The camel’s nose snuck under the tent with MVNOs; wireless brands whose lack of network ownership was irrelevant to consumers. A couple of years ago there was a warning signal that the old model was shifting when UK consumers voted MVNO pioneer Virgin Mobile “Best Network” even though it didn’t have a network (and the network that Virgin used was way down the list).

Recently, however, the camel has crawled all the way under the canvas. UK carriers T-Mobile and Hutchinson’s “3” have announced that they will combine their networks and share the capacity. The two companies project they will save $4 billion over the next 10 years by competing with each other while using the identical infrastructure. What makes this even more interesting is that 3’s cutting-edge new services have been hindered in the market by comparatively poor network coverage. Overnight that differential will vanish thanks to a competitor. Scratch your head, the world as we know it really is coming to an end when one competitor helps another out of a multi-billion dollar capital hole.

Let’s think anew for the new year. Where is it written that carriers need to own their networks? If American Airlines can run flight services without owning any airplanes, why can’t wireless service companies do the same? It looks like 3 and T-Mo have just figured out what the airlines already knew: that profitable operations in a capital-intensive business come from providing a service, not necessarily owning the physical methodology of delivery.

The history of the U.S. wireless industry is a network-centric history that wasted untold billions of dollars building duplicative networks and advertising “mine is better than yours.” For the first two wireless carriers this might have made sense, but when the PCS licenses came on the scene in the mid ‘90s the capital wastage went into overdrive. Why was it necessary to have up to nine different wireless networks in a market? Why should the capital markets and corporate balance sheets be strained to build purposeless redundancy? Couldn’t that money have been better spent providing a deeper, more robust network and developing new and innovative services? Alas, however, that’s all money over the dam.

Someone approached me years ago with the idea of buying cellular towers and leasing them back to the carriers. “The carriers will never part with that important and differentiating infrastructure,” I foolishly opined. As we now know, carriers engaged in just that kind of infrastructure sharing and their business did not fall apart. So, if it was financially and operationally advantageous to share towers, why not take the next step and share the network that runs over those towers?

Last month I wrote about the tectonic plates that are shifting the relationship between carriers, handset manufacturers and consumers. The albatross around the carriers’ necks, I suggested, was their networks. The Internet folks define themselves by building high-margin services while the wireless carriers continue to define themselves by building networks. It now appears that two UK carriers — T-Mobile and 3 — have decided the Internet approach of selling services is the way to the future. Their networks are just a necessary evil.

Happy Brave New World!