Monday, December 9, 2013

To Attack U.S. Mobile Pricing Structure, Sprint and T-Mobile US Will Have to AddressTheir Own Cost Structures

If a mobile service provider wants to attack prevailing retail prices in a serious way, it also has to attack its own operating and possibly capital costs.

That's the only way to sustain lower prices (and hence lower revenue) over time, while maintaining long-term profit margins at a level that allows the firm to survive.

And time works against even a successful attacker.

Given enough time, and enough success, a contestant in a market attacking with “low prices,” and operating with a better cost structure, eventually will find itself with fewer of those advantages. Consider Southwest Airlines, which revolutionized air travel and best exemplified the “discount carrier” concept.

In 2004, there was a 36 percent cost gap in terms of operating costs per available seat mile for the three largest US network airlines versus Southwest Airlines, a study on airline costs found.

But the cost gap has narrowed. By 2011, the “mainline” or “full service” airlines had gotten costs down as well. Southwest still had an advantage, but it was a narrower advantage.

Southwest's cost per average seat mile was still 30 percent lower than even the most efficient of the network carriers. For a brief period in 2008, the cost gap was greater than a 70 percent.

More has changed. Southwest now is the largest U.S. domestic airline, and by some reckoning, its labor costs are higher than the “mainline” carriers. Keep in mind that fuel represents 28 percent of total operating cost, while labor represents 24 percent.

At least so far, it would be hard to find an exact analogy in the U.S. or global telecommunications business. But, in broad outlines, legacy service providers have been chopping away at operating costs, while upstart providers, ranging from over the top app providers to metro fiber access providers have been building business models designed to attack retail prices by economizing on cost parameters.

Some might argue that robust wholesale access policies in Europe have allowed many contestants to enter markets and compete precisely because they can operate without the cost of building their own access networks.

Cable TV operators in the United States arguably have been able to build profitable voice and data access businesses because cable TV operators, while building their own networks, have chosen an approach that--by luck more than design--works well for broadband access and IP services.

Cable TV operators also have had lower operating costs, compared to legacy telephone network operators. As the Southwest example indicates, though, advantages can erode, or even flip, over time.

Whether or not that is possible, and to what extent, in the U.S. or other markets, is unknown. Fixed networks remain capital intensive affairs. And, to some extent, “service quality” is related rather directly to hiring enough people to handle the customer service load.

However, as Southwest Airlines and the U.S. airline industry experience already has shown, given time and will, legacy providers can reduce the operating cost advantage over lower-cost, competitors.

At the same time, the longer a competitive service provider remains in business, and the bigger it gets, the more its costs will tend to grow.

If a SoftBank-lead Sprint or T-Mobile US assault on U.S. retail pricing is to be sustainable, it also will have to be accompanied by creation of a cost structure that sustains reasonable profit margins over time.

How that can be done is the issue. Sprint says Network Visions is one such example. 

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