Wednesday, 12 May 2010

More on the parallels between personal transport and personal communications

I've been doing some more thinking about what the mobile industry could learn from the automotive. See what you think:

The parallel between personal communication and personal transportation

Although outwardly very different, mobile telephones and automobiles actually offer a similar consumer proposition, in that they provide a means of obtaining services, doing business and, most importantly, maintaining social contact. Both are a personal choice, as the vast range of styles available in each market demonstrates; moreover, both started out as niche, expensive fancies and have matured into mass market items.

If automobiles and handsets are analogous, then there are also clear parallels between the mobile network and the network of fuel stations that support car travel. Both networks are spread out to provide coverage over a wide area and both have economics that vary significantly from location to location. One could even suggest that the recent interest in wi-fi bypass to increase the efficiency of data supply is akin to the almost simultaneous development in hybrid automobiles, intended to increase fuel efficiency.

How handset manufacturers could become more like auto makers

Despite similarities in the underlying model, there are significant differences in the structure of the two industries. Mobile operators are still largely vertically integrated sell handsets direct to the consumer. Conversely, the automobile industry is split into manufacturers that build and sell their range through their own dealerships and oil companies, which sell fuel through their own channels, entirely separate from the auto-makers.

If the latter model were true in the mobile phone industry, then it would see Nokia shops on every high-street, competing for consumer attention with Samsung, Sony-Ericsson et al. Consumers would purchase a handset from one of these outlets, then choose a network provider. Handset manufacturers have attempted this business model before, but have met with limited success, principally because they have not included two key lessons from the auto industry in their consumer proposition – finance and trade-in.

The importance of finance and trade-in

Today, basic financing is built into mobile phone contracts to spread payments over a long period and hence enable the consumer to afford an item that, it should be remembered, often costs as much as a flat screen TV or personal computer. The auto industry is more sophisticated, offering leasing and balloon financing as well as spread payments. The former solutions may also be valid for mobile phone manufacturers, as they enable consumers to have a device from the most current range most of the time and offset the high initial purchase price that may have dissuaded consumers from direct purchasing in the past.

A crucial part of the success of balloon or lease financing is the retained value of a handset. Although it is rarely considered when they are superseded and put away in a drawer, handsets do have considerable retained value. It is true that depreciation is faster than it is for a car – a high end Nokia loses about 50% of its value in the first 2 years, whereas the average car loses 50% over 3 years. Thereafter car depreciation tends to slacken off, whereas the phone will plateau for a time, then drop precipitously. Even so, the secondary market for 1-3 year old handsets is strong in developing markets and is likely to remain so as a billion or more consumers come on stream in India and China.

To build a proposition around finance a manufacturer must understand and be able to control the lifetime value of the handset in order to set the lease price. By leasing the handset and offering an option to purchase at the end of the lease term, consumers are incentivised with a lower monthly charge compared to that offered by a mobile operator. Divorcing devices from the service that enables it also increases customer choice, particularly benefiting pay-as-you go customers who have limited access to high-end smart phones.

Using benchmark prices for handsets and retained value, we anticipate a manufacturer could offer a 30% discount on the cost of a handset and 12 monthly upgrades for a gross margin of around 50%. This is compared to today’s gross margin on handsets of c.25%.

Impact on the operating model of manufacturers

This model has significant impact on the business model of handset manufacturers, since it entails them becoming customer-centric retail organisations, able to manage a direct, long term relationship with their consumers. In such a business, consumer finance, credit checking, billing and collections will become major operational processes.

Two key challenges should be highlighted. Firstly, since the model depends on retained value of handsets, consumers must be helped to unlearn engrained behaviour around handset ownership and robust processes put in place to ensure handsets are returned.

Secondly, an apparatus would be needed to match supply and demand on the returned devices. This is akin to a commodity market and may function best in an environment where many manufacturers are using the same business model, thereby creating a rich platform for buyers and sellers. It should be noted that the WEEE regulations in Europe may mean that collection and recycling of devices is in fact compulsory for their vendors, meaning that such a trading platform has a place in the today’s market as much as in the scenario we present here.

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