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Alternative distribution Channels Telia launches new distribution channel for mobile telephony 2003-08-20 14:02 Telia has started to co-operate with the company Retail and Brands to sell mobile telephony services in a newly opened clothing department called "NK B-Tween" at the NK department store building in downtown Stockholm. Telia is the first operator in Sweden, and probably in Europe, to sell mobile telephones and services together with fashion apparel. Retail and Brands has 121 retail outlets in Sweden and owns the store concepts SOLO, Champagne, Polarn O. Pyret, Blombergs and Saks. Retail and Brands is also one of the major companies selling apparel at the NK department store building in Stockholm. Alternative distribution channels are new strategy The first department combining fashion apparel and mobile telephony services, NK B-Tween, targets a young group of consumers. The department sells mobile telephones from Nokia, Sony Ericsson and Siemens - all with Telia subscriptions - and fashion clothing from the labels Nudie, Puma, We, Energie, Killah, Miss Sixty, Diesel, Fornarina and Svea. "Clothing and mobile telephones are on the wish-lists of many young people and the new department at NK gives us the opportunity to package these products in an attractive way," says Indra Åsander, head of the Consumer Segment at TeliaSonera Sweden. "Mobile and Nudie jeans at a special price" The business model allows new types of sales offers that will be marketed to consumers in campaigns featuring both mobile handsets and clothing. For example, NK B-Tween will be the only outlet selling Siemen?s new designer telephone Xelibri. "This is a new way to sell clothes and mobile phones. I am convinced it will contribute to enhancing the experience for our customers and also benefit both our industries," says Mikael Solberg, CEO, Retail and Brands. All store personnel at NK B-Tween have been trained in the mobile phones and services that are for sale at the department. Each employee is also equipped with a camera phone. If they receive permission, the phone can be used to photograph customers wearing different creations. The photos are then shown on plasma screens on site in the department and on the website www.stilikon.se, which is being launched at the same time as the department. With MMS messages, customers can also send photos of themselves in different fashion garments to friends and acquaintances in order to get their opinion about the clothes they are considering to buy. Year of change Jan 6, 2005 For the past four years the UK mobile market has been dominated by four operators sharing the market amongst themselves, making it difficult for customers to distinguish between them. In fact, it would not come as a surprise if the majority of British mobile users couldn’t explain the difference between Orange, Vodafone, T-Mobile and O2, despite the networks’ attempts to counter this. But this is set to change. Today customers primarily buy new mobiles bundled with either prepay or contract connections. Subscribers’ main focus has historically been on the mobile handsets and voice minute prices; SMS prices have also been important, but do not usually influence their choice of operator. In 2005, the mobile market will mainly be influenced by:
High mobile penetration in the UK, combined with other factors, will lead to a market where differences between various players will become more apparent within 12 months. The UK market will change more in 2005 than it has over the past three years. Consumers take power Many people will be taken by surprise at just how fast the mobile market will change, as customers start going for the offerings that give them the most value for money. In 2005, unlocking handsets will become a national pastime despite the industry’s best efforts to stop it: the press, consumer organisations and even politicians will defend customers’ desire to unlock their mobiles.
The operators Vodafone will most likely position itself as the 3G business provider, focusing on how businesses could benefit from 3G connections to corporate applications. Its strong selling point is that it can support this approach with the promise of European-wide roaming between its many networks. Orange will be similar to 3, but with an already established brand to help. Orange will charge higher prices for 3G services than 3, while at the same time becoming more competitive with its handset portfolio. There is a good chance this strategy could see Orange lose UK market share in 2005. O2 will emerge as the most sensible operator, offering high-ARPU customers very attractive offerings on both 3G handsets and tariffs. Its message will be that if customers will be spending a lot of money on 3G, it will make an offer very hard to refuse. T-Mobile’s strategy will vary somewhat from other players’. By 2006, it will undoubtedly be the largest mobile UK operator in customer numbers. An aggressive MVNO-based strategy will give T-Mobile, in contrast to rivals, the widest distribution in the UK with the lowest subscriber acquisition costs (SACs), which will offset the impact of lower revenues from cheaper MVNO tariffs. 3 will continue large subsidies and low prices, resulting in a continued growth in its customer base. But 3’s growth will result in a number of problems or challenges regarding the quality of customer service, billing, network etc. By 2006, 3 will have a more noticeable share of the UK market, but many will still question the cost of acquiring that success.
Not-so-super market
As prices drop, operators will make every effort to bring down operating expenditures and SACs by reducing workforces, as T-Mobile is already doing, and changing subsidy and commission strategies. Operator subsidies for prepay customers will diminish or disappear altogether, taking a chunk out of retailers’ earnings. The large mobile retail chains that can add value in different ways, like The Carphone Warehouse, will have a reasonable year. Their size and the fact they offer products from multiple operators will help them maintain good levels of activity. Smaller chains and operator-owned stores will probably see reductions in activity and turnover, and non-specialist FMCG (Fast Moving Consumer Goods) retailers will see a larger decrease in prepay sales, meaning leaner times for them. MVNO storm warning Virgin Mobile, easyMobile and others will grow T-Mobile’s overall customer base and ensure an ever-increasing growth of traffic staying within T-Mobile’s own mobile network, helping to lower its termination charges. EasyMobile will surprise many in the industry and the press. The name on everyone’s lips will without a doubt be easyMobile’s CEO, Frank Rasmussen (pictured). He is a man who speaks out for, and sides with, the man in the street. In Denmark, he is loved by customers and the press, while his competitors usually find him an irritating pain. His message will be simple: cheap mobile telephony and freedom for the customers, cutting through the mumbo jumbo of the tariff jungle. This will lead to serious competition between Virgin Mobile and easyMobile, most probably with Virgin copying easyMobile’s online, Sim-only model that made Danish MVNO Telmore world famous – a model others will emulate. The MVNOs will become a consumer favourite and customers not too worried about the latest and smartest mobile phones will flock from comparatively expensive prepay tariffs to MVNOs’ cheap, internet-based offerings, resulting in a dramatic decrease in prepay prices and then in contract prices. However, the good news is that this will lead to an increase in voice and SMS traffic.
Content grows market The 2005 VAS market will be influenced by five things:
Some operators might even admit in public that the VAS they are selling via their open-garden offerings, like premium SMS services, will be generating much bigger earnings than their own portals. ICSTIS will also tighten regulation of premium VAS, especially with regard to protecting minors, making the marketing of subscription services another conversation piece in 2005. Handsets
HTC will take many by surprise. T-Mobile, Orange and O2 will focus on the corporate market, and one of the big conversation pieces this year will be mobile handsets for business users – an area HTC knows well from the SPV and Xda devices. Operators will see increasing numbers of customers owning two mobile phones, two Sim cards and two separate mobile subscriptions on different networks. This will not only negatively affect SACs, but also make an impact on churn. Despite handset manufacturers’ assurances that advanced phones will stimulate higher ARPUs, operators will have difficulties when customers choose one handset for voice and another for data, or one handset for work and another for leisure – both on different networks. Conclusion: a sea change The new behaviours, combined with falling prices, will affect the operators, handset suppliers and, of course, the retail market – and mostly for the worse. By the end of 2005 there are likely to be significantly fewer employees in all areas of the UK mobile industry and many executives will be looking at a job change. Who profits from service? Feb 3, 2005 Martin Darby, Vodafone head of retail ‘You can’t start thinking about an incentives policy until you know what’s important and what your business objectives are,’ he says. Darby soon found out that staff priorities varied depending on what the Key Performance Indicators (KPI’s) were on a given day, and that these KPI’s meant Vodafone was heavily sales-driven. ‘We had to be honest about where the sales-service balance was so we could manage it,’ he explains. ‘We decided that it was 60:40 and so had to get the balance of our KPIs in this ratio. If we didn’t we would be kidding ourselves that we’d get the balance right over a month or a quarter.’ This prompted Vodafone to introduce a weekly Top 10 priorities list for stores, which are monitored monthly to ensure they adhere to the desired sales-service ratio. For each priority stores are ranked red, amber or green, to provide clarity for both management and store staff of their priorities that week. ‘It provides a very clear focus and helps us to avoid things that don’t need to be measured,’ says Darby. With the priorities lists in place, Darby says, it is imperative they are effectively communicated to Vodafone’s sales people in stores. A key component of the strategy is Vodafone’s annual conference in March, supplemented by roadshows across the UK. Darby says that despite the fact they involve two-hour events held in the evenings, they attract average attendances of 89% of local staff. Stores also receive ‘key communications’ each day, related to the Top 10 and delivered using Vodafone’s own technology. ‘Mobiles are terrific ways of reinforcing and delivering a message. A quick photo taken by a camera phone can deliver a message for changing part of a store layout. Speed is the key to us,’ says Darby. Store managers also receive additional communications giving them information of a broader nature; for example: ‘What’s Hot, What’s Not’, ‘Ask Martin’, ‘Mood of the Nation’, and ‘Listening Groups’. Although ‘Mood of the Nation’ is not related to KPIs, it is used to assess how Vodafone staff are feeling about issues like sales and motivation, and provides the basis for month-by-month comparisons of employees’ attitudes. With these platforms and initiatives in place, the element that links them together is the staff incentives package. Darby is quick to point out that these incentives are non-monetary and as such are entirely separate from employees’ salaries, including commissions. He says that the ultimate objective of Vodafone’s strategy was to increase sales and service levels. But it was also to reduce the variable salary bill, i.e. commissions, ‘which means, how do we fill the gap? And using incentives was the answer.’ Vodafone runs one major incentive from April to June plus weekly and monthly prizes, the first being ‘Party in Paradise’, funded by Nokia, which offered a main prize of a holiday in Thailand. Darby maintains that supplier-funded contributions ‘do not change the agenda of Vodafone’, and that for Nokia the greater knowledge gained about its products by Vodafone staff during the incentive made its involvement sufficiently worthwhile. ‘The key thing is that over the past year our service levels have improved and it has cost a lot less to deliver than paying people a lot more commission. It enables us to reinforce and clarify a message,’ says Darby. Vodafone
Anthony Smith, Orange Retail head of store operations Orange’s direct retail arm has found that improved levels of customer service have led to increased sales as it has made its transition from a sales-driven business to a service-led operation. The most visible element of this shift of focus was the company’s £9m ‘Learn’ ad campaign in 2003, which was aimed at changing consumers’ perception of mobiles and worked on the basis that 80% of people used only 10% of their handsets. In this campaign store staff were portrayed as ‘trainers’ rather than sales people. ‘This led to a major change in the way we operate, from shifting boxes to delivering service,’ explains Smith. ‘This move from a sales culture to a service culture was hard work; we changed our rewards payments, method of recruitment and the way we measured service.’ Some of the easier aspects involved changing the roles of sales people by introducing new uniforms and changing the way training was conducted. The latter involved setting up a bi-annual Orange Training Academy that is fully funded by manufacturers, and also imparting greater product knowledge to new recruits through week-long training programmes. Changes to staff recruitment involved broadening out the search from sales people within the mobile and electrical goods sectors into other areas. Not surprisingly, the most difficult aspect to change was staff payments, from a per-phone-sold basis to one also addressing commissions for service. Smith says: ‘Rewards had to be linked to service scores so we had to measure how service was being delivered.’ Orange decided on a video mystery shopper programme involving a visit being made with a covert camera to each Orange store every quarter. ‘There is no better tool than video to find weaknesses,’ adds Smith. Based on such visits, stores are given scores out of 100 and staff commissions for the quarter are then based on a sliding scale: scores of 95-100 ensure that all store employees receive 10% commission in that quarter, while scores under 20 mean 2% commissions. Smith says that by hitting employees’ pockets with reduced commissions, rather than keep the previous company-wide fixed rate of 6%, it is hoped that poor performers will try to sell more units to make up any shortfalls – and store staff will work together to improve service levels in their store. Initial results proved disappointing, partly because the rest of Orange’s business continued to focus solely on price. However, Smith says the retail division had to ‘hold its nerve’ as it sought to build relationships with customers. One early positive sign was the 20% increase in footfall as the number of service questions from customers grew, driven by the launch of the ‘How to…’ initiative, which included showing people how to use SMS. Shortly afterwards the full effects of Orange’s new service-led culture started to feed through and conversion rates (from customer interactions into sales) increased from 21% to 25%. Orange’s average store customer service score has subsequently risen from an initial 53 to 78 (a commission rate of 7%), and a 5% drop in staff turnover has led to falling costs too. ‘It’s a fact that service leads to sales,’ claims Smith, revealing that since the shift in focus, average transaction values have increased 18% and turnover has risen 37% year-on-year. Orange
What Vodafone and Orange have done
Every little helps Feb 14, 2005 Everything Tesco touches at the moment seems to turn rapidly into sales – it now accounts for £1 of every £8 spent on the UK high street. Its Tesco Mobile MVNO offer is no exception as it continues to carve out a position in a market that it only entered just over 12 months ago. Evidence of the retail giant’s efforts to grow this part of its non-food business was the announcement that Christmas Day saw Tesco Mobile connect its 500,000th customer, giving a clear signal that the company continues to win market share from more established rivals despite increasing competition in the mobile market. Although Andy Dewhurst, chief executive of Tesco Telecoms, won’t reveal any further numbers or discuss levels of profitability at Tesco Mobile, it is clearly enjoying sufficiently healthy sales per square foot to warrant giving the category a decent chunk of store space and an online presence on Tesco.com. Handling handsets Dewhurst says this space could be increased further if required in the future: ‘If we need more space then we’ll give [Tesco Mobile] more space. We’ll listen to our customers and adapt. Mobile will be a popular part of our stores for the foreseeable future.’ The new fixtures also provide Tesco with a new self-service method of selling. Customers are now required to take a DVD case featuring the desired handset to the checkout, where it is scanned and the handset handed over. This enables shelf space to be used more effectively and for a broader mix of handsets to be displayed. The in-store mobile selling space is split 50:50 between Tesco’s own mobile range and various handsets and tariffs from each of the major networks, including its joint venture partner O2 and even rival MVNO Virgin Mobile. Dewhurst says this ratio is likely to stay the same because Tesco wants to offer customers a broad choice of products. He denies any intention of squeezing out any other networks in favour of solely offering the Tesco Mobile handset range. He says: ‘Part of our strategy is to give customers choice so that we are a destination store for phones. We’ve not set out to grow our [Tesco Mobile] business at the expense of the other brands.’ According to Dewhurst, the success of Tesco’s MVNO is based on its arrangement with O2, which follows a similar business model to that employed in 1997 with Tesco Personal Finance (TPF), through a partnership with Bank of Scotland that split the revenues straight down the middle. The Tesco Mobile and O2 arrangement combines the network and telephony know-how of the operator with Tesco’s customer understanding, marketing clout and substantial footfall. Indicative of the serious way Tesco has structured the deal is that Tesco Mobile has its own board of directors comprising both Tesco and O2 personnel, including O2 UK’s CEO Matthew Key as chairman, which meets every four weeks. Dewhurst suggests that Sainsbury’s didn’t have the same structure Tesco has put in place when it tried to launch its own now-aborted mobile service. It argues that other players looking to enter the market might also fail to reach their own 50:50 agreements, which could also give them problems. ‘We’ve done it in a serious and committed
way from our learning from TPF,’ explains Dewhurst. ‘In
the mobile industry joint ventures don’t always work and you’ve
got to pick your partner carefully.’ EasyMobile’s intention to market itself in the online Sim-only market would position it against Tesco Mobile’s own Sim-only offer, run both online and off. Although the Sim-only offer has been available since the launch of Tesco Mobile, Dewhurst says it is becoming ‘increasingly popular’ with customers; evidence, he claims, that they are ‘buying into’ Tesco’s tariff. While Dewhurst will not provide numbers for Sim card sales, he does confirm that they are currently on trial in a small number of Tesco Express convenience stores as well as online. A decision on rolling out the offer to Tesco’s entire portfolio of smaller stores will be made later this year. Contract conundrum However, Dewhurst says that for the time being prepay is sufficiently attractive to Tesco’s customers: ‘It is wrong to say that prepay is not important – it is still two-thirds of the market. But some people who come into our stores are on contract, and they would be interested in a tariff from Tesco that earns Clubcard points.’ Clubcard points will prove a powerful tool when Tesco does decide to launch mobile contracts, because the provision of loyalty points whenever prepay customers top-up their phones in a Tesco store has enabled it to build a database of the heaviest Tesco Mobile phone users. Since it is likely that some of these customers would be better suited to contract agreements, they would be prime targets for Tesco to migrate away from prepay onto contract. Like every other operator in the industry, Tesco acknowledges the importance of customer loyalty, and it is in the particularly strong position of having one of the most successful retail loyalty schemes on which to build its mobile operation in the future. ‘Loyalty is the key in this business, and to the profitability of phone companies,’ says Dewhurst. ‘If you look after your customers and give them a good deal then you’ll keep them. We think we’ve got this, and Clubcard helps.’ When contract does eventually launch, a crucial component will be a simple tariff; this is the basis on which Tesco seeks to differentiate itself from its competition in all non-food categories that it enters. ‘Our customers love simplicity and value. With telecoms we believe we have an offer that they can understand and is value for money. It’s about simplicity, convenience and value,’ says Dewhurst. Although Tesco does not typically use marketing or advertising for its mobile business, in line with the policy at its other Retail Services businesses including Tesco.com and TPF, Tesco Mobile did undertake a rare TV advertising campaign before Christmas. Dewhurst claims that the move was essential in order to give the Tesco Mobile proposition sufficient ‘credibility’ in the mobile market at that important time of the year. Marketing The Tesco.com online operation is an integral part of the mobile business, as the channel lends itself well to selling prepay connections. Dewhurst claims that online mobile sales represent a larger proportion of total Tesco Mobile sales than online food sales as a proportion of Tesco’s total food sales. However, before Tesco Mobile’s MVNO rivals start thinking that Dewhurst will be happy to concentrate on online sales over retail, he has a warning for them. He argues that sales of mobile handsets can still grow both in stores and on Tesco.com, based on one simple assumption: ‘There is [still] no sign that mobile phones are on the way out’. The range Handsets:
Sim packs
Tesco Mobile’s tariff
60 Second Interview On Supermarket sales On Tesco’s Loyalty Card On Building a Brand Crossing the channel Jan 31, 2005 The success of Charles Dunstone’s massive Carphone Warehouse chain has arguably put more independent mobile dealers out of business than any other single factor; nonetheless, he’s widely respected by those still selling phones, from one-man bands to his high street rivals. Now Carphone is preparing to make a serious bid for the distribution market. There’s nothing new in the UK’s number one mobile retailer having bold plans. The business has constantly sought new opportunities to make its scale work for it. Carphone has 600 UK stores, a significant web presence, a telecoms business and a list of services for both operators and consumers that are the envy of its rivals – and that’s just in the UK. Now the retailer wants to be the mobile dealers’ best friend and take a chunk of the distribution market too. The idea of a company playing both retailer and distributor might be an anathema in some industries, but it’s something that is very familiar to the mobile industry, most famously in the form of the Caudwell Group. Pump up the volume ‘I don’t know why anyone would do that,’ complains one distribution rival, but the prices and availability that the Caudwell Group can offer are compelling arguments. The Caudwell Group is not alone in having its own retail interests alongside distribution. Fone Logistics, Mainline and Avenir, to name just three, also have retail outlets, but none of them are large chains. Now Carphone wants to make a play for distribution. If John Caudwell can make it work, the reasoning goes, then Charles Dunstone is also in with a shot. Carphone, with its established relationships with both operators and manufacturers, is well placed to make an impact in distribution. Operator and manufacturer volume bonuses – the key to profits in a cut-throat market – can only benefit from the opportunity to pump up the volume that comes from an even broader channel. Carphone’s efforts to date through Mobile Phone Express have made little impact on the market. The Sim-free distributor has a relatively low profile and often features products with a trade price that is left in the shade by the retail price available to any consumer, or dealer, at a Carphone on the high street, say dealers. But Carphone Distribution, for want of a better name, could be as well equipped as 20:20 to offer fiercely-priced handsets and airtime should it wish. Will it want to get into a price war with the mighty Caudwell Group? John Caudwell still has more than enough loose change left from his sale of Singlepoint to ensure that he can meet tough commercial challenges. A senior retailer, whose chain is already attached to a large distributor, says the introduction of another potential heavyweight could be beneficial to the market as a whole: ‘I think it might help the market rather than swallow it up, because at the moment 20:20 dominates. It will spread the cake a little more evenly and will put serious pressure on the Caudwell Group.’ However, others fear that any price war is more likely to produce casualties from smaller rivals. While Carphone obviously has a handle on the operators and manufacturers, the company will need to move quickly to establish a dealer base. Carphone’s UK MD, Andrew Harrison, is acutely aware that whatever dealers may say about customer service, price remains paramount. But there may be obstacles along the way. One distribution rival claims that a previous foray into the distribution market – Carphone’s efforts to build TalkTalk sales through independent channels – came unstuck because of dealer fears that the TalkTalk subscriber details might give Carphone access to their customers. This could put a brake on Carphone’s expansion into mobile airtime distribution. Buy me! One dealer Mobile spoke to captured the dealers’ dilemma: ‘It would be like buying from the enemy camp – but with their buying power they will able to put together incredible deals. They’re our enemy on the high street with their volume bonuses and pricing, but you’ve got to admire what Dunstone has done.’ Carphone is considering acquiring an existing distributor to speed up its retail customer acquisition and has looked at European Telecom and, it is widely believed, Fone Logistics. Unique, with its established business supplying Woolworths and strong relationships with a range of businesses, is also thought to be a possible target. However, Carphone won’t want to pay a premium and may well baulk at the prices asked by many UK distributors. Carphone won’t be the first to have quibbled
with the price that some in the industry would like to command for
their business. Non-specialist forces With Woolworths, Argos, Boots, Comet and Tesco accounting for a massive proportion of non-contract sales, the frontline for prepay is now found nestling between boxes of cereal and DVDs. In fact, in Carphone’s bid to establish itself as a serious player in distribution, supplying the axis of non-specialist retail could be as much about defending itself from their encroachment on its established market. If the forces of general retailing are going to take a chunk of your business anyway, you might as well make some money from supplying them. Unique has made a good business out of supplying Woolworths, while 20:20 serves the retailer of the moment, Tesco. Recently Unique and Dextra tussled over another high street prize, Boots, with Dextra coming out on top. There are a limited number of these big contracts going and Carphone is going to have to fight for them. As the head of a retail chain who declined to be named says: ‘The retail market is changing so Carphone will want to move with those changes and cover those avenues.’ Public pressures Carphone has more reason to do so than most. As a publicly-listed company, it is under constant pressure to demonstrate growth. It has consistently been able to grow its business, even being able to cope with the impact of pulling out of the low-yield but high-revenue inter-community handset trading business in the wake of Customs’ ‘joint and several liability’ provisions in 2003. Distribution can make excellent use of Carphone’s existing assets. The question is less ‘why move into full-scale distribution?’ and more ‘why not?’. The appointment of Steve Fraser as director of indirect distribution is the most recent and overt sign of Carphone’s ambitions. Fraser, a veteran of two operators, won’t be drawn on specifics, but says his job is to ‘explore all the options’. He says: ‘I started the distribution at One 2 One and 3. Now we’re starting from scratch.’ Since leaving 3, Fraser says he has had several options, ‘but joining Carphone wasn’t a hard decision to make.’ The numbers that add up Mar 3, 2004 Brian McBride didn’t exactly have an easy job when he came in as chief exec of T-Mobile UK. The operator’s name was mud in the financial press thanks to its bitter spat with Virgin Mobile, and after a resounding defeat in the courts it stood to lose the MVNO’s business – and even its share holding – unless a peace deal could be worked out. It was McBride’s first job to pour oil on troubled waters. Now things are looking altogether different. A truce was formally announced last month – and not just a temporary lull in hostilities, but a 10-year agreement to work together. It leaves McBride free to enjoy the job he started 10 months ago after leaving Dell. New results for the business – due next week – should make that task easier. They are likely to show T-Mobile UK driving ahead. Revenues are thought to have increased by around 20% a year, but the bottom is set to leap up by around 30% – a sure sign the business is getting into top gear. Strong performance Some of those things were at national level: in the UK, distribution was rationalised and brought together on a single campus. Others were dictated at group level, like centralising purchasing power to aggregate the operator’s clout over all its territories. That’s not to say McBride has not made changes. In the computer industry, he was dubbed ‘Frugal McDougal’ for his rigorously commercial style. He is evidently bringing the same approach to bear at T-Mobile. ‘When I came in 10 months ago, there was a feeling almost of driving growth at any costs. Unit market share was the big measurement. What we’ve done over the past six months is really make sure that the goals for T-Mobile UK are fully aligned with the goals of the group as a whole. ‘We’ve pulled back. I would say that we have been probably one of the less aggressive players in the market with the channels over the past couple of quarters, and yet our growth has reflected the fact that our propositions are still what the customer wants.’ Fastest-growing operator Of course there are lies, damn lies and network subscriber figures. These numbers mask the fact that McBride still has a problem with the mix of his business. ‘If I look at ARPU by customer I’m number one in pre-pay. My contract ARPU is second out of four. The problem is when you blend them together. I’ve got far more pre-pay than post-pay customers to blend. My blended ARPU is the lowest of the four.’ McBride’s challenge, then, is to hang on to his high-value pre-pay customers and add more contract customers. ‘We’ll continue to focus on the bottom line. We’ll continue to make sure that we’re bringing in the right customers. We’ll continue to manage churn, but we’re not going to give a free handset to every single person who’s got a contract. There will be some people who phone up for a new handset and we’ll say, here’s the price.’ McBride is taking the same tough line with his sales channels. Over the last six months, he has controversially changed commission structures. On the plus side, the confused scheme to share a slice of ongoing revenues was dropped. But there was also a determination to remove bonuses from ineffective customers. ‘I met all of the channels shortly after I took over and they were a little bit annoyed at the changes in commission. When we reset the commissions with the channels we were consciously trying to incentivise them to bring us customers at the higher end of the spectrum, and that’s worked its way through in terms of the ARPU growth and the revenue growth we’ve enjoyed.’ This restructuring of commissions was accompanied by a tidying up of tariffs: ‘Some old tariffs gave us lots of volume but quite frankly in terms of adding to the bottom line were fairly insignificant. We’ve really discouraged a lot of that. There are fewer tariffs out there today, they’re easier to understand and they clearly do relate to certain types of customers.’ One of the concerns when McBride came in was that he would turn T-Mobile into another Dell, with a big shift to direct distribution. Anxieties would hardly have been allayed when he brought in Gordon Valentine, the man who set up Dell.com, to revamp T-Mobile’s web sales operation. After a quick fix, turning monthly sales from hundreds to thousands, Valentine is working on a grander strategic plan. O2 has attracted a million customers through the Internet, and McBride’s hope is to emulate it. Web sales McBride is also set to approve modest expansion of T-Mobile’s own stores. There will be another 30 stores this year, and a further 50 next, taking his total to 200. ‘I’ve never been in retail in my life, so I spent some months trying to get my head around what the shops could do before I tried to get involved in any big decisions about their role. I’m now absolutely convinced that there is an important long-term place for them in our business.’ It’s the usual arguments of customer support and marketing that have won the day. In the South East, these roles are being carried out by T-Mobile’s ‘front three’ indies – Ace Contact, Chitter Chatter and Fonehouse. But further north McBride feels under-represented and sees own-brand stores as the way to fill the gap. Retail presence But what about the smaller independents with whom T-Mobile trades now? ‘The independents and the smaller players will be important, but I think they’ll be less of those around. We want to deal with less of them.’ It would be unfair to claim that McBride is contemplating a crude cull. However, he is clearly going to continually sift his dealer base to remove lacklustre retailers. ‘I review their performance every month and I’m looking at the number of connections they’re giving us,’ he says. ‘I’m also looking at things that never pay. I’m looking at their own payment behaviour, so there’s a real quality threshold to be applying to these guys now. ‘Hopefully, they’ll do very well by being a partner of ours. But it doesn’t come for nothing.’ In the heat of the market Jul 15, 2004 Free texts, free weekend calls, free top-of-the-range handsets… the market is certainly a free-for-all at the moment, as the established networks battle to hold their ground against aggressors such as 3 and BT Mobile. And it looks like there will be more to come as Tesco and Virgin both gear up to launch contract deals. This is great for customers – as well as retailers and dealers, who are all currently enjoying something of a commission bonanza – but it’s not so good for the networks that are footing the bill for this giveaway frenzy. Not surprisingly, questions are being asked about whether their aggressive drives to acquire and retain customers at a high cost is sustainable. Revenue growth When this is combined with the regulator’s decision to reduce interconnect fees, thereby making less cash available for customer acquisition, Shiret says: ‘Subscriber acquisition costs are being boosted by the networks and this isn’t sustainable. The operators’ models are questionable.’ However, they are all doing it and the prime motivator behind this activity is the acquisitive stance of 3. Ian Driver, general manager of independent channels and channel support at O2, agrees that the current climate is unsustainable: ‘You have to question what 3 is doing. We’ve got a big base of customers so we do not need to keep them at any cost.’ Vodafone takes a similar stance. Consumer segment director Richard Daly says: ‘We don’t think it’s helpful for anyone to get into a game of overpaying. Effectively being asked to pay a year’s worth of revenue for a new customer who is almost certainly going to be a serial churner doesn’t make economic sense for anybody. I can’t put more and more in to protect share, it’s crazy.’ Despite these comments, one City analyst, who does not wish to be named, suggests that Vodafone has ‘been compelled at times to match 3’, especially when it involves high-spending customers threatening to switch networks. ‘The operators will say they are offering a better service so they can maintain their pricing points, but I hear Vodafone is matching some deals,’ he says. O2 has also looked to retain its more valuable customers with increasingly competitive offers. In addition, the introduction of a two-year contract further highlights how seriously it is taking the threat from 3. However, the analyst claims that the other networks are generally willing to let 3 chip away at their market shares while it still has a low subscriber base rather than let it completely ‘do their margins in’ by joining it in offering chunky handset subsidies and generous commissions. ‘The effect to the other operators’ top lines is pretty negligible, and there hasn’t been a seismic shift to high customer acquisition costs for them.’ He suggests that much of the talk about a ‘crazy’ market from the networks is down to straightforward and sensible bluster to protect their subscriber real estate. Although, he adds, should 3 get to 15% market share in five years’ time, it would be a very different matter. According to Peter Green, MD of Phones 4u, the market will probably remain ultra competitive until then. He suggests that 3 and BT Mobile’s predatory view of high-spending customers, and the likes of T-Mobile, O2 and Orange desperately protecting their existing base, make it inevitable that the market will remain ferociously competitive. Wider choice 3 certainly recognises that it has rocked the boat and seems to be revelling in its maverick stance. A spokesman for the company says: ‘These guys are shaken. The market was comfortable, and the likes of Vodafone were making a lot of money. Now 3 has upset the other operators as it is challenging them. 3 is already a serious threat, otherwise why are they now squeaking?’ He argued that 3’s acquisition model was sustainable, despite the accusations from its rivals about its high customer acquisition costs. The City analyst calculated that it costs 3 between £350 and £400 to add a new subscriber. For a company such as O2, it amounts to much less – nearer £160. While not disputing these numbers, the 3 spokesman suggested that the average 20% churn rate of the other networks means they have to acquire many thousands of customers just to stand still. So the average price they effectively pay for each new customer that grows its market share is very high. ‘For O2, two million new subscribers is a standstill element, but because 3 is a new business there is very little churn and each new customer is new business and new revenue,’ he argues. However, this argument is unlikely to hold for more than 12 months – when 3 will begin to suffer from similar churn rates to its rivals. Green predicts that it could take 3 three to four years to reach the point where it has a base of around 10 million subscribers and can compete squarely with the other networks. It will have some difficult decisions to make about its customer acquisition costs when churn starts to really kick in. Until this point, customers will continue to be the winners in a competitive market. ‘Currently the market is over-heated,’ he says. ‘There is always an upside if the market is after incremental volume, and the customer is ultimately the major beneficiary.’ Shiret agrees, but suggests that retailers such as Phones 4u and The Carphone Warehouse are also enjoying the high levels of commission coming in their direction – although they are sensibly reluctant to admit as much. But while this is good news, there is a potential downside: when the market does eventually cool, retailers and dealers could be in for a hangover if the networks pull their horns in. Healthy? However, the dealers are definitely starting to feel a downside – as the networks seek to push more business down their direct channels in an attempt to limit commission payments to their indirect partners. Vodafone is currently re-jigging its business model in such a way. ‘We understand where our economic threshold is with our indirect partners,’ says Daly. ‘There’s been a shift of emphasis… and the swing to direct has been driven by the market.’ As a result, the company has sought to grow both its online and high street operations. This increased focus on the high street has not gone unnoticed by Christian Maher, telecoms analyst at Investec, who says gross connections from the networks’ own stores is on the increase. He cites both O2 and Vodafone as companies whose focus on own-brand stores is ‘making a material difference’ to their performance. As well as increasing their portfolios of outlets, some networks have also benefited from the introduction of better retailing and merchandising skills and a move towards operating larger premises. Driver agrees, and acknowledges that stores are certainly part of the gameplan at O2. ‘We believe that there are still opportunities to take advantage of gaps [in our stores coverage], although we are not in major acquisition mode,’ he says. As a result of such action, Maher believes there will be a continuation in the ‘fallout of some smaller stores’. However, he adds that many small independent operators are still flourishing and will continue to do so in the future. According to Green, customers will always value an independent shop over a network store because they ‘will never get away from being a proprietary offering’. He suggests that building a chain of network-owned stores was a ‘potentially short-sighted’ strategy that would leave O2 with a significant fixed cost that would be difficult to reverse out of when the climate changed and the focus was less on growing direct business. However, this climate change could be some time away, judging by the aggressive actions of 3 and BT Mobile and the imminent moves by Tesco and Virgin. So despite the suggestions that this over-heated market is unsustainable, it looks unlikely that we shall see it cooling down for some time to come. |
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