The Dilbert comic strip for today was a perfect trigger for me to revisit something I’ve been thinking about for a while, and that’s the impact of apathy and laggards on the adoption of new technologies in telecom (something I promised to write about here), but almost more importantly the abandonment of old technologies. Here’s the strip:

The key point that I’ve been thinking about recently is that these late adopters or laggards have a pretty dramatic effect on telecom spending, in that they considerably slow the rate of change, and especially the rate at which old services decline.

A case in point: AT&T’s standalone long distance voice service. This used to be AT&T’s bread and butter, alongside its services for business customers, and it sold it aggressively (as illustrated by New Yorker cartoonist Kim Warp in another cartoon, at left). In 2001 it made just under $14 billion from these services and made up the vast majority of its consumer revenues. Around that time, local telcos such as Verizon, SBC and BellSouth began marketing their own long-distance services, sold as part of a bundle with local services and over time broadband and video as well. Also, in 2003 the FTC introduced the ‘Do Not Call’ list, preventing companies like AT&T, MCI and Sprint (and also obviously many others in other industries) from cold-calling non-customers to sell their services. This in essence destroyed the main way these companies signed up new customers.

As a result of both of these trends, AT&T saw its long-distance revenues drop from that $14 billion in 2001 to $10.4 billion in 2002 and $7.5 billion in 2003. That’s a pretty steep decline for a core service. But look at the equivalent number for 2007: $3.7 billion. Yes, it’s about half what it was in 2003, which is a steep decline. But look at it a different way: this is a service that AT&T hasn’t marketed for five years and which competitors have been aggressively selling against for even longer. And yet the subscriber base has only declined by 50% in four years.

That’s actually pretty remarkable! Every one of the customers still using AT&T for long-distance must have been contacted by their local phone company to add long-distance to their package, and yet they’ve resisted? Why? Because these people are by their very nature apathetic about changing services that serve them perfectly well – they’re classic laggards when it comes to new technology. And yes, I’m sure the over-60 set is unusually well represented among this group as the Dilbert cartoon seems to imply.

But they’re not the only ones. A few years ago I heard one manager at a telco talk about two types of customers in the context of bundled services:

• Those who were cash rich but time poor. This group tended to be favor a telco bundle, because the money saved by switching to several individual products at a lower price was worth less to them than the time they’d spend researching, choosing and switching replacement products. Busy professionals earning a decent living would be among the prime examples.
• Those who were time rich but cash poor. These people needed to save money wherever they could and had the time and inclination to hunt down the best possible deal, even from multiple separate providers if appropriate. 

Laggards don’t just include the seniors who simply can’t keep up with changes in technology and just want the phone to work. They also include those in the first group above – young and middle-aged, affluent people. The interesting thing is that, although all providers naturally chase the group most likely to switch, this is often a mistake. The laggards can often be far better customers, because once you’ve got them they’re much less likely to switch to someone else. The second group would have taken up the old AT&T, MCI and Sprint on every offer presented during a telemarketing call and probably ended up being paid to take long-distance service from whichever provider they were using at any given time. Those are the worst customers in the world to have!

Telcos should be doing everything they can to ensure that they can hold on to those customers that are motivated by inertia more than they are motivated by cost savings. A former colleague of mine did some analysis a few years ago about net present value related to wireless subscriptions, and he discovered that the ‘glovebox phone’ – the cellphone someone signs up for and then stashes in the glovebox in the car for emergencies – is the highest net present value subscription that carrier has – lots of revenue, hardly any cost. And they’ll never churn.

In all the segmentation work telcos are currently engaging in, they need to ensure that this group is identified and respected for what it is: the backbone of their business. Obviously a telco can’t afford only to attract those customers in this laggard group – at least at current revenue levels. There are many more customers who are much more likely to churn, and lost customers to win back. But this group of customers can be the anchor for a broader customer base, and provides the economies of scale to keep costs low for the rest of your customers. This group of customers provides a massive chunk of overall cash flow and margin. So this segment should be rewarded for its loyalty with perks and appreciation. In addition, telcos shouldn’t take steps designed to save 1-2% of customers which reduce prices for the other 98% of customers as well, including those who were already entirely happy with their service and very unlikely to switch. 

On the flip side, though, telcos also need to understand that these customers will still be on an old network even when the vast majority of the base has migrated to the new technology. Shutting down analogue cellular networks was delayed for a long time because of the rump of subscribers still using those old phones (or at least keeping them in gloveboxes). ATM and Frame Relay networks (yes, this effect applies in business too – businesses can be at least as inert as individuals) will have to be run for several more years even if the vast majority of customers have migrated to MPLS. This means you have to find ways to migrate those customers gracefully when the time comes, in such a way that they suffer no disruption and the service works the way it always did (don’t be tempted to think that it has to be better – they won’t see it that way).

Overall, my key message is that this group, and the effect of inertia and apathy on telecoms growth, cannot be ignored. These are some of the most valuable customers telcos have, they need to be served differently, and they don’t want to migrate to the latest greatest product or platform. Telcos need to understand all of that better and act accordingly.

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There was yet another article recently on the topic of why we all need faster broadband – this time on the GigaOM site. What’s funny is that the same arguments have been made for faster broadband ever since the days of dial-up, and they really haven’t moved on that much. In brief, here are the three reasons the author thinks government should invest in broadband:

Educational Access

Today the New York Times ran an article about the rising costs of a college education and offered up the idea of distance learning as being one solution to rising costs. I don’t think distance learning can substitute for the entire college experience, but having participated in several distance learning classes, it can be used in conjunction with meetings online or weekly in-person meetings  to create a rich learning and discussion environment. Broadband makes that possible today, and faster speeds will only add to the interactivity of those online environments — making a college education more accessible. The kids who most benefit from this are not living in FiOS areas; they are in poorer areas where ISPs try to avoid or delay launching high speed services. I know, I live in one of those areas. The government needs to step up to improve this access divide.

Medical Care Improvements

Broadband also can save on medical costs and improve access to health care. A release issued todayhighlighted radiologists’ frustration with quality of care. Ninety-four percent of radiologists surveyed blamed missed or delayed diagnosis on the inability of medical imaging systems to communicate with information systems of physicians and hospitals. Delivering radiological scans via broadband requires fat pipes and rapid speeds, but the benefit to patients, insurers and doctors would be many: fewer scans, faster delivery of images where they are needed, and lower costs associated with the process.

Telecommuting Expansion

Another benefit of better broadband would be the ability for people to telecommute. This has far-reaching benefits, from fewer cars on the roads to increasing a family’s resilience in the face of economic uncertainty. As a telecommuter, when I change jobs I don’t have to sell my house, uproot my husband’s career or leave the network of friends and family who support us. The more people who have that flexibility, the less traumatizing job loss can be both for the individual family and for a particular region.

Education, telemedicine, and telecommuting are all arguments that have been used from the beginning. So is the issue really insufficient speed at this point? No – it isn’t. Cultural issues are a much bigger barrier to these things than Internet speeds are.

The reason we don’t have more telecommuting? Because many companies still don’t believe in it, or provide it as an opportunity for their employees. The vast majority of employees of the vast majority of companies have plenty bandwidth available at home – 3Mbit/s or more – for $50 a month or so, which would be plenty to do most desk-based jobs – certainly enough for IP telephony and remote access to enterprise applications. Unless you’re working in media or other fields where you need to move around huge files, bandwidth just isn’t an issue.

The reason we don’t have telemedicine? We do, only it’s restricted to a few areas where it really makes sense. Most patients – and most doctors – still prefer the face to face approach that has worked for thousands of years, and rightly so. Unless we all have full-immersion virtual reality suites in our homes telemedicine is always going to be fairly basic. But it has a role in very remote areas such as the Australian outback, where doctors are able to connect with distant medical facilities as needed to provide specialist advice.

The reason we don’t have remote learning in education? Again, we already do, and it’s expanding rapidly. It doesn’t require that much bandwidth to deliver video content, to allow for voice or other interaction between students and teachers, or to do many of the other things that are required to allow education to thrive. Again, a standard broadband connection available to the vast majority of the population is sufficient.

Sure, we should be aiming for faster speeds over time to allow things like delivery of HD video and faster transfer of large files and so on, but these are really incremental improvements at this point, and none of them are required to make the three things listed by the GigaOM author possible. Rather, cultural changes and an awareness of the benefits and possibilities associated with broadband will make the biggest difference. But let’s not make this yet another area where the government gets involved in a way which prejudices the way the market develops.

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There’s been a lot of hullaballoo about the BlackBerry Storm over the last couple of weeks. David Pogue, normally so mild mannered, used his print column to lambast the device from several different directions. Another example of the kind of critiques that have been going around is here.

Pogue’s column generated a fair amount of both commendation and condemnation according to his latest blog post, and understandably so. He seemed unusually vituperative about the device compared with his normal even handedness, and you sensed a certain amount of annoyance at the way Verizon Wireless refused to acknowledge the bugs in the device and that this annoyance might have colored the rest of his commentary. At the same time, many users (including me) seem to have experienced similar problems and he gave their frustration voice.

All in all, I agree with some of what Pogue said but don’t feel quite as strongly about it all as he did. I like a number of things about the device:

• the exterior is very attractive – both front and back – the black glassy finish over the front looks nice and sleek and the brushed metal finish on the battery cover adds further class. Feels more solid than the Curve and a number of other recent BlackBerries.
• The user interface is also attractive, although the default Verizon red is a little offputting. The new wireframe icons that debuted with the Bold and continued with the Flip are here too and look pretty good on the whole (although downloaded applications still use the same logos they always have, making them look out of place among the minimalist native ones)
• The email and other PIM functions BlackBerries are famous for are still first class.

But there are a number of problems with the device, too, and the main one is the implementation of the touch screen. I’ve never understood why anyone thought tactile feedback was a useful thing with a touchscreen. If tactile feedback is your thing, then you should really buy a device with a keyboard. If you like touchscreens you don’t get tactile feedback and that’s just fine. What does that tactile feedback do for you anyway? If you hit the wrong key on the virtual keyboard (or more likely in the Storm’s case, select the wrong item in a menu) the feedback is the same – the same clicky sound you’d have got if you hit the right key or selected the right menu item. The Sprint Instinct tried to solve the same perceived problem in a different way – with “haptic” feedback (little vibrations confirming virtual key presses) which was just as useless and also a little distracting.

RIM has made the mistake of assuming that people who want a touchscreen are actually closet QWERTY keyboard addicts. Even if they pretend they’re willing to forego the keyboard they really want a clicky feel afterall – they’re just in denial. No. They actually prefer the flexibility of a keyboard and have made a deliberate decision to do without the clicky keyboard, thank you very much. If I wanted both a touchscreen and a keyboard I’d have bought a Treo.

I had the same issues as David Pogue as regards using the virtual keyboard and the touchscreen in general. Coming from the iPhone (which is my main personal device) the two-layered touchscreen (selection via regular touch, action via hard push) was unintutive – I kept finding myself wondering why things weren’t happening after I had clearly touched the screen as indicated by the on-screen highlighting on the object touched. Admittedly, one would get used to this after a while, but it also takes considerably more effort to push the screen down to the point of clicking compared with other touch screens, which would get old quickly and tiring soon after.

Then there’s the portrait mode implementation of the virtual keyboard, where the device uses the Suretype keyboard layout instead of just a more tightly spaced QWERTY layout as the iPhone does. This is frustrating for those of us who don’t regularly use suretype or other predictive text keyboards. And using the keyboard in landscape mode takes up so much of the screen as to be useless too.

RIM should have realised that, in other areas too, other touchscreen phones – especially the iPhone – have now defined the expected user experience. In Google Maps and the web browser, multi-touch commands like pinching are now the norm on other devices, but not on the Storm. You double-click (as with the iPhone) to zoom, but have to hit the back button to zoom out again (never would have figured that one out on my own). As with the Bold, where this also annoyed me, even perfectly visible links can’t be clicked on until you’ve zoomed into the page – an issue you don’t have with the iPhone where precision finger clicking can be done when in full page view of a webpage.

The acceleromter-powered screen rotation is either much too slow or much too eager – taking ages to turn when you rotate the device very deliberately but constantly switching to landscape mode when you so much as look at the device at a different angle. I don’t know how RIM has managed to create both problems at once but they have.

I’ll stop complaining there – I actually like the device a lot, and a lot of its foibles just take some getting used to. But it really feels like RIM was making a device for reluctant touchscreen users instead of touchscreen enthusiasts, and as a result has rather handicapped what could have been a much more compelling device. Instead of trying to reinvent the full-screen touch device, it should have recognised that Apple defined that space with the iPhone, creating certain expectations, and that the best BlackBerry could do was match the iPhone for ease of use and design and improve on it with all the stuff BlackBerries do best. Instead of which, they’ve combined a sub-par interface with those BlackBerry goodies and come out behind the iPhone instead of in front of it, at least for this user.

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Scott Cleland of Precursor has posted a very interesting analysis of Google’s usage of bandwidth and the associated costs. He claims that Google is underpaying for its bandwidth by a factor of 21 based on a variety of calculations and estimates. The analysis is sound up to a point but it then makes the mistake of conflating two things that are really separate and don’t make much sense being treated the same. I posted a comment on his blog but since it hasn’t appeared (neither have any others) I’ve posted it here too.

In essence I think Scott’s doing a solid job of representing his clients – the telcos – but he also repeats a trope that began, I think, with Ed Whitacre – that Google is somehow using telco bandwidth for free when it should be paying for it. I use an analogy below to critique the analysis because this stuff is complex enough to benefit from it. Let me use another here to critique this idea that Google somehow ought to be paying its fair share. Say a store in a certain area suddenly starts doing great business, and customers are flocking to it on the local bus system. Would it be reasonable for the bus company to start charging the store to recoup some of its costs when all its customers are already paying the prices it has decided to charge in order to ride the bus? No. If it is unable to fund its costs from the prices currently being paid then it needs to charge more or seek ways to reduce its costs. The store isn’t the problem – in fact it’s doing good by creating more demand for the company’s services.

The telcos have no business asking Google to fund the costs of consumer broadband connections any more than the bus company has any right to ask the store owner to subsidise bus tickets. With that, I’ll leave you to the comment I posted on Scott’s blog.

Scott,

You’ve done some very interesting and useful analysis here. Thank you for sharing it with us.

However, one criticism is that you conflate two things and treat them as if they were the same and part of the same category: namely, consumer broadband spending and service provider bandwidth spending. These two things happen at opposite ends of the internet value chain and are entirely separate.

In chart VI of your report you act as if consumer broadband and dial-up internet access spending and Google’s spending on bandwidth were the only chunks of money being spent on bandwidth/broadband in the US. This is, of course, not true. Google’s spending should properly be put in the context of overall service provider spending on bandwidth, not treated as part of consumer internet access spending.

Measuring Google’s spending as a proportion of consumer internet access spending is meaningless – it’s like asking how much it costs the Yankees to drive their players to the stadium as a fraction of how much it costs all the fans to get to the stadium. You’ll get a number of out that but it won’t mean anything.

I would suggest calculating how much Google pays for bandwidth as a portion of all the spending by service providers on bandwidth used to serve US consumers. Your numbers might be just as stark, but at least then you’d be measuring the right thing.

The study attempts to push a theory that AT&T under Ed Whitacre but also others among the broadband providers have attempted to push for some time, which is that consumers and Google and others should all just pay their “fair share” of the costs of the Internet. However, this simply isn’t the way free markets work: the fact is that there is a value chain and different players pay for different parts (as they do in any other free market).

Google pays less than it otherwise might because it has so many peering arrangements (entered into voluntarily by the various parties to them) which it doesn’t pay anything for. That’s the way the system works, and large broadband providers benefit from it too. AT&T, Verizon, Qwest and the cable companies are perfectly free to develop their own business models to compete with Google and are entirely within their rights to sign whatever agreements they want to. No-one is forcing them into anything. They can also charge their customers less or more if they think that will solve the problem. The real issue here is that bandwidth use is skyrocketing and broadband providers don’t want to pass the costs on to their customers, but those customers are causing the increase in costs and should rightfully pay for it.

I’m not a stooge for Google or the broadband providers (though the broadband providers are clients of mine) but I think this analysis needs some tweaks before it becomes really meaningful. Thanks again for some very interesting groundwork though.

Note: I’ve heard Scott argue against net neutrality at a couple of industry events and I think he actually makes some really good arguments (although I think there – as here – he sometimes overplays his hand). I have a lot of respect for the work he does and I’m grateful for the analysis he’s done here too.

Note 2: Google has posted its own critique / response here.

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