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Viodi View Newsletter - February 16th, 2005 Issue

Indie Telco Local Content Workshop Advertisement

Beware of the Unforseen Competitor

By Ken Pyle, Viodi, LLC

It has become conventional wisdom that video is a key element to ensure the long-term survivability of independent telephone companies. Since the 1996 Telecommunications Act, there have been scores of independent telcos which have significantly increased their subscriber base by adding video to their service mix. Video is great, but video by itself is not going to be enough for a telco to be an effective competitor in the years ahead.

To be an effective competitor, it is important to look at who the competition will be. Today, cable companies are clearly telcos’ largest competitive threat, as most have or will soon have the ability to offer virtually the same services. As competitors, cable companies and telcos could be considered to be in the same category since their core businesses are about providing bandwidth to their subscribers. Thus far, independent telcos have successfully competed within this category.

A telco’s long-term concern should be competition that can arise from an unexpected source and has to potential to disrupt “business as usual”. The result of this sort of unforeseen competition is what economists would call product substitution, which often has huge impacts on entire categories. For instance, the decline of the steel industry could be traced to lower-cost technology alternatives, such as aluminum and plastics. More recently, the widespread adoption of cellular phones is a major cause in the decline of POTS lines.

The independent telcos unforeseen competition might come from the big box retailers that have already devastated other mom and pop businesses throughout rural America. The big box retailers already provide independent telcos some level of competition by selling phone cards. Walmart is in the movie distribution business with their Walmart.com offering (starting at $12.97 per month for unlimited DVD rentals sent to the consumer via U.S. mail). At the 2005 Consumer Electronics Show, there were scads of VoIP consumer premise electronics from various name brand consumer electronics manufacturers and it will not be long before these offerings are available on retailers’ shelves.

It is not too far-fetched to imagine retailers bundling their own branded VoIP services with the VoIP phones. Retailers might even go one step further and build their own networks (or resell others net, completely bypassing the independent telco. Eric Mantion, Senior Analyst of Instat/MDR suggested at NTCA’s January 2005 IOC Wireless Symposium that, using the McDonalds and Walmart facilities, a WiMAX network could be built that would serve 83 million homes, while requiring only $1.5 Billion in capital expenditures.

Mantion also mentioned the gasoline industry as another potential competitor in this arena, as a real-time communications network could result in significant operational savings and increased profit, from initiatives such as demand-based pricing. The operational savings alone might justify such a network, meaning any retail sales would be virtually pure profit. This scenario could provide for some interesting product bundles (e.g., a free movie with a tank of gas).

The possible threats from retail are almost endless, but instead of speculating on what might be, it is important to begin to lay out a strategy for competing against this inevitable threat. Here are three high-level thoughts on what can be done to meet the retail competition

• Work within your community – identify ways to work with local retailers to create “bundles” that are unique to the community and cannot be easily matched by “out-of-town” competitors. Working with local community organizations, such as Churches and schools, will also give a telco a competitive edge. Don’t be afraid to compete with yourself – if you do not, someone else will eventually.
• Make yourself heard at the FCC – the FCC takes seriously its mandate to ensure broadband communications to everyone. Make sure that the FCC is aware of the costs of serving the most remote customers and that some of these new competitors might not have a plan for serving these remote customers.
• Work together as an industry – the deployment of IPTV services is still too much magic and not enough science. There needs to be significant improvements in standardization and interoperability testing before the independent telcos can roll out new products as quickly as the cable television industry and, potentially, some of these retail competitors. Telcos need to make sure that their voice is heard among the Consumer Electronics Manufacturers.

The good news is, at a strategic level, what is required to meet and beat retailers is not much different from what is needed for a telco to compete against a cable operator. In the end, having a variety of products that meet the various needs of your customer base while providing a better value will ultimately win against the competition – whoever that competition might be.

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