“Excessive margins always come with a sell-by date.”
The mobile industry is an interesting place at the moment. Blessed with license-based market protection, not available even in the wildest dreams of most business owners, mobile network operators have successfully held serious competitors at bay for some time now. But as this highly regulated market matures cracks are appearing in its defences.
In July roaming charges are reducing, a bit, thanks to Brussels, in a popular but not particularly painful move against operators’ margins. Now Free, the newish French mobile phone group, owned by French billionaire Xavier Niel, through his listed company Iliad, is beginning to unnerve French operators, adding 2.6m subscribers in the first 80 days of operation. Free was launched in early January and has created the perfect competitive storm by offering some mobile phone usage, to subscribers of its fixed-line business, at no charge. The big guys are now publically worried about future profitability and Vivendi in particular is in a spin. They are all slashing their dividend and profit forecasts. Whilst they may be surprised by the timing they knew it was coming – one day.
The inevitable emergence of this low tariff market, echoing the emergence of low-cost airlines, caused Orange to blink whilst its peers kept a poker face, and arguably Orange have taken the competitive lead. It has become rather unpopular amongst other operators by allowing Free access to its network, in a pre-emptive strike that it says is a hedge against this emergent market threat. Elsewhere, O2 is a notably exception in recognising the threat and doing something about it with its development of gigggaff, a novel self-service offering. I’d never heard of it until it began to sponsor my favourite TV show, The Big Bang Theory, so I thought I’d investigate.
Like Free, giffgaff has a low price proposition. It is owned by O2 and delivered on the O2 network and it has a strong relationship marketing theme. It has been positioned nicely as “The Mobile Network Run By You” as you can not only earn credits for doing some of the customer service, like answering other users’ questions, marketing and sales, but there are also benefits for friends if you sign them up too. A “collaborative network, run by you to get a better deal” is how it is sold. It incorporates a new twist on a referral scheme and is a very good defensive move in a world that could soon be populated with Free clones. giffgaff has also integrated a community/charity theme – a sort of “big society” vibe.
While mobile operators have had to invest big bucks in building and upgrading networks, they haven’t done badly out of it. But I think you can only protect your margins for so long and we seem to be entering a new competitive phase with more utility characteristics for the big guys rather than early adopter ones. I guess few will sympathise with them too much as margins shrink.
Few businesses have the benefit of such strong competitive protection. Licenses have been the industry’s main source of competitive advantage to date. Most people have to rely on much softer things, like brands and reputations and relationships with customers and they are all much easier to attack. This is why it is so important to not only understand where your competitive advantage comes from but to single-mindedly protect it.
It is one of my axioms that excessive margins always disappear, because someone is going to come after them, the only question is how long it will take. Whatever business you are in you need to do just what the mobile operators have done and hang onto your margins as long as possible.