A Brief History of Landline Business
The customer access and economics were similar. Service providers had to invest in bandwidth locally, similar to wireless carriers today that have cell towers and spectrum. Customers weren't typically mobile, but, could connect from anywhere. So, service providers like AOL, could service customers anywhere as long as the customers had a local service number the carrier had invested in. Otherwise, it was too expensive for the customers due to the long distance charges. Customers were able to self select initially based on which service provider was cheaper overall. Over time, service providers built capacity across all local service areas.
Two key things that made this a competitive market were regulations that allowed any business to have a local service number and sufficient peer to peer bandwidth (that telephone carriers built) for anyone to provide service. This made the connection commodity. Internet service was the differentiation and the service providers were able to segment their customers based on usage. The more you used, the more you paid. This was the world of wireless carriers till Unlimited came around.
Then came the shorter range technologies such as DSL, cable and fiber that were no longer peer to peer. No regulation was enacted to ensure that local connection was universally accessible. So, anyone other than the service provider that built it couldn't provide an alternate service. Internet was commodity, but, the local connection wasn't any more. Something else had changed. For the service provider, it really didn't make sense to segment the customer based on usage any more. The real costs were based on speed rather than the usage as the cost of carrying bits over long distance became extremely low. Higher speeds required higher investment in the local access infrastructure. So, speed, instead of, usage became the segmentation parameter. This also had parallels to wireless as I will explain later.
Economics of Unlimited
Coming back to wireless, unlimited is tough on the carriers. With spectrum still the primary cost driver and revenue limited to the line access charge, revenues from customers don't match up with the costs of customers that consume disproportionately. With every carrier now offering unlimited, US customers are likely to "super size" on data. Of course, every carriers has come up with a band-aid patch for this with network prioritization over a certain level of usage. That only regulates perhaps the top users of data. Affecting a significant portion of the customers with a low threshold for network prioritization would likely risk customer dissatisfaction and backlash. You can create speed and usage tiers, but, pricing can become quickly complicated. So, what's a carrier to do to match pricing to the costs?
A New Model for Wireless?
Let's now look a little farther away to another retail market. Consider that the service plan revenue is a given and the carriers don't know how much risk a prospective customer presents in terms of network cost. If we consider the service plan revenue as premium and the data usage cost as risk cost, the wireless market looks a lot like a huge market we know very well - the consumer auto insurance market.
Consumer auto insurance companies are able to assess the risk posed by different segments of the population and present a personalized quote to individual customers. The costs are matched to the price, thanks to hyper-segmentation and data analytics on each potential customer.
In a market such as this, it's important for the company to know which customers to bring on and how to get them off the insurance, if the risk profile changes. This is why Progressive has an insurance comparison site - it helps convert prospective customers that fit a risk profile become current customers and later encourage current customers to go away, if they no longer fit the risk profile that Progressive wants to insure. Segment purity might be a key differentiating factor in keeping the churn low - an important factor for investors.
Segmentation and Future of Retail Wireless
Taking a leaf out of the auto insurance market, wireless carriers need to be able to segment the customers based on usage and speed needs and offer the pricing that caters to them. A customer that consumes lot of video presents a different risk profile from a voracious reader of news and e-mail. To be successful, the wireless companies need to be able to hyper segment the customer base, just like the insurance market. This will avoid the morass of ever complicated price offerings.
In a world of such hyper segmentation, each brand might mean different things to customers. One that is known for its customer service will not likely be the cheapest. You might argue that it's true today too. But, retaining segment purity will require the right combination of the channel, customer service, network service and of course, pricing along with the means of identifying the customers that belong to the segment. A carrier going after the urban millenials might have a purely online/ mobile presence, might advertise on social media, might make it easy for the customers to BYOD, focus on WiFi offloading and will look very different from a carrier that is going after baby boomers that might use TV and radio ads, provide phone and store support and provide low cost phones. This is no different from how Esurance or AARP Auto Insurance target their customers. Identifying the customers in the segment requires not just demographics, but, also, data usage and data type behaviors, device ownership etc. This ensures that the discover, evaluate, buy, use, support and exit phases of a customer journey are properly matched to the customer segment.
Unlike auto insurance market that depends on the reinsurance companies to insure the insurance companies, wireless carriers, today, are their own re-insurers. So, that's where the similarity might end. But, the interesting thing about the auto insurance market is that it is a whole lot more competitive than the wireless carrier market. To compete effectively and maintain segment purity, would a carrier need more than one brand - perhaps as many as three or four to ensure a match between customer journey and the segment? Or, a carrier could spin off its retail operation, become a pure network operator (the re-insurer of the wireless market) and let the others duke it out!
An interesting question is what happens to customers when carriers can hyper segment this way? How do the customers compare the service/price combination with their friends? The consumer auto industry again provides a clue: they can't! If they can't, would that lead to more churn or less?
Potential Disruptors
Who could help upend this happy story? Clearly, carriers need help prospecting new customers and understanding their data usage. Nielsen and other data collectors will be happy to help. Retail carriers that can best use predictive analytics to understand the customers will win.
The interesting players are Google and Apple that have a hold on the OS and the underlying amount and type of data. Could they potentially use that information to either stand their own retail carrier or help others compete? Given my previous prediction about Google, you can guess who I think will jump into the fray!
The biggest disruptor, though, might be technology again, similar to how the landline market unfolded.
5G: A Rewind?
5G, as is currently implemented in the US, is based on shorter range frequencies such as 28GHz and 39GHz with the potential of providing up to 3Gbps. But, the range of 5G cells is much lower than a typical LTE cell tower, closer to 200m, not the 20km of LTE. This means only highly urban areas will have dense deployments necessary to enjoy the high throughput. Coverage will vary wildly across the US. It will take a long time for a country like the US to attain 5G coverage similar to that of LTE. Countries such as Korea and Japan that are highly urbanized would have much better coverage than a country such as the US. As with the shorter range technologies in landline, 5G will have a profound effect on the cost of mobility. Will 5G change how the industry evolves in the short term?
So, What Comes Next?
My bet is that, in the US, 5G adoption will not be fast enough to impact the industry forces discussed before. So, I expect that the US wireless market will evolve into hyper-segmented multiple brands within the next four years before 5G could ever become dominant.
