THE CURRENT MAJOR wireless players have all committed themselves to LTE (Long Term Evolution) – or more commonly 4G. The interim (2009-2012) has emerged as the critical point of inflection for the Canadian wireless industry with new spectrum auctions bringing in new competitors and some key competitive advantages being negated with a unified operating technology.

The previous issue was a detailed analysis of the historical evidence of competitive actions between the major wireless players. As in the previous article, we have limited our consideration to Bell, Rogers and Telus, given that these players have the requisite breadth and competitive presence to inform a pan-Canadian perspective.

As we analyzed and unearthed the competitive actions of the three key players, the drive to establish competitive strongholds surfaced as a common intent across the peer group. Given this, the key question to be resolved is whether such competitive strongholds are sustainable in the emerging competitive landscape.

The device advantage
Carriers have exploited their device advantage to dominate the device suppliers on technology, product attributes and supply restrictions, and to thereby craft unique offerings in order to grow or capture ARPU (Average Revenue per User). However, this influence is about to be tested in the Canadian wireless space as all the major players move toward a common standard. Before delving into the implications of this shift, it would be useful to provide a historical perspective on the current state of play.

A brief historical perspective
With respect to customer acquisition, Carriers have had to bear heavy device subsides to acquire contract-based customers. However, this acquisition strategy has had the positive effect of creating significant buyer power for carriers (at the expense of device manufacturers). Moreover, the multi-year contract model has helped carriers in recouping the heavy subsidies over the contract period.

From a device selection perspective, Canadian wireless carriers have historically been a strong follower of trends south of the border, and have relied on their US counterparts’ size and scale in negotiating with device manufacturers. Thus, Rogers has taken its device cues from AT&T in the GSM space while Bell and Telus have done the same from Verizon. This leverage has provided each player with technology, products and customer segments that are unique to it.

For example, AT&T and Rogers were able to lock-in the Apple iPhone for their networks with volume commitments and royalties to make the device GSM centric. In turn, as the largest reseller of RIM BlackBerry devices in Canada, TELUS acquired initial exclusivity on RIM’s BlackBerry Storm, a touch-screen device to compete with the Apple iPhone.

Challenges emerging from diminishing device advantage

Loss of stickiness and relevance of contract-based subscriber acquisition and retention strategies
In the new competitive environment, technically all carriers might have access to all devices, and consumers may be able to port their devices to any network. Will this result in true number and device portability to an extent the subscribers have never experienced before? Assuming the answer is yes, the question that emerges is whether the contract-based subscriber acquisition and retention model will remain viable.

Growing the Canadian penetration
Canadian wireless penetration levels are one among the lowest in the OECD (The Organization for Economic Co-operation and Development) countries. With vanishing device-oriented customer acquisition drive and a strongly polarizing market place, how will incumbents and new players create and execute strong penetration enhancement strategies?

The prevailing hypothesis among the market leaders is that incremental penetration can be achieved at the lower end of the ARPU spectrum. Will this be the undoing of the relatively higher price premiums paid by Canadian consumers for their wireless service? Will wireless carriers have to adjust to a new reality of additional complexities of competition, lower retention rates of users as well as lower price realizations?

Polarizing device choices of consumers
With improvements in carrier technologies and device capabilities, smartphones have evolved as true mobile platforms to complement both the business and lifestyle needs of today’s consumers. On the one hand, this is increasing the uptake of revenues from data plans. However, it is also increasing subsidy costs on the smartphones and consequent risks associated with subsidy recoupment.

Moreover, while smartphones have created a large and significant segment of device choice and usage, they are not the only devices to have experienced significant growth. The choice of “no-frills”, voice-based, low-cost devices has also gone up along with unbundled low-cost wireless offerings by carriers.

These apparently conflicting signs of growth (i.e. both high-end and low-end device growth) lead to a fuzzy forecast scenario of what the future holds for carriers. Should carriers position themselves to capture value from data products (which they currently are doing, but are under-monetizing due to the influence of device manufacturers’ delivery mechanism of data products) or should they aggressively capture the growth and capitalize on scale arising from the larger subscriber base at the cost of ARPU retention?

Intensity of share swap and sustaining current ARPU levels
With a level playing field in device choice for new customers, competitive actions could move into a tough and dirty share-swap arena where carriers compete with one another to capture subscribers, thereby resulting in a very expensive share-gain strategy for carriers along with a potential fall in ARPU levels at rates far surpassing those within other OECD economies.

Will this finally bring to bear the criticism plaguing the Canadian wireless incumbents that the industry lacks competition and customers are not receiving adequate value? How will carriers create exit barriers for subscribers and counter the competitive guerilla actions from their competitors (new and old)? Will this create a whole new competitive dimension in market share capture and retention in the Canadian wireless space?

Competitive strategies in the interim

Decoupling of device and contract
The Asian wireless markets have become technology and business model initiators with faster device life cycles and faster deployment of carrier technologies. If the prevalent business model in Asia is any indication of what alternatives exist, then Canadian wireless carriers can consider the possibility of the rise of the brand power of device manufacturers with rising device interoperability. This is already evident with Apple actively setting the rules of engagement on its iPhone.

Once device portability is clearly established along with a device-based demand-pull from the customers, the contract-based revenue model may give way to the decoupling of device and service. Carriers will realize savings from the large device subsidy costs they have borne and will be able to pass a portion of the savings to their customers, thereby improving the net customer value.

Are the Canadian wireless carriers ready for this change? Probably not. However, the more important question is who in the wireless value chain and ecosystem could or should initiate this? The apparent answer is smartphone manufacturers.

Content led push for increasing stickiness
Increased data bandwidths and devices capable of utilizing them are now a given. The industry is also getting transformed from a software development perspective, with an ecosystem of application developers and distribution systems for their applications, i.e. iTunes and BlackBerry app world. Another key evolving and potentially dominant space is also the location specific contextual ads/searches. However, Canadian carriers have under- monetized their bandwidth by being absent from most of this value chain.

Canadian carriers have to capitalize on their unique proximity and familiarity of user characteristics and needs, and provide compelling user-centric content in order to enhance user choice and thereby enhance their revenue stream.

Profitable penetration strategies
Is the current dominant view of incremental penetration at the cost of lower ARPU a valid assumption? Our analysis of the relative evolution of other telecom markets demonstrates that incremental penetration does not result in drastically lower profitability. Given this, a more informed view of the customer segmentation and latent needs of the current user base is required.

Specifically, we believe that carriers can effectively segment customers into profitable niches to occupy without resorting to low ARPU price-fighting tactics. The class opportunity that presents itself is device-based utility. For instance, trends already indicate user preferences for living with different devices for different needs, i.e. executives using both the iPhone (for lifestyle needs) and BlackBerry (as the effective email client).

Active subscriber engagement
A more pragmatic and positive change that could emanate is an alteration of the existing operating model. Leading carriers currently have little incentive to engage customers beyond initial customer acquisition, cross-selling opportunities and pre-emptive contract extension through device upgrades.

Carriers must evolve from this passive engagement that focuses on just a few customer touch points to an extensive, active engagement of their user base. The key business denominators will also change with focus moving to customer service, customer engagement in terms of lifestyle and brand building activities.

Carriers should start with effectively revamping their systems and support functions to be more resilient and responsive to user needs and carry the responsibility and reward systems that promote retention and customer satisfaction. This is easier said than done as it will involve a substantial overhaul of their organizations. However, the company that is most successful at it will emerge as the most preferred and profitable carrier.

Sridhar Parthasarathy is a principal at Surje & Company, based in our Toronto office.

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On the Road to LTE - Issue 1 - Archaeology of Competitive Strategies of Key Industry Players