Lowenstein's View: How will operators differentiate themselves in 2011?

Mark LowensteinIt's only mid-January, but the battle lines are drawn. Verizon will sell the iPhone. AT&T and T-Mobile have re-christened their HSPA+ networks as "4G." And every major U.S. operator will be selling an expansive lineup of terrific smartphones, tablets and 4G (or "4G") "dongles" and "pucks."

Let's admit it: From a user's perspective, no matter which operator is chosen, you can have a phone and a network experience that will be at least good, and possibly great. With service pricing that is roughly in the same ballpark. The exceptions are more in the market's margins. Wireless coverage in rural areas is still fair at best (and differences between the operators more pronounced), and smartphone selection is limited and prices high on certain prepaid operators or for those not wanting to sign a contract. And there are still compromises no matter what choice you make: want the Verizon iPhone? It's on 3G, with no simultaneous voice and data or global coverage. Not exactly a hardship, but it still falls short of Fortune's hyperbolic "Dream Phone" cover. Want to experience LTE in 2011? Phone choice will be limited to Android, for the time being (is a surprise from our friends at RIM in the wings?).

So this begs the natural question--with deltas having narrowed on network experience, phone selection and service pricing, and no game-changing device exclusives at the moment, how will operators differentiate going forward? There are two angles to this question. The first is the larger strategic question of how the operator "business" must undergo a transformation, as their traditional proposition has become somewhat commoditized and the balance of power has shifted to Apple, Google, Facebook, Amazon and Best Buy, among others. I wrote a column about this in 2010, and maintain that there are still significant market opportunities for the operators in adjacent, synergistic lines of business, such as analytics, advertising, cloud services and customer service. No doubt we will see some moves in these areas over the next couple of years. The second angle of the question pertains to the day-to-day business that today generates 95 percent of revenues--how to differentiate? Here are some thoughts.

Pricing. Boring as it might sound, pricing discussions dominate more meeting minutes than just about any other major issue at a large wireless operator. That's because even minor moves effect more change to the bottom line than any new product, service or app. Verizon's still unannounced iPhone or 4G phone service pricing is evidence of the complexity of pricing decisions.

I expect 2011 to be an "experiment" year with respect to pricing. First, all operators will introduce some version of usage-based or tiered pricing. We still don't know what elasticity exists with data pricing, how quickly consumers will grasp the concept of "a megabyte of data," or whether the data traffic growth curve will continue along the same trajectory. Second, I expect some action around family/group plans for data, similar to how voice minutes are shared. Third, the "personal hot spot" concept leads to interesting questions: will multiple devices sharing the network lead to data overages? Are operators leaving money on the table in not selling incremental data plans for connected devices? Finally, with the upcoming availability of the Verizon iPhone, likely availability of iPhone 5 this summer, and pace of introduction of new Android devices, I think times will get much more interesting with respect to upgrades, contracts, and ETFs. With the accelerated pace of ever more capable smartphones and a more level operator playing field, I think a larger number of consumers will push back on making a long-term commitment--to a device or operator service contract.   

Market Segmentation. Let's use AT&T as a case study here, since they are the only major operator selling devices representing every major mobile OS. I'd argue that most smartphones can perform 90 percent of what the average user would want to do in a typical day. Further, the UI delta between iOS and competing OSs has narrowed significantly. So the question now becomes one of marketing and customer segmentation. AT&T, which is going to have to rely on a more distributed handset mix, is going to have to get a lot smarter at helping users decide which device is the most appropriate for them.

Questions the operators should be asking themselves: Which is the killer device and plan for the youth market, which is ready to evolve from quick messaging devices but whose parents won't ante up for a full-fledged smart phone (device or service plan)? What do I do with the huge installed base of BlackBerry users, who are getting itchier by the day to upgrade to something and whose companies are more open to supporting other OSs? The new Windows Phone 7 devices are pretty good, but who should buy them, and why?

I also think there's a good opportunity for a mid-market, lower-priced BlackBerry or Android device whose wholesale price is less than $250--making smartphones accessible to the next wave of more price- or contract-elastic smartphone adopters.

Content/Applications. Once a user is on a smartphone data plan, the operator has become less relevant in the service proposition, since so much content is being consumed from app stores and via browsing. Can the operators regain some ground here? I think there's a particular opportunity to create a more operator-centric experience with Android, since there are so many devices spread across so many operators. Sprint has probably done the best job so far, with compelling marketing for the Evo and Sprint ID. We're likely to see more in the way of unique or exclusive content and applications for particular devices or operators--mainly in the area of sports, games and TV/movie programming on phones. Also expect the operators to attempt to shift the tide of UI overlay from the OEMs to themselves, or to work more closely with select OEM partners.

Messaging. I'll close with a provocative thought: Has today's messaging framework become outmoded? As more individuals and families move to smartphones and data plans, I think users will start rebelling against that ‘ol operator cash cow: separate charges/plans for texting. After all, texting is becoming increasingly intertwined with social networking, analogous to how email is part of most data plans. Over time, I think operators will have a harder time drawing out a la carte charges for distinct data apps, be it navigation, TV, or text. However, there is a good opportunity to more put together a more seamless, integrated messaging "experience."  

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.

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