One scenario is where pre-paid, retail SIMs are used in a “SIM Box” by a reseller. The reseller then routes fixed to mobile calls via this device to take advantage of the cheap on-net retail rates. Now, I would actually call this “arbitrage” rather than an insidious term like the f-word. Of course, the carriers and their expensive lawyers take a different view, and declare such practices in breach of their Acceptable Use Policy (you know, that stuff that no-one ever reads). AUPs are very cool things (for vendors); their goal is to protect against practices that go against usage assumptions the pricing people make. The challenge is enforcing them!

I recently heard a rumour that a certain carrier was driving around the major cities using a device that would detect the concentration of mobile activity caused by SIM boxes! It may be true, it may not be true. Even if it isn’t, such an “urban myth” can achieve the desired prevention on behalf of the carrier.

Another source of revenue leakage is where someone takes advantage of particular pricing of call to premium numbers in a pre-paid mobile to call his own premium numbers. In this case, the cost of the calls can actually be less than the revenue obtained from the premium number service. Again, this straddles the fine line between fraud and arbitrage. Such practice was common several years ago as an international arbitrage. The smart carriers shut it down quickly by simply creating additional pricing scales for premium numbers in certain countries. So, for example, calls to UK might be 5c/min, but calls to UK mobiles or UK premium numbers might be 50c/min. Problem solved. The not-so-smart carriers kept charging 10c/min to all UK numbers, and were burnt until they got their billing act together.

The reason that these examples of revenue leakage exist even in the pre-paid world is because of the assumptions the pricing folk make. In their eagerness to offer attractive headline rates and sweet capped plans, they make usage assumptions that in turn have weighted-average margin implications. If the customer broadly fits the usage profile, then the vendor makes money. But if the customer doesn’t, then this can cause problems.

An “efficient” market will shut down an arbitrage very quickly by closing any pricing discrepancy. Unfortunately, the complexity and underlying assumptions built into retail mobile pricing is such that it does not allow discrepancies to be closed down. Therefore, vendors must resort to AUPs to protect themselves. How have you dealt with these challenges?

A Vodafone customer in New Zealand was charged nearly $50 to call a customer who had ported their number from Vodafone to Telecom NZ. Previously, the call would have been free to her. She suggested that the network should have advised her that the call was no longer free!

I’ve heard of many absurd things in my life, but that one is up there with the best.

The event that caused the price to change was totally out of the Vodafone’s control - one of its customers moved to TNZ. Can we really expect them to advise customer A that customer B has moved away because it affects the call charge to customer A? And if we do, is this not a breach of customer B’s privacy?

This is just another case of “protecting the customer” going too far. At some point, we must draw the line and make customers just a little bit responsible for their actions. What do you think?

The first one is the effect of call blocking - because a minute means “a minute or part thereof”. So for a 1 second call, you pay for a minute, and for a 61 second call, you pay for two minutes. We have had 30-second billing here for a long time, and most of the carriers still use it. Switching to one minute billing only amplifies the effect, as I will show.

In order to get a better understanding of the effect, I took a sample of calls over a period of one month, and did a distribution of call durations. The results are fascinating.

Over 68% of calls were one minute or shorter. You know, like “call me back in 5″ or “buy milk” or my favourite (not!) “when will you be home?”. In this sub-sample of around 220,000 calls, their total duration was actually 78,000 minutes. This means an average call of under a minute has a duration of 21 seconds. However, with one minute blocking, customers are charged a full minute for each one of these. If you take the “blocking factor” - the ratio by which blocking multiplies the actual duration, it is 2.8. This represents a huge margin boost for vendors for these short calls - customers are paying 2.8 times as much for those calls.

Of course not everyone always makes very short calls. 94% of calls are under five minutes. For this group of calls, the blocking factor is 1.74 - still very significant.

When we extend it out to to the entire sample, the blocking factor is 1.43. This represents the total effect of one-minute billing. So if you get 1000 minutes, your average effective usage is actually about 700 minutes.

Having done this analysis, it made sense to do exactly the same analysis for 30-second billing. It provided a finer granularity analysis of the distribution of call durations - of the 68% of calls that are under one minute, 48% are under 30 seconds, and the remaining 20% are between 30 and 60 seconds. The blocking factor for 30-second billing is 1.2, which means for 1000 minutes, you get an effective 833 actual minutes.

This should give you a good sense of the actual effect of 30-second and one-minute call blocking. The great thing about them is that customers don’t really value them in the same way that vendors do! What have your experiences been?

There is a “watchdog” web site called www.HonestReporting.com. Of course, we all know there is no such thing - all reporting is biased - so what this site tries to do is point out that bias. In particular, it focusses on the Middle East.

In the spirit of that web site, I thought it would be interesting to create www.HonestTelco.com (now there’s an oxymoron), where people could debunk the latest deception in the telco market. Instead of a dedicated web site, you will soon see a special section on Quack dedicated to this topic.

What has most recently caught my eye was Vodafone’s latest changes to their capped plans. I have already expressed views on capped plans and will not elaborate here. What I do want to explore is the nature of the changes Vodafone have made.

They are “bumping up the value of our $49 Prepay Maxi Cap from $230 to a massive $310 worth”. Now, any consumer would look at that and say “Wow! That’s a 34% increase!” because that’s exactly what it looks like.

They then point out that if you used your entire cap on one standard call, you would go from 382 minutes to 397 minutes. Now that’s an increase in buying power of just 4%. Why? Because they have offset the increase in cap value by increasing the underlying rates of the standard calls - from 30c to 39c (per 30 seconds), a 30% increase.

It’s actually worse than this. You see, they have also increased the connection fee from 25c to 29c. So if, like most people, you don’t make one long 300+ minute call per month, you will be hit by an increased flagfall for each call, and therefore probably experience less buying power than before!

Why the change? I think they have done this to realign their core rates to their competitors - 3 and Optus have similar underlying capped call rates. That way, they are better able to differentiate based on the total “cap value” (another oxymoron for you).

Important to note that they have left the SMS price the same - at 25c. This means that if you only used your capped plan mobile for texting, they would cost you just 4c each (down from 5.3c). Now that is a genuine saving. And indeed, there are plenty of these SIMs connected to GSM modems and used by businesses for sending bulk SMSs.

Do you have a great example of “creative pricing” in today’s telco market? I want to hear about it.

Call me an old-fashion capitalist if you like, but what company in the world does not try to get its customers to spend more on their products? Isn’t that what business is all about?

Why is the telecommunication industry always picked on as the contributor to such social malaises as overspending and bill shock? The mobile phone has changed the world so significantly (just watch the movie Zodiac and observe the way the telephone was used back in the 1970s to get a sense of this) and, together with the internet, has led to a surge in the level of communication between people. This has value and utility to consumers, and therefore they are prepared to pay for it.

Instead, academia are more interested in the the potential social evils associated with mobile phones, and protecting our youngsters.

Chris Althaus, CEO of AMTA responds that the industry is aware of this, and has implemented a variety of initiatives to make consumers more aware. Yes and no. While pre-paid allows true control of your spend, the price you pay is high - literally. Actual call rates are quite exhorbitant for most pre-paid customers. And don’t get me started on capped plans - they are the ultimate in consumer deception.

I’m a firm believer in the free market. And at the end of the day, customers have and will vote with their feet. In particular, the youth market are the most savvy around and are not as easily fooled as people make out.

It has been a feature of mobile phone markets to “give away” (i.e. subsidize) handsets over a contract period. It is also common here for pay TV. In either case, the contracts are “needed” to amortize the customer acquisition cost (handset, pay TV installation and/or STB) and also to ensure the customer does not churn away.

What I want to question is the value of lock-in contracts in preventing churn.

Contracts can have a few different impacts on the customers themselves, and their behaviour and perception of the vendor.

One thing they can do is lock in a rate and commitment to service over a period of time. However, in the telco and data worlds, prices trend down in the long term, so this is of little value to customers.

If a customer is unhappy, being in a contract can make them less happy - in addition to poor service, they are unable to leave without incurring a penalty, which is like rubbing salt into the wound. On the other hand, it they are happy (or not unhappy enough to want to do something), a contract can sometimes be a good thing. Firstly, they often get some “perceived value” (handsets, plasma screen, jelly beans) at the start of the contract period. Secondly, they may use the existence of the contract to deflect nasty telemarketers (”p*ss off, I’m in a contract”).

So to summarize, contracts:

• have no (or negative) value for fixing rates
• make unhappy customers more so
• don’t necessarily make happy customers more sticky
• carry a maintenance overhead

Perhaps this is why Vodafone dumped them (for a while) and promoted the “freedom” angle of no contracts. Certainly, a similar argument can and has been made against network-locking of handsets.

My view is that if you keep a customer happy, they will stay a customer. Unfortunately, that argument isn’t good enough for your bean counters to allow you to spend $1000+ acquiring each one!

Are you able to quantify the benefits of customer contracts?

Very short because it’s limit is 140 characters. To me, that screams of SMS (160 characters) minus 20 for something. The something is probably provision for advertising or other revenue generating information. And the apparently chosen transport of SMS is because it’s the only one that carriers can actually make money on.

What the social networking sites are doing (and this is especially exemplified by Facebook) is bringing people to a whole new level of “intimacy” and connectedness about each others’ lives. So you get a running commentary of what is going on with your friends, and their friends, and so on.

This is hugely increasing the volume of communication across the network - not in a way that needs tons of bandwidth like broadband does, but rather with a large number of very small messages.

So the big question is: how to turn these social trends (which are being driven by both online communities, and peoples’ insatiable and ever increasing desire to know what is going on everywhere, up to the minute) into a revenue opportunity?

The typical answer is with advertising, which is the classical revenue model for portals.

However, twitters take it one step further, and tap into the other addiction, and that is to use SMS as a transport. Nothing is yet to topple this juggernaut, which continues to provide great revenues, and is the swiss army knife of the telecommunications world.

So are twitters the convergence of social networking and telecommunications carriers (or MVNOs)? This could just be a match made in heaven. What do you think?

Regular readers will know that I am one of those PDA freaks, of the Treo subvariety. It is a fantastic, functional, device that does many things I need whenever, wherever. However, being a complex animal, it does reboot every now and then (sometimes every day). I take the good with the bad, and on balance, it’s great.

Speaking to people who use i-mates, Sony Ericsson M-series, or the new Nokia N-series, I hear similar feedback. These things do crash on a regular basis.

For someone used to a regular mobile phone that is just a phone, and always works, day in, day out, this is a major culture shock. We have always perceived the telephone as a “hardware” device that offers a high degree of availability. However, as these devices become more clever and complex, they have a greater dependence on a larger operating system, software (some of it third-party), and intrinsic to that is a reduction in their reliability.

Blackberry did it right. They chose to limit the functionality to phone and e-mail, and do those really well. So those devices are very popular, and very reliable.

As the battle for the personal device rages on, more toys will come out trying to do more and more. Some of them might even allow you to make phone calls. It is reminiscent of the early days of digital watches (yes, I am that old), where they offered a myriad of stopwatches, timers, and other functions.

Now, when Microsoft puts up their hand as a provider of phone systems, I am afraid. Very afraid. Business telephone systems must work, keep working, and never stop working. Like the trusty NEC system that we still use at my office and has been running straight for a few years with nary a hiccup. Microsoft just don’t have that sort of inherent reliability in their systems. Anyone can do integration between a phone system and the Office suite - you don’t need a phone system from the same vendor.

This, together with some of my PDA examples, is a case of vendors try be everything to everyone, and that is impossible.

Would you buy a phone system from Microsoft?

The Telco Gospel, Chapter 1. In the Beginning, there was Long Distance Resale. And the Resellers saw that the margins were generous, and that arbitrage opportunities abounded. And the Customers saw that discounts were available, and flocked to the Resellers like the seagulls. And the Resellers enjoyed the simplicity of selling everything at a mark-up. And the Regulator saw that it was Good.

Yes, it was good back in those days. With a single, simple, product to sell, retail pricing and revenue assurance was straightforward because resellers were selling something in substantially the same form as they bought it. The wholesale systems from the carriers were either non-existent or primitive, but they did the job. Billing of just one product was quite easy.

Things started to get interesting with the introduction of products like capped calls by the carriers. Unlike resellers, carriers had fixed infrastructure costs and a very low marginal cost per call, so they could leverage this during off peak times. This posed a challenge for resellers who had to pay for any call at a wholesale rate, and could potentially lose money on some capped calls.

With the addition of mobiles to the reseller mix, the gap between how a product was bought and sold became wider. On a wholesale basis, it was mostly pure airtime, but the retail plans were full of “magic tricks” like 30-second billing, on-net special rates, included spend, and subsidized handsets. Again, carriers had a different cost structure, and deep pockets. This posed a major pricing challenge for resellers, who were still not used to selling anything at a loss.

The billing picture also became more complex as resellers started selling multiple products: long distance, line rental, mobiles, and data. Putting all of these on a single bill was a significant challenge. Fortunately, this was far more difficult for the slow-moving carriers – for them, it was cheaper and faster to just get another billing system than to integrate into existing systems.

More recent trends such as capped plans, and multi-product bundles have further widened the gap between the structure of what is bought and sold by resellers, and caused rating and billing to become more complex still. However, this brings with it opportunity to innovate and differentiate far more than in the past.

So where to from here? The shift of voice to run over data/IP networks leads the charge towards selling a raw “data pipe” with applications layered above it. These will be voice, content, software applications, movies, games, and more. The way these are packaged will be more and more as bundles. It will be interesting to see how the variety of suppliers: network providers, content providers, and aggregators or resellers, work together in the future.

From a vendor perspective (carrier, service provider, technology provider), this is awfully scary. It’s hard enough to predict where things will be in two or three years at the most stable of times in the telecomms world.

Recent research shows major shifts ahead in the VOIP world. We have already seen technologies like Skype and Jajah threaten to cause a mass exodus from traditional telcos.

This is all about “product substitution”. What is on offer to customers is a fundamental change to the way they communicate. As an example, in the fixed-to-mobile substitution scenario, which has been happening here for some time already, customers are asked the question: “do you really need your home/fixed phone?” and many are chosing to abandon it in favour of just a mobile.

With VOIP and other new technologies, the same question is being asked: “are you prepared to change the way you communicate?” To do something different than pick up a handset, dial a number, and have someone answer it at the other end.

So now, the question is: how quickly might customers change, and which customers are most prone to change. The answer, of course, depends on the particular proposition put to the customer. In the case of fixed-to-mobile, the substitution would especially appeal to someone who is never home and always reliant on their answering machine, or a “road warrior” who is never at their desk in an office.

Now consider the equivalent in the VOIP situation: who is most likely to be prepared to change, or be early adopters? Well, it is clearly those who have already voted with their feet - the mass market, low ARPU, residential customers. They are the ones who have embraced Skype, Vonage, and Engin, and are on the cusp of throwing out their fixed phones completely.

But what about business customers? Well, there are a raft of business VOIP offerings, from the likes of Powertel, and recently Optus have thrown their towel into the ring. But it’s important to consider that businesses have very different telecommunications needs to residential customers. In fact, you could easily segment businesses (as carriers do) in to a handful of categories, each with their own (very different) needs and constraints.

My view is that businesses will not be running to disruptive technologies and changes to their IT&T infrastructure, and will not migrate en masse until there are simple, proven, and comprehensive solutions that deliver both voice and data, and do so with a smooth transition. This is something not yet available here, and which may take some time to evolve.

What is your experience in this market sector?