AT&T Tower Sale Raises, Does Not Answer, Question of "Core Competency"

What is AT&T’s “core competency?” That is a question observers might raise, in the wake of AT&T’s decision to sell its U.S. mobile tower network to Crown Castle, and then lease the towers back.

But the question is not new. Sprint Nextel decided to outsource network operations in 2009, for example. In other words, Sprint decided that the day-to-day operation of its network was not, in fact, central to its success as a mobile service provider.

Some might note that leasing a tower site, or even a whole tower network, is not core because ownership does not provide unique value. But at least some service providers do not believe running a network is crucial, either.

But you can peel back the onion yourself. What actually is the unique, hard to replicate competence that is customer facing and also enables a service provider to apply in other new lines of business or markets?

Except for the fact that it they are not customer facing, one might be tempted to include deep understanding of the regulatory process, ability to raise large amounts of capital at reasonable rates or ownership of scarce access assets as examples of core competence.

So what is a mobile service provider’s core competence, or key competencies? Many would be very hard pressed to identify them, at least using a classic definition.

A core competency, as seen by, C. K. Prahalad and Gary Hamel. In their view a core competency is a specific factor that a business sees as central to the way the company or its employees work. It fulfills three key criteria:

1. It is not easy for competitors to imitate.
2. It can be reused widely for many products and markets.
3. It must contribute to the end consumer's experienced benefits and the value of the product or service to its customers.

A core competency revolves around a specific set of skills or production techniques that deliver additional value to the customer, allowing a firm to succeed in a wide variety of markets, not just one, it might be argued.

By that definition, many “core competencies” actually are not central, because competitors can and do imitate the claimed core competence, because the competency cannot be demonstrated in more than one product line or market, or because the claimed core competence is not customer facing.

Walt Disney World Parks and Resorts has three main core competencies, some would argue:

• Animatronics and show design
• Storytelling, story creation and themed atmospheric attractions
• Efficient operation of theme parks

Some might argue that core competency does not matter, in the sense that what is core is the ability to operate outside the legacy core in a new line of business or ecosystem.

Others might argue the core competency is the ability to recognize and acquire a new core competency, or that adaptability is the core competency.

That’s a reasonable approach, except that it implies “customer facing” skills are not, in fact, required as part of the definition. Some will say that is the case.

Some might argue a successful competitor can have multiple “core competencies,” despite the classic definition of a core competence as the singular capability a firm has that cannot be replicated easily by its competitors.

Of course, one key scientific principle is that when a theory does not fit new facts, the theory likely is wrong in some way. In the case of telecommunications, it is likely the fact that do not fit are that most of the likely candidates for “core competence” are in fact, not directly customer facing.

That is not to say telcos have no core competencies. But it is hard to fit the likely sources of advantage within the traditional definition of core competence.

Selling towers is not unprecedented.  T-Mobile USA has done so. Sprint did the same. Other carriers, such as Saudi-owned PT Axis Telekom Indonesia, have sold off tower networks.

In fact, the sale of tower assets seems to be a global trend.

VimpelCom, as did Sprint,  has signed a five-year managed services contract with Ericsson that has Ericsson managing network operations on VimpelCom's behalf at more than 10,000 sites.

The deal suggests that network operations are not viewed as a core competency by VimpelCom. It isn’t that the network is unimportant; simply that it is not the unique source of perceived value.

Likewise, Reliance Communications signed a similar deal with Alcatel-Lucent in India.

Such developments might have been unthinkable back in the monopoly era of telecommunications, when executives might have argued that network operations were the core competency. The phrase can be misunderstood.

In common usage, a core competency might be understood as “something we do well.” That is not quite what business strategists might mean.

A core competency is a single, specific competence that not only is essential, but offers a key way of differentiating from other contestants in the same market.

A core competence therefore is a subtle thing. It is not just “something we do well,” not only the “singular advantage” a company might possess, but a capability that also distinguishes a firm from all others in the same business. And the traditional definition is even more stringent: the competence is customer facing.

That is what makes a “core competence” hard to pin down. Firms might have key skills in the regulatory area, for example. But other leading firms might also have such skills. That means skill at managing the regulatory process is not a “core competency.”

What is a bit shocking is that “running a network” is no longer seen by every carrier as a “key competence,” much less a core competence. That is not to say the network is unimportant, only that it is not uniquely important.

Mobile virtual network operators, and most fixed network service providers in Europe, likewise would say “owning a network” is not crucial for them. On the other hand, “access to use of a network” is foundational, if not a unique source of advantage.

Most difficult, one might argue, is the “customer facing” nature of such competencies. Unless you want to argue that billing, or marketing, or retail operations are examples of core competencies, it is quite troublesome to identify what a core competence is, for a communications service provider.

Most of the sources of advantage some of us might identify--regulatory skill, access to capital, ownership of scarce access assets, huge customer bases--are not directly customer facing.

There's Only So Much Service Providers Can Do, to Boost "Value of the Brand"

Though it is a nuanced finding, a recent J.D. Power survey of mobile handset satisfaction suggests attributes of the service provider experience (network quality, coverage, customer service, pricing, device availability) influence consumer choice of carriers, even when the same handsets are available from more than one service provider.

The good news is that the service provider “experience” matters. The bad news is that it might not matter as much as some think.

"It's very interesting to see that satisfaction performance differs by smart phone brand across tier one carriers," said Kirk Parsons, senior director of telecommunications services at J.D. Power. "This indicates that carrier services and how these carriers position specific features and services on their devices influence the experience customers have with their smart phone device."

Just how important the service provider experience might be is the issue. At least one other analysis suggests handset issues can be crucial. A study sponsored by Oracle found that perhaps 61 percent of consumers would switch service providers to get access to a handset they wanted.

Consumers in France (48 percent), the Netherlands (40 percent), and the U.K. (45 percent) showed similar signs of loyalty toward their handsets, stating that they too would switch operators to use the handset they wanted.

So at least when a service provider has an exclusive (if temporary) for a desirable device, that can in principle outweigh the other service provider attributes (customer service, network quality, recurring service price, other terms and conditions).

In Germany, however,  more than 82 percent of surveyed respondents indicated that they would not switch operators just to get a particular handset.

Beyond those findings, there is little dispute that consumer affiliation with products and brands increasingly is titled in the direction of apps and services reached on the Internet, and not with the “access” function itself. That isn’t a new value proposition. People always have valued the ability to talk more than the value of “phone service,” which is a means to an end.

So it is not surprising that mobile service providers have a “love-hate” relationship with smart phones, especially popular devices. On one hand, smart phones drive adoption of Internet access services, and hence represent the underpinning for industry revenue growth. On the other hand, devices potentially shift consumer allegiance and preferences in favor of the appliance, and away from the service provider’s brand.

Still, popular devices that require Internet access are the closest thing to a “personal emotional personification of the service” that mobile service providers or telcos ever have found. Think of the difference between the high emotional involvement people have with products such as perfume, autos, clothing or sports equipment, compared to intangible products such as “dial tone,” “Internet access” or “messaging.”

All other things being equal (wise observers will note that this almost never is completely true), getting customers on service contracts, as much as consumers might not prefer it, could be the single most-important action a mobile service provider can take to reduce customer churn.

To be sure, any number of important issues, ranging from recurring service cost, handset cost, handset selection, customer service, call quality, Internet access speed, billing accuracy and simplicity or network coverage can be a triggering issue for a customer decision to change service providers.

But you might also argue that maintaining significant differences--much less uniqueness--on any of those attributes is virtually impossible to sustain over time. And that might argue for the crucial importance of service contracts as the single most-important element for most service providers (providing postpaid service) in combatting customer churn, ensuring gross revenue and lifetime value of a customer.

Though the relationship between customer satisfaction and loyalty is highly nuanced, one clear trend of the past several years in the U.S mobile services market is that postpaid or contract customer churn at Verizon and AT&T has been rather low (on the order of one percent a month) while churn has been much higher at Sprint and T-Mobile US (on the order of two percent).

Those are low churn figures for a consumer or business service, where churn sometimes reaches three percent a month.

Prepaid accounts, sold without contracts, have significantly higher churn, at every company.  Though mobile customer churn rates generally have declined since 2010, there remains a huge difference between contract customer and no-contract customer churn rates.

Where a prepaid account can last two years or less, a contract-based postpaid account often can last six years to eight years, according to company reports.

And one might therefore be quite tempted to argue that it is the contracts which account for the big differences in churn behavior, even if all other elements of the experience (service and handset prices, perceived value, network quality, customer service, handset selection) are roughly comparable, which tends to be the case.

Prepaid services, for example, are typically synonymous with “no contract” service. Postpaid services more commonly are contract based.

In many markets where prepaid service is the norm, monthly churn rates of four percent are common, leading to annual churn of about 48 percent, of the equivalent of nearly half the entire installed base of customers.

Where churn is one percent a month (characteristic of postpaid services), it takes about four years for a service provider to lose the equivalent of half its customer base.

So any change in the way service is sold (a genuine shift away from contract-based service) should also have churn implications, with direct implications for profit margin, lifetime value of a customer account and gross revenue as well.

In that sense, the growing use of prepaid services in the U.S. mobile market is a strategic problem for most mobile service providers whose financial performance is driven by postpaid and contract service.

The basic issue, where customers can, and do change service providers, is how to reduce the propensity to churn. And though “quality of the network” can be a problem, it might not be the most common reason for a customer to experience an issue leading to choice of another service provider. And price arguably is a disproportionate driver of churn.

Though 53 percent of consumers across Europe had been with the same operator for the

past five years, 34 percent of consumers across Europe have been with two operators

in the past five years, and a further 12 percent reported that they have been with three or more

mobile networks in the same time frame.

Among Apple smart phone owners, user satisfaction with their overall experience is highest among Verizon Wireless customers (861), according to J.D. Power. Among Samsung smart phone owners, satisfaction is highest among Sprint customers (853).

Smart phone models that perform particularly well across all four U.S. national carriers include the Apple iPhone 5; Blackberry Z10; Nokia Lumia 920 and Samsung Galaxy Note II, the study found.

The primary reasons for purchasing a smart phone device differ by carrier. Sprint customers are more likely to purchase their smart phone device because of phone features, while T-Mobile customers are more likely to select their smart phone due to price.

Still, one might well argue that the single most-significant step service providers can take to reduce customer churn is to get customers on multi-year contracts.

Service provider differentiation in the mind of the buyer seems much clearer in the small business market.

The small business satisfaction survey, conducted among very small business customers (companies with between one and 19 employees, with a corporate service plan) and small and medium business customers (companies with between 20 and 499 employees) does show significant differences between the top-four U.S. providers, especially between Verizon Wireless and AT&T.

The conventional wisdom for most people, including executives at mobile service provider companies, is that there is a relatively direct relationship between "customer satisfaction" and customer churn. In other words, "happy customers" don't leave.

It doesn't appear that is the case. Perhaps perversely, even happy customers will churn (leave a supplier for another), and at surprisingly high rates.

Two out of three (66 percent) wireless and cable TV consumers switched companies in 2011, even as their satisfaction with the services provided by those companies rose, according to Accenture.

The paradox is that “customer satisfaction” does not lead to “loyalty.”

The Accenture Global Consumer Survey asked consumers in 27 countries to evaluate 10 industries on issues ranging from service expectations and purchasing intentions to loyalty, satisfaction and switching.

Among the 10,000 consumers who responded, the proportion of those who switched companies for any reason between 2010 and 2011 rose in eight of the 10 industries included in the survey.

Wireless phone, cable and gas/electric utilities providers each experienced the greatest increase in consumer switching, moving higher by five percentage points.

According to the survey, customer switching also increased by four percent in 2011 in the wireline phone and Internet service sectors.

Sometimes “customer satisfaction scores” have to be evaluated carefully, as it is not clear what predictive value such scores actually have. There are often multiple reasons.

Though customer satisfaction logically is related in some way to customer retention and churn, the relationship is complicated.

Even “satisfied” or “very satisfied” customers will churn, because the other providers are perceived to provide equally-good experiences, and might from time to time also offer better prices or features.

But there are other instances where even rising satisfaction scores are perhaps not what they seen. Consider the example of a declining business, such as fixed network voice services, which might shed about half its subscribers over a decade.

As consumers bleed away from fixed network service providers, satisfaction scores are rising, because the unhappy customers are leaving. Those who remain are more satisfied than the customers who have left, according to the American Customer Satisfaction Index (ACSI).

The fixed-line industry’s ACSI score got better nearly six percentage points, reaching 74, with gains for individual companies ranging from four percent to eight percent, ACSI said. Those are big gains indeed, for the ACSI index.

Verizon improved six percent while Cox gained four percent,  to tie for the lead at 74. AT&T follows closely at 73 while Charter scored 72.

CenturyLink’s score improved eight percent, and Comcast got better by six percent, both reaching a score of 71. Time Warner Cable scored 68.

To be sure, it is possible all the fixed network service providers are doing much better than they have in the past. But ACSI also cautions that the reason satisfaction is growing is that unhappy customers are deserting the service.

That might not be such a great way to earn higher customer satisfaction scores.

ISPs were ranked for the first time in the latest ACSI study, and scored the lowest of any industry studied by ACSI.

Internet service providers were rated for the first time, with an average score of 65, the lowest score among all 43  industries tracked by ACSI, which ACSI attributes to high prices, service reliability, speeds and video-streaming quality.

Only Verizon’s FiOS and the aggregate of all other smaller ISPs break out of the 60s with identical ACSI scores of 71.

Cox beats the average at 68, followed by AT&T U-verse and Charter at 65. The low end belongs to CenturyLink at 64, Time Warner Cable at 63 and Comcast at 62.

Video subscription services offered by cable operators, fixed line voice services and even mobile services traditionally have not scored all that high for customer satisfaction, it might also be noted.

Hence the value of service contracts.

AT&T Adds Tesla to GM OnStar "Connected Car" Access

AT&T has good reason to anticipate new revenues from connected car services. For starters, AT&T will replace Verizon Wireless as the connectivity provider for General Motors vehicles starting in 2015.

And AT&T now has added all Tesla cars to its roster of customers. Tesla vehicles will incorporate mobile communications supporting such services as roadside assistance and stolen-vehicle location, Internet access, navigation and entertainment on a 17-inch (43-centimeter) touch screen.

Many observers believe it is only a matter of time before all vehicles are connected using the mobile networks. 

But observers also disagree about how fast that will happen. The "connected car" is one example of the Internet of Things (sometimes known as machine-to-machine communications), that might represent technology and services revenues of $4.8 trillion in 2012 and $8.9 trillion by 2020, growing at a compound annual rate of 7.9 percent, globally, according to IDC.

IDC expects the installed base of the Internet of Things will include 212 billion "things" globally by the end of 2020.

Others think that figure is wildly inflated, and might suggest 50 billion connected devices, including PCs, smart phones and tablets, might be connected by 2020. That is the problem with such forecasts, which mix machine to machine (sensor apps) instances with devices people use (PCs, smart phones, tablets, game players).

Simply conflating consumer devices using the Internet with machines using the Internet confuses the issue. For one thing, service provider revenues are likely to be quite distinct when providing communication and other services to humans, and when providing enterprise customers with support for their sensor devices and networks.

The IDC forecast includes 30.1 billion "connected (autonomous) things" in 2020, consisting of sensors for intelligent systems that collect data.

With the caveat that many analysts and observers consider mobile Internet connections for tablets to be “machine to machine” connections, or part of the “Internet of Things” revenue segment, there is a reason “connected car” and M2M services appeal to mobile service provider entities, namely the sales model.

As is the case for communications service sales to large multinational enterprises, compared to consumers, the size of opportunities, and sales process, arguably are “easier” when selling solutions to business partners (enterprises) who then package services for actual sale to end users.

In other words, M2M and connected car sales are more akin to wholesale operations than retail operations, and more like enterprise sales efforts than retail sales.

Where enterprise sales can efficiently be conducted using in-house sales forces, consumer sales normally are handled by channel partners and retail operations. In the former case, a relatively small number of prospects exist. In the latter case, many millions of prospects exist, and cannot be marketed in the same way as an enterprise or wholesale account.

In other words, the potential revenue return from providing connected car services directly to General Motors outweighs the revenue return from selling connected car services to individual end users, one at a time.

More than 20 percent of vehicles sold worldwide in 2015 will include embedded connectivity solutions, the GSM Association suggests.

More than 50 percent of vehicles sold globally in 2015 will be connected, while every new car sold will be connected in multiple ways by 2025, a study conducted for GSMA now suggests.

Connected car services will constitute a €24.5 billion revenue stream, based only on in-vehicle services, such as traffic information, call center support and web-based entertainment (up from €9.3 billion in 2012).

Perhaps €4.1 billion will be earned providing connectivity, such as mobile data traffic (up from €814 million in 2012).

Global sales forecast of automaker connectivity solutions for passenger cars (Source:SBD/GSMA, “2025 Every Car Connected: Forecasting the Growth and Opportunity”)

Mobile Network, OTT App Provider Return on Invested Capital Headed in Opposite Directions

The financial return on invested capital has been a key issue for virtually all communications service providers for several decades. Originally, the issue was more simply: the return from investing in a next generation network, either fiber to the home or fiber to the neighborhood. 

With the evolution of the communications, software and content businesses to Internet Protocol format, new and more challenging questions have been arisen, especially the issue of how to create value in a loosely-coupled business ecosystem. 

Accenture research, for example,  has found that from 2002 to 2010, return on invested capital for mobile operators declined by 32 percent globally. 

At the same time, content owners, aggregation platforms and device manufacturers saw their ROIC rise significantly—50 percent or more in some cases. 

In other words, mobile operators’ investments are being monetized more effectively by content, device and over-the-top (OTT) service companies. 

That is a difficult problem for an access provider, since the very nature of the ecosystem (loosely coupled) means that the access provider no longer has control of what services and apps can be created and used by access customers. 

According to recent analysis by PwC,  the return on invested capital (ROIC) generated by telecom operators has decreased over the last three years (about 2010 to 2013)

PwC estimates the cost of capital for a typical operator in Europe is around eight percent to nine percent and, for them to create shareholder value, returns generated need to exceed the cost of financing. 

But with heavy levels of regulation and competition faced by network operators in the markets they operate, this hasn’t always been the case.

Handset manufacturers, new media companies and content providers have seen their returns grow, PwC says. 

Fixed networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade, Bernstein equity analyst Craig Moffett has argued.

Mobile networks had a meager return of 0.3 percent. Cable TV operators garnered a 2.5 percent return. 

Satellite networks had the best return on invested capital at 5.5 percent.

Performance arguably is worse if one accounts for merger and acquisition activity, since part of the value is "goodwill," a soft metric. 

The point is that investments in the access networks business have gotten increasingly risky over the last couple of decades, as revenue and value have shifted to the applications people get access to using networks. 

LTE Deployment Activity Moving to Asia-Pacific, Latin American Regions

The majority of new Long Term Evolution networks globally will be happening in the Asia–Pacific and Latin American regions between now and 2018, Analysys Mason researchers say. That is a logical progression, as LTE networks have been under construction for some time in Europe and North America.

The first LTE deployments occurred in Finland and Sweden, and the world's largest Long Term Evolution networks (measured by number of subscribers, if not area of coverage) are in the United States, but emerging Asia-Pacific and Latin American regions have the highest number of planned LTE networks, according to Analysys Mason.

       Operational and planned LTE networks by region, July, 2013 (Analysys Mason)

Emerging market countries are also taking advantage of LTE technology. India, Malaysia and Vietnam are the leaders in the emerging APAC region for the number of LTE networks planned, says Analysys Mason.  

Some 59 LTE network trials were in progress as of July 2013. The largest number of LTE network trials is in Central and Eastern Europe (26), emerging Asia-Pacific nations (24) and Western Europe (20).

Tablets Not Replacements for PCs, Generally Speaking

Forecasters are virtually unanimous in forecasting pressure on PC sales and an uptick in tablet sales, with the commonplace assertion that “tablets are replacing PCs.”  In some cases that probably is the case. In other cases one might argue smart phones are displacing PCs.

Some of us would argue that mostly, tablets are a new device in the consumer market, not so much displacing PCs as representing an attractive new content consumption device. In that sense, tablets "displace" PCs primarily because there is latent demand for content consumption that previously was hidden because people were using PCs and notebook PCs to consume content, even when many of the other features of a PC were not required.

According to a YuMe study, some 81 percent of tablet owners watch TV shows and video on their tablets.

According to Gartner, half of device screen time is spent accessing entertainment, with people primarily playing video games, reading books, listening to radio, podcasts or music and watching video content.

“Of the different types of activity, people spend by far the most time on entertainment, and people often use several devices at once, so it seems we are turning into a society of multitasking, multi-screen users,” said Meike Escherich, principal research analyst at Gartner. “Tablet users, for example, continue to use tablets most in the evening, between 7pm and 10pm.”

That would suggest tablets are used as companions to television viewing and other living-room activities.

Smart phones are used more for ad hoc research or quick sessions on social media websites while on the move or engaged in another screen activity.

The remaining screen time is used for communication, which represents 26 percent of device use, production activities, 15 percent, and researching information, nine percent. Gartner based these results on a survey of 726 tablet owners in the United States, the United Kingdom and Australia.

The average participant was found to spend an average four hours per day using a tablet, smartphone or computer.

The point, one might argue, is that tablets are not so much replacements for PCs as they are a convenient new content consumption screen. In some cases, tablets are used for work, but arguably mostly for work-related consumption or work-related email and messaging.

U.S. Connected Device (Tablet, E-Reader) Adoption 43%

The number of Americans ages 16 and older who own tablet computers has grown to 35 percent, and the share who have e-reading devices like Kindles and Nooks has grown to 24 percent, according to the Pew Internet and American Life Project. 

Overall, the number of people who have a tablet or an e-book reader among those 16 and older now stands at 43 percent. 

In some cases, that will be important for reasons other than device adoption. Some market watchers consider connected tablets and e-readers to be part of the machine-to-machine services business. 

Those who own the devices are especially likely to live in upper-income households and have relatively high levels of education. In addition, women are more likely than men to own e-readers. 

Hispanics and Asians are more likely to own tablets than blacks or whites, the study found. Blacks, Hispanics and Asians are more likely to own a mobile phone than white users. 

Those sets of findings are instructive. It now has become commonplace for mobile networks to be the way most people, everywhere, get access to voice, messaging and Internet apps. That also seems to be the trend in the U.S. market, for Asians, Hispanics and black users. 

That also has implications for understanding voice, messaging and Internet access usage patterns. Simply, some groups tend to prefer use of mobiles for Internet access more than others, and more than average. 

That, in turn, has implications for understanding the voluntary actions of citizens and consumers. We should not expect rational consumers to use every form of high-speed access in the same way.