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Another Perspective



HELLO COST DENIAL

In Washington Irving's short story, The Legend of Sleepy Hollow, schoolteacher Ichabod Crane becomes the victim of a headless Hessian horseman who haunts the countryside around Tarrytown, New York.  It is up to the reader to decide whether Crane was taken by the ghost, or merely scared away by a local rival preying on Crane's fears.  Mobile phone giant Vodafone's February decision to write off about $50 billion in goodwill that would be an unacceptable asset in the world's more stringent financial markets is a similar sort of act.  It remains to be seen whether the company will be praised for its prudence or killed by the specter of criticism.  Either way, Vodafone's decision is a wake-up call to every investor in the mobile phone industry.

Vodafone had amassed the goodwill by acquiring Mannesmann, one of Germany's largest high tech companies.  It wrote off the goodwill, which is the value in excess of concrete assets Vodafone paid during its hostile takeover, because critics of Vodafone argued that the perpetuation of the goodwill on Vodafone's balance sheet unjustifiably inflated assets.  Vodafone needs all the fiscal credibility in can get these days, because the mobile phone market, where it is arguably the biggest player on the world stage, is just plain brutal.  Total revenue keeps rising and handset sales are booming, but profits for even the best companies in the business are erratic and many of the carriers have to service hefty debts.  Against that background of high opportunity, large debt service, and high risk, the big service providers need to maintain support in the capital markets.  If they can't raise the funds to feed their appetite for modernization and expansion, they could face collapse.  It's as scary as the situation in which Ichabod Crane found himself.

Washington Irving
Washington Irving
Started as a lawyer, but saw it was hard work
and decided to be a writer instead

Crane came to Sleepy Hollow, a nice village to teach school and became enamored of an attractive local woman, Katrina Van Tassel.  The woman had a suitor, Brom Van Brunt, but flirted with Crane, playing the two off to her advantage.  Crane liked a lot of things in Sleepy Hollow, particularly Ms Van Tassel, but didn't like the Headless Horseman, the ghost about which every in town seemed to know.  In the end, things didn't work out for Crane, or, depending on your reading of the tale, maybe in a way they did.  But he didn't end up with what he sought, that's for sure, and he hadn't really figured on that outcome.

Mobile phone companies know what they want:  more customers using more services.  They say they know how to get customers, at least in tactical terms.  They seem to know how to identify new services they can sell, too.  But they don't always do as well in strategic terms.  The rate of customer churn is very high, perhaps as much as 20 percent per year in the US, and the cost of replacing the lost customers and adding new ones takes a big bite out of profits.  Sure, the carriers generally report nice looking financial results, but that's in part due to their imaginative bookkeeping and a willingness on the part of the investment community to tolerate high rates of debt.

They can't seem to see they are not quite in the real world, any more than another of Washington Irving's other famous characters could.  We are thinking of Rip Van Winkle, who did a bit of drinking with some local elves and ended up taking a 20-year snooze.  It was pretty hard for him to get his bearings when he finally woke up.  So, too, it may be for the mobile carriers and their partners in error, the mobile phone manufacturers.

It really doesn't look too good for theses outfits.  They seem to have fallen into the traps they set to snare customers.

One way the carriers compete is by targeting the two hottest market segments:  Young customers for whom a mobile phone is not an appliance but more a lifestyle accessory and business customers for whom instance access by voice, text, and email has increasingly become a necessity.  The carriers and phone makers think that each of these two market segments wants a different kind of phone and believes that each segment will happily pay for different extras.

The carriers haven't figured out how to make their services more general, like the Internet.  The phone makers haven't been able to produce phones that are pretty good at everything for everyone, like personal computers.  And the industry as a whole hasn't been very good at separating the equipment business from the services business.

The mobile phone industry would be wise to study the life of Washington Irving.  He was born in New York and got his education in the United States, but went abroad quite a bit, mainly across Europe.  He didn't do this to get away from his roots, but to find ways to use his background to better advantage.  He used what he learned to please people through his writing.  He knew fact from fiction, and when to exploit each.  He may be famous for his short stories, but his historical and biographical writing is by itself a distinguished body of work.  And his appreciation of what others knew was keen enough to, among other things, earn him a stint as the US ambassador to Spain.  He did spend his last years exclusively in his home country, but never lost touch with his many friends around the world.

It's hard to say if Vodafone, getting realistic in its maturity, will do something similar.  It is headquartered in the UK, but does big business around the world.  In the US, for instance, it is largely invisible but not ineffective through its 45 percent ownership of Verizon Wireless.  But even Vodafone, with European roots, has so far been unable to execute a more effective strategy than its less sophisticated competitors.

Will Rigers as Ichabod Crane
Ichabod Crane
Will Rogers played the schoolteacher in the silent film
The Legend of Sleepy Hollow

Across Europe, the mobile telephony business seems to be more advanced than in the US, not because the carriers are smarter but because the regulatory climate is more intelligent and the level of intervention by standards groups has been more effective.  In Europe, all the phones pretty much work on all the networks.  Independent dealers sell phones and services that are not tied together.  Even phones sold by carriers that are locked at the time of purchase can be easily unlocked, with the consent of the carriers or by independent technicians who do this for a very small sum.  In London, for instance, there are storefront unlocking centers up and down the busy shopping district streets, and they can free your phone of carriers locks in a minute for less than the price of a fast food meal.

While the European carriers might wish they could control the handsets and thereby put more of a squeeze on their customers, they have adjusted to the facts of the situation and by doing so have put a lot of pressure on the phone makers to improve their instruments.  Still, by marketing mobile services in a segmented way, the carriers have forced themselves to deal with two different kinds of phones, fun phones and business phones, and the phone makers have little choice but to build for the demand shaped by the carriers' marketing schemes.

In the US, things are even goofier.  The two major incompatible mobile phone systems (GSM and CDMA) split the market in two.  The carriers are in general not as helpful when it comes to unlocking phones.  And even when the phones are unlocked, they can't be moved across the barrier between the two transmission standards.  The upshot is a generally higher level of customer dissatisfaction in the US compared to Europe and much more customer hostility, because an unhappy customer finds a change of networks can be annoying and expensive and feel trapped.

Meanwhile, the confusing and costly mosaic of services offerings has not helped the carriers.  In the US and EU, the average revenue per mobile number seems to be trending downward even as the carriers boast of booming downloads and growing bases of data services customers.  Something doesn't add up, or, possibly, hardly anything adds up.  And the carriers seem to be in a state of denial, and not even getting close to pondering the possible future impact of WiFi and WiMax.

Compounding the carriers' problems in both the EU and US is the fact that the next generation of mobile phones, called G3 in the trade, has not been fleshed out.  Carriers, phone makers, and customers moving to what are sold right now as 3G handsets and services may be buying into technology that is at best transitional (and subject to upgrade) and at worst short-lived.

What 3G is supposed to do is to provide, in addition to the familiar voice and text message services, always-on data services.  Whether used by the youth market to get new ringtones or music downloads, or by the business buyers to access email, the data services for mobile phones are not yet fully standardized.  Even where there are standards, they standards are not very satisfactory.  What passes for web browsing and webmail on a typical mobile phone is a far cry from what anyone can do with a computer.  It's also expensive.  The carriers lack the courage to make data cheap or free and see what happens.  Instead, they are pricing in ways that chock the market before it can grow enough to develop a meaningful character, which might then be better exploited through a suitable strategy.

Here's an example of how tactical success has failed to yield strategic victory:  Mobile phone carriers are trying to hop on the iPod bandwagon by offering phones that include music players.  They sell these phones to the young customers who seem to have big phone budgets and an insatiable thirst for downloads.  But far more often these customers buy iPods or other players and not phones that can play songs.  Interestingly, these music phones offer flash memory storage on either miniSD or microSD (also called Transflash) cards that can store a gigabyte or more of sound or video.  But the same phones usually don't have software that lets the memory cards hold business data, such as spreadsheets or office documents that could be viewed, if not on a phone with a small screen, on a computer or a television set .  .  .  if the phones were just slightly more versatile.  It's possible to have a phone transmit a very low power video signal; it's just not done.

Arun Sarin
Arun Sarin
The boss of Vodafone cleaned up the books,
a good deed for which he will be punished

Still, business customers aren't completely out of luck.  They can get phones designed for email and limited business functionality, phones that are basically PDAs with radio transceivers or email terminals with radio, but these phones are clunky and don't appeal to the youth market.  They don't always play nicely with their owners' computers.  They cost a lot, and so do the related services.  And, despite the obvious fact that the sales volumes of these gadgets is miniscule compared to that of more ordinary mobile phones, the makers of these items keep trying to take their products further from the mainstream.  They don't seem to realize that the market for common mobile handsets last year was about 850 million units and that in two or three years it will pass a billion units.  Priced right, and coupled with low cost connectivity services, phones with some useful data capability could easily take a quarter of this market.

It's hard to understand why one phone can't do it all.  Now that the music player phones are so thin they can almost be lost when they are folded in two.  Why aren't there thin phones that unfold twice to reveal a larger screen and keyboard for that business user?

It's easy to see why Blackberry has missed that boat, because for the past several months its main management interest seemed to be in talking to lawyers instead of customers.  (Note to Blackberry, a bit late but still worth contemplating:  Washington Irving studied law and even tried his hand at the racket, but figured out his opportunities lay in invention, not litigation.) But it's awfully hard to understand how Nokia, Motorola, Samsung, LG, Sony-Ericsson, Palm, HP, and all the other mobile gadget makers have not been able to get their products to evolve into general purpose communications devices that everyone could use for music, email, or just a phone call.

It's equally difficult to understand why carriers don't provide full service bundles that encourage customers to learn now to use mobile technologies in more ways and encourage businesses to provide more news, commerce, travel guidance, and even advertising supported info and entertainment services over the mobile systems the way they do in broadcasting and over the Internet.  Instead, the carriers are busy trying to charge separately for everything, confusing the relatively small base of wealthy customers with the market as a whole.

But that's the state of things.

One of these days one of the phone makers or one of the carriers is going to wake up and just murder the competition by doing what seems pretty obvious:  offer a simple and affordable mobile package that's got something for everyone.  Until then, it's pretty easy to understand why customers, particularly business customers who are sick of schlepping laptops around and uncomfortable with the cost of mobile communications, might think of the cellular phone business as Ripoff Van Winkle.

— Hesh Wiener February 2006


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