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The mobile operators' Three Ring Trick

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Comment A classic magician’s tricks is to flash three solid steel rings then hand them to a punter to examine before spinning and linking them as though metal passes through metal.

Mobile phone networks might wish to turn to magic to help with Subscriber Acquisition Cost. Margins are being squeezed by regulation - a problem they treat with the blunt implement of price. It’s not the magic they need, it’s the rings.

Price is only one of the three rings of mobile. This isn’t in Powerpoint and I’m not going to start posting Venn diagrams, but imagine, if you will, three overlapping circles in a straight line. Like the Audi logo with the last ring missing. In the first one you write Coverage, in the second Price and in the third Service. Go on, get out a pencil and do it.

This is the growth path for carriers and it is the overlaps that are important. When a network is new it has limited coverage. In the days when all the networks in a country were new they all fought on coverage. Indeed this is still true of some emerging places like Cameroon, Ghana and North America. If coverage is poor, particularly if there is a better established rival, the new entrant needs to be cheap. Really cheap. Smart handsets discounted to zilch and masses of credit for cents. This is at a time when money needs to be spent on infrastructure and makes for a very expensive business. Governments don’t help with what they charge for spectrum. Live through the pain and build enough customers and coverage and you can start to recoup the cost. One of the nice things is as kit and costs get cheaper tariffs can be kept fairly static and the margin improves.

Then comes the second ring. As consumers realise coverage is much of a muchness, everywhere is reasonable and all the networks have the same blackspots – imposed by geographic conditions – there is no longer a need to pay a premium for better coverage and prices decline to that of the cheaper operator.

Operators then fight on price. A subtle war with offers which cannot be compared directly. Are anytime free calls to a few friends worth more than free weekend calls to anyone? Free calls on your Birthday? Free at Christmas? Bundles of minutes and texts, In the overlap between coverage and price there is the opportunity for showing off: “Our network is so good that if we drop your call we’ll give you the next call free”. Once, however, things stabilise, the savvy customers who are the focus of churn realise all the deals pretty much amount to $30 a month for a low to medium user and it doesn’t matter which network you are on.

Then comes the Service ring. In the mature UK market this is the focus of the battle and it is what is behind the music services and particularly the interest in social networking: Post to Facebook, Flirtomatic or Last.FM from your mobile. Teens are more loyal to their social network than carrier, and will happily swap carrier if it means they have better communication with their circle of friends. Other services make different customers sticky – SpinVox, Zyb, Blue Book or Gypsii.

Price regulation may actually be destructive because it harms the two rings to which it is attached. If prices are kept low then so will be coverage , and you won’t get new innovative services, but this is something that is outside the control of networks and they have to live with it. They can’t roll out a great, compelling service before coverage is a non-issue. This will be a major obstacle to the fourth generation, be it LTE or WiMax. The proposition of super services needs to be built on complete coverage. As we saw with the launch of 3G, people didn’t want the advanced data services when coverage was rubbish. Now it’s good, and sensibly priced, 3G dongles are doing well.

If the networks want advanced use, they need to build the first two rings of confidence. No amount of trickery will get subscribers to sign up for something that might be great - but that only works some of the time. ®

Catherine Keynes is a electronic engineer turned consultant who works for IT and telecoms companies. This is a longer version of an article first posted at her blog, Cat Calling.

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