Winning in Wireless

Can the industry learn to operate at one-third its current price levels? Companies will need to build businesses around key segments The challenge: reducing churn among the customers who provide most of your profits The once cozy us wireless telephony industry(*) is becoming less comfortable by the day. New players are entering the market, capacity is expanding at a breakneck pace, and prices are set to tumble. Most players take comfort in the belief that demand will rise as prices fall, but not everyone is likely to achieve enough growth to offset plummeting prices. As growth stalls and revenue per user declines, profits will become increasingly elusive. Many executives are only now recognizing the magnitude of the change facing their industry. Our analysis suggests that net earnings for some players could shrink to between 25 and 30 percent of revenue over the next three to four years - a far cry from forecasts of nearly 45 percent by industry players and Wall Street analysts as recently as last Fall. Large incumbents such as AT&T Wireless, Bell Atlantic NYNEX Mobile, and AirTouch Cellular will need to make radical changes if they are to succeed in the new environment. New attackers entering the wireless market in the wake of the recent bandwidth auctions pose a threat to which incumbents must respond swiftly, while there is still time. They will have to improve their operations and restructure their business systems to remain profitable as prices fall. They will have to adopt managerial and leadership approaches appropriate to the new competitive environment. And they will have to introduce innovative products and services to make their offerings stand out to the most attractive customers. The end of an era The US wireless industry has not always been so competitive. From 1984 to 1995, a government-created duopoly consisting of one Bell operating company and one independent wireless operator existed in each regional market. The result was similar service offerings and prices from both players in a region - and the kind of high earnings that are difficult to maintain without regulatory protection. The game in those days was to increase demand for wireless by expanding from segments where mobility was a necessity to segments where it was a luxury. As Exhibit 1 demonstrates, the strategy succeeded: penetration rates increased from 6 percent of the US population in 1993 to 18 percent in 1997, although both minutes of use and average revenue per user declined during this time [ILLUSTRATION FOR EXHIBIT 2 OMITTED]. What made the economics work were higher prices for lower-usage segments and increased operational efficiencies that more than offset the decline in average minutes of use per month of 9 percent a year. The duopoly allowed providers to operate in a way that was more brute force than best practice. They set up complex and costly customer acquisition programs, sold through a wide range of retail channels, paid high co-op advertising and commission payments to indirect channels such as agents and dealers, and offered consumers free or heavily subsidized handsets. And they managed churn (subscriber turnover) through annual contracts and broad loyalty programs rather than through the sophisticated segment and life-cycle profitability models employed by competitors like MCI in the long-distance market. The good old days came to an end when the Federal Communications Commission, the US telecommunications licensing authority, began auctioning wireless spectrum in 1994. These auctions, which continued until 1996, enabled new entrants whether established telephony players such as Sprint or competitors new to the industry such as Omnipoint - to join the market. Wireless incumbents such as AT&T AirTouch, and Bell Atlantic Nynex Mobile also purchased spectrum, and became attackers in regions where they had not previously competed. And Nextel's national digital network upgrade to high-quality wireless telephony created another competitor for attractive business segments. …