Opportunities for Action in Technology and Communications Broadband, the Promised Land: How to Make It Keep Its Promise
Broadband, the Promised Land: How to Make It Keep Its Promise Throughout the world of wire-line telecommunications, broadband is being hailed as the promised land a place where Internet access is constant, speedy, and effortless, and where business and leisure benefits will flow like milk and honey. Consumers are buying the vision in ever increasing numbers. For telecom companies, however, things are not so straightforward. Certainly for some incumbent telcos, broadband will indeed prove to be the promised land, but for others it could turn out to be Death Valley. Broadband s very promise brings peril. It has lured many new providers to move in and stake their claims, and more are on the way. A land grab has already begun, against the background of an intensifying price war. Incumbents are under pressure to keep their existing customers and attract new ones in order to maintain their revenues. But peril in turn brings opportunities, and incumbent telcos have the means to seize them. What they need to do is capitalize on their strongest legacy assets including an established customer base, customercare experience, sales and distribution power, scale advantage, and brand recognition to frame a new winning business model. With that model in place, incumbent telcos stand a better chance of sharing the benefits of the promised land in the future. Responding to the Market s Evolution In advanced Asian countries, led by South Korea, broadband has become the household norm. In Europe, uptake has been lower so far, but the prefer-
ence for broadband is spreading. That much is clear from a wide-ranging European study recently conducted by The Boston Consulting Group, which included a survey focusing on France, Germany, and the United Kingdom (with more than 1,000 interviewees in each of these key countries). All three markets can expect a doubling of broadband penetration during 2004. France in particular thanks perhaps to more active publicity and competition there is surging ahead and has now actually overtaken Germany and the United Kingdom in broadband penetration, despite still lagging in total Internet penetration. If the trend continues, dial-up access in Europe will dwindle into insignificance within five years. Various broad findings from our study offer useful guidance to incumbent telcos. Current Motives for Adopting Broadband. When customers upgrade from dial-up access to broadband, the main reason for their decision is simply to enhance traditional Internet usage: e-mail and Web access. The next three most popular reasons for upgrading shopping online, downloading music, and being able to work from home are cited far less frequently and fail to qualify as killer apps. As for those customers who haven t upgraded, our survey confirmed the obvious explanations: ignorance (advertising and media coverage are still insufficient); inertia (despite peer pressure and the appeal of keeping the phone line free); and the price gap. A Growing Tendency Toward Bundled Services. Increasingly, customers will migrate to broadband by acquiring it in a package. Of the emerging optional services likely to be featured in such bundles, the two most prominent are Voice over IP (or VoIP), which provides free or almost-free phone calls over the Internet, and TV over DSL, which offers interactive
TV and video on demand through traditional copper wires rather than cable. Their prospects look rather different. So far, our survey showed, TV over DSL has been struggling to win new hearts and minds. It seems to be preaching to the converted those already subscribing to both Internet and pay-tv who are simply hoping for a bundle discount. By contrast, VoIP appears to be very promising (or menacing) because customers can make unlimited phone calls for free or at very low cost once they ve paid for the basic service. Given the superior price-value ratio, early VoIP providers such as Yahoo! Japan and Free in France are already relishing VoIP s popularity. A Great Threat to Be Embraced, Not Shunned. VoIP seems to pose a dilemma for incumbent telcos. According to our survey, consumers welcome the very idea of free phone calls, so VoIP will accelerate broadband adoption. But it could turn out to be a killer app in a different sense, imperiling incumbents by undermining their traditional major source of revenue: fixed-line phone service. Still, if incumbents resist introducing VoIP, their customers may defect to a provider that does offer it. What an awkward choice: to sacrifice average revenue per user (ARPU) or to sacrifice customers. Actually, there is no real dilemma. In the end, incumbents will have to accept a decline in their traditional voice business in order to retain their customer base. That customer base is crucial. Incumbents have a disadvantaged cost structure; and to compensate for it, they must strive to retain market share leadership as the broadband market matures. Some incumbents clearly have come to that conclusion already and are rolling out VoIP proactively. The real decision for incumbents, then, is not whether to adopt VoIP but rather how to price it. A Ray of Hope. As the price war intensifies, incumbents can take comfort at least in the following find-
ing from our survey. Broadband migration seems to prompt a boost in fun- and work-related activities, and an increased overlap in such activities. For example, in the United Kingdom, 68 percent of broadband users compared with just 40 percent of dial-up users engage in fun-related activities on the Internet (notably chatting/instant messaging, downloading music or movies, and gaming). Furthermore, a full one-half of U.K. broadband users compared with only one-third of U.K. dial-up users engage in multiple fun-related activities on the Internet. The survey also showed that of the U.K. broadband users who sometimes work at home, approximately three-quarters engage in fun-related activities compared with fewer than half of U.K. dial-up users who sometimes work at home. Such figures give hope for the future, suggesting some encouraging opportunities for developing revenues beyond basic access fees. Reconnoitering the Territory To establish a successful settlement in the broadband promised land, incumbents will need to divide the consumer universe into key segments and devise for each of them some differentiated marketing techniques. What follows is an example of such a segmentation, with a basic first-step marketing approach for each group. Fun Seekers (those who use the Internet for leisure purposes, such as chatting and gaming): Test this group s willingness to pay for new services and analyze the preferences of previous migrants in order to help decide which bundles to offer. Home Workers (those who can do their work from home, thanks to the Internet): Test new pricing schemes, partly to encourage fun-related activities.
Price Seekers (those who are interested mainly in e- mail and Web information, and who seek the most cost-effective access): Educate this group in new uses to encourage adoption. The Internet Mass (those who still use dial-up access): Optimize the bundle of services and the brand message to encourage migration to broadband. The Internet Dark Zone (those who still do not have Internet access): Analyze this group s telephone usage to try to maximize phone revenues. This represents a dynamic segmentation: the relative size of various segments will change rapidly as people move from one to another. Incumbents will need to monitor these changes carefully in order to adapt and optimize the marketing mix. The Land Grab and Beyond Tradeoffs are unavoidable, and deciding how to make them will be a painful and painstaking process. From our survey and case work, we have identified many of the topics that should feature prominently on the broadband agenda of any incumbent telco. The following are just a few examples. Colonizing the Land: How to Achieve a Strong Market Share. Both pricing and multiplay offers are key considerations. Pricing. Proactive or reactive? A crucial choice is whether to take the initiative on pricing or to wait and see that is, to react only if new entrants make aggressive moves on pricing. When it comes to setting prices, incumbents should go beyond just testing various pricing levels. There is the possibility, for exam-
ple, of returning to old-style pricing options, such as time-based and volume-based pricing. Multiplay Offers. As bundles become standard, you need to determine how best to structure them which components to offer (broadband, VoIP, interactive TV), what rates to set for phone calls, how to align overall pricing with costs, and so on. Our survey found, for example, that users are very attracted to the prospect of unlimited free phone calls but remain fairly unimpressed by an offer of premium television channels. To determine the best features and pricing for a bundle, you need to combine your insights into customers with your understanding of your current cost structures. So far, only a handful of operators have proved themselves able to do that. Defending the Land: How to Avoid Disruptions and Consolidate Your Customer Base. To counter the twin threats of competition and environmental change, considerable vigilance and finesse will be needed in strategy, marketing, and operations. Managing Change. With the inexorable advance of VoIP, incumbents will need to engage in a diversity of relevant tasks. Such tasks will probably include investment, notably in the next-generation network; contingency planning for a standards war and for new regulatory constraints; monitoring customer segmentation; partnership opportunities with manufacturers; and giving employees a sense of shared purpose so that their independent initiatives will align with their companies broad objectives. Maintaining Your Reputation. Competing against cheaper newcomers, incumbents have to rely on established virtues, such as infrastructure and image. Image can be polished by tweaking and upselling the brand, but be sure to get the mix right: branding for a telephone
service should be fairly staid, conveying security, quality, and confidence; branding for an Internet service should be more youthful and hip. As for infrastructure, draw on it to ensure the process fundamentals smooth installation, prompt customer care, accurate billing, and so on. Get the fundamentals right, and your reputation for reliability is enhanced. Cultivating the Land: How to Retain Customer Loyalty and Develop Revenues Beyond Basic Access Fees. Here lie many of the best opportunities for increasing ARPU. Content. One way to make such features as online shopping, advice, and socializing really attractive to customers is to cultivate a kind of symbiosis with content providers, as both i-mode in Japan and Audiotel in Europe have done. Person-to-Person Communication. Video telephony, in particular, seems to promise much; but at the moment, its appeal to consumers remains that of a status symbol rather than of a real need. In due course, it should develop into a formidable platform for e-learning, e-health, and e-dating; but until then, telcos might need to rely on aggressive pricing and hope that it pays off in the long term. Home-Devices Management. Incumbents are seeking alliances with device and software manufacturers; but in doing so, they risk being marginalized to the role of pipe provider. To avoid such an unbalanced partnership will take delicate research and deft negotiation. * * * Since the promised land of broadband remains uncharted territory, any business model will have to
allow for considerable flexibility. There is so much trial and error in projects conducted on new frontiers. Given all the dangers and uncertainties, the business plan cannot be too prescriptive. What s needed is a shared vision within the company to guide and shape the initiative. Once that is firmly established, the company s foot soldiers and generals can truly coordinate with all decisions, objectives, and actions properly aligned and advance toward a common goal. To seize the broadband opportunity, then, incumbent telcos would do well to reset the clock and craft and communicate that new vision of the broadband project. Companies that neglect this task will find that they are unable to enter the promised land after all. Stepan Breedveld François Candelon Henri Salha Stepan Breedveld is a vice president and director in the Amsterdam office of The Boston Consulting Group. François Candelon is a vice president and director in the firm s Paris office. Henri Salha is a manager in BCG s Paris office. You may contact the authors by e-mail at: breedveld.stepan@bcg.com candelon.francois@bcg.com salha.henri@bcg.com To receive future publications in electronic form about this topic or others, please visit our subscription Web site at www.bcg.com/subscribe. The Boston Consulting Group, Inc. 2004. All rights reserved.
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