NEW YORK-When it comes to getting airtime to the end customer, no distribution issue is captivating carriers like cost reduction. As international competition increases and markets mature, carriers will be even more pressed to trim costs to ensure healthy profit margins, according to most industry participants and observers.
But looking to less costly channels such as the Internet and telemarketing won’t be sufficient. The global trend to reduce acquisition costs by extending airtime distribution from the corporate user to the mass market has created new cost centers. Many carriers will have to enlist the aid of complex and expensive database marketing tools simply to identify their customers, now concealed among the masses.
Prepaid cards, traditionally an option for the credit-challenged, have become ubiquitous even in wealthy markets such as Germany. As a result, many wireless consumers have become anonymous. That means customers will be harder to identify when carriers try to market news and information services or unified messaging (fax, e-mail and voice mail). Those add-on applications will be necessary to drive up minutes per use, which have been declining as more mass consumers become wireless users.
“You certainly have to be using database marketing to determine what the needs of the consumer are going to be, and whether there’s a distinction by gender or income level,” said analyst Zia Daniell of the telco and cable Internet strategies group of Jupiter Communications, a New York research firm. “It is a pricey proposition, but it’s one that most players are going to have to shift to because consumers are going to move toward customized solutions,” Daniell added.
Declining customer-acquisition costs won’t help cushion carriers too much. The decreasing acquisition costs are only gradual because of increasing competition and because carriers are not likely to wean themselves off handset subsidies, said Callie Pottorf, analyst at the U.S.-based research firm International Data Corp.
In that environment, few network operators are likely to be as well-prepared to handle the new cost structure as carriers in Italy, observers said.
Like carriers in other markets, Italy’s network operators have managed to trim acquisition costs by disseminating prepaid cards more successfully than most. Prepaid distribution accounts for 80 percent of the market, said Lisa Modisette, managing director of European operations for Lightbridge Inc., a Boston firm that helps carriers keep costs in check with tracking software.
But unlike every other Western European market, Italy’s first two carriers-Telecom Italia Mobile and Omnitel-made a pact not to subsidize handsets. Coupled with the ease of selling prepaid cards, the financial leeway the Italian carriers get from avoiding subsidies to retailers gives them better margins and more flexibility in their distribution choices, Modisette said.
Clearly, the global trend is toward more carrier control of the distribution channel. Network operators in the United Kingdom, for example, are increasing their direct sales as a result of deregulation. U.K. middlemen known as “service providers” are becoming relics as they become swallowed up in carrier-led acquisitions.
“Not only do [the carriers] have the company-owned stores, but they are buying the independent service providers and turning them into either network-branded stores or creating a new brand,” Modisette said. “And similar to the [United States], there’s been a reduction in selling service through the small dealers and agents. At the same time there’s been an increase in service provision through owned channels and through major [specialty] retailers.”
Carriers in other global markets are looking for precisely that kind of control and flexibility once they establish a comfortable foothold in the mass market. The carriers say they need tighter reins.
Retailers that cater to the mass market are using increased carrier competition for shelf space as leverage for higher commissions, asserted Bill Powell, executive director of marketing operations at BellSouth International in Atlanta.
Of BellSouth’s 7.7 million worldwide subscribers as of third-quarter 1998, 3 million are in international markets, in Denmark, Germany, Israel and nine Latin American countries. Exclusivity deals have been difficult to reach with retailers in many of those markets, Powell said.
“In many cases we have to convince not only the customer to purchase from us, but also the agent to sell us,” he said. “We’ve seen that in Brazil and in Germany, for example.”
BellSouth has to balance its needs for ubiquity and control, Powell added. “We certainly need to have some flexibility in the way we distribute so we don’t get caught short if things go bad with a particular channel. If the indirect channels become too expensive, our own retail operations become more important. That’s why you’re seeing more of these retail stores and kiosks that are more controlled by our companies.”
Like other carriers, BellSouth increasingly is tapping telemarketing and the Internet as channels, though e-commerce won’t play a discernible role in the wireless arena until later this year, by some accounts. Still, carriers and analysts are optimistic the Internet has strong potential as a sales channel in the wireless sector. Encouraging for carriers looking to e-commerce as a distribution channel is the Internet access that wireless devices could provide, as well as the precedent set by other high-tech product sales, such as computers, over the Internet.
Research by Jupiter Communications shows a correlation between online and wireless usage, boding well for the Internet’s success as both a component of wireless services and as a sales channel for those services, said Jupiter analyst Daniell. The company’s research showed that 33 percent of U.S.-based PC owners without Internet access also owned cell phones, while more than 55 percent of PC owners with online access owned cell phones.
BellSouth, for one, expects to make its first overseas online airtime sales by the fourth quarter, Powell said. The company was encouraged about the Internet by its use during a lottery system to register potential customers for cellular service in Brazil last May. Of 1.8 million applicants, 400,000 registered online.
The lottery helped BellSouth offer its service in segments to avoid the kind of single huge crush of demand its Israeli partner, Cellcom, experienced in the Middle East market, Powell said. “We didn’t want to relive that,” he said. “The lottery and the online effort helped our distribution channel, and it helped our network.”
