The War of the Roses is a 1989 movie about a couple that, when their marriage begins to fall apart, begin an intense divorce battle about their material possessions. In the U.S., it feels as if we are experiencing an intense war of the roses between AT&T and Verizon Wireless... and the winner is... Is there a winner?
Let's back up for a minute. We began 2010 with some breaking news about a drop in prices. The first target of the announced new pricing strategy was for unlimited mobile phone plans, which included unlimited voice and data. Both CSPs also got engaged into a TV ad battle about who was offering the best network coverage. AT&T sued Verizon for making false claims, and the war of the roses, I mean, prices, began.
Later in this year (more specifically, last month), AT&T eliminated the unlimited data plans. The company introduced new data plans for its smartphone and iPad users, which brought its existing unlimited data plans to an end and a return towards a tiered (or metered) pricing system. This replaced the existing, flat monthly unlimited plans, which were launched to persuade customers to spend more on data services. Clearly, AT&T's switch was an effect of the data overload on its networks, particularly caused by the higher usage by iPhone and iPad users (about 3 percent of AT&T's smartphone customers represented 40 percent of overall smartphone data usage).
In a non-price competition, companies try to differentiate their offerings on the basis of distinctive attributes, like quality of service, customer focus or any other "sustainable competitive advantage other than price." While in a price competition, companies try to distinguish their offerings "on the basis of low price." Companies will "engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price, and avoids the risk of a price war."
The issue with AT&T and Verizon is that they seem to have a strange combination of price (data plans) and non-price competition going on (smartphones), but that doesn't appear to be going on right.
Playing the Chicken and Egg Game
Undoubtedly, AT&T grew its market share and revenue as a consequence of its increasing smartphone user base. "Smartphone subscribers typically spend 80 percent more on monthly subscription plans than basic feature phone users." On the other hand, the company engaged in price competition and reduced data service prices to attract more smartphone customers, which can hurt the growth of data profits. The website Trefis forecasted an annual growth rate of about 10 percent in data ARPU for AT&T, amounting to more than $28 per subscriber by end of its forecast period. However, if this annual growth were to decline to 7 percent as a result of greater price competition and ARPU were to reach $24 per subscriber by the end of the forecast period, AT&T could see more than a 4 percent downside to its stock. In other words, one strategy can ultimately damage the other.
Let's just say for fun that the iPhone edge vanishes soon, be it because AT&T loses the Apple exclusive deal when the current contract expires or because we see the appearance of a "next cool thing" that challenges the ability of Apple to maintain its apparently unbeatable super stardom. Or like Martin Creaner wrote in his recent blog, the media stops its love affair with Apple: "There is an element of Apple living by the media sword and dying by the media sword... Whatever the rights and wrongs of their dodgy antenna, it is clear that their brand has been damaged and only time will tell whether the damage is permanent or transient."
Who will be the winner then? For now, "there's no question the winners in this battle are Apple and Google, and the losers are the carriers." What we also know for now is that, most likely, AT&T and Verizon will be stuck again in another price competition. Ultimately, and put in very simplistic terms, both AT&T and Verizon don't have many cool ideas going on these days. It's all dependent upon two variables: what smartphone they are offering and the data plan price battle they engage in.
Behind the Big Buzz
Let's back up again for a second. There were 49.1 million smartphone owners in the U.S. during the three months ending in May. According to comScore, this is "up 8.1 percent from the corresponding February period. RIM was the leading mobile smartphone platform in the U.S. with 41.7 percent share of U.S. smartphone subscribers, followed by Apple with 24.4 percent share and Microsoft with 13.2 percent. Google saw significant growth during the period, up 4 percentage points to capture 13 percent of smartphone subscribers, while Palm rounded out the top five with 4.8 percent. Despite losing share to Google Android, most smartphone platforms continue to gain subscribers as the smartphone market overall continues to grow."
Still, what do most mobile subscribers really do with their phones? "65.2 percent of U.S. mobile subscribers used text messaging on their mobile device in May, up 1.4 percentage points versus the prior three month period, while browsers were used by 31.9 percent of U.S. mobile subscribers (up 2.3 percentage points). Subscribers who used downloaded applications comprised 30 percent of the mobile audience, representing an increase of 2.1 percentage points from the previous period. Accessing of social networking sites or blogs also saw significant growth, increasing 2.6 percentage points to 20.8 percent of mobile subscribers" (These figures exclude the impact of the iPhone 4).
Basically, it comes down to text messaging and the Internet (browsing, downloading applications and accessing social networks). Perhaps I'm too simplistic, but it seems that there's too little sustainable differentiation going on, doesn't it?
Here's what I know from the humble perspective of a marketing professional. A profitable product differentiation strategy will move competition based largely on price to competition largely on non-price attributes. When customers value a relationship with a service provider, they will be less responsive to elements offered by competing service providers. Neither AT&T nor Verizon are there yet... So the game is wide open, and it can be anyone's game, including companies other than AT&T or Verizon.
In the meantime, we'll continue to see how smartphone/price battles continue to unfold, while the CSPs continue to invest in expensive network infrastructure to keep up with the pressure derived from the data overload on its networks caused by the smartphones of the world. Isn't it time to switch from a price to a value mentality instead? When customers see value, "then price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product's price."
In other words, it's truly about perceived benefits, which is not only financial. There's so much CSPs could do to boost revenue, like differentiation via vertical integration, which can help produce a variety of products and services to satisfy additional customer needs. Or why not go more frugal. That is, develop a more frugal innovation mentality… Anyone?
By Monica Zlotogorski, Editor of TM Forum's Inside Latin America and Vice Chair of TM Forum's Latin America Advisory Board