Archive for August, 2007
Posted by: Eric in Opinion
The TMF recently asked me to write an article about revenue assurance in Latin America. To write it, I spoke with a quite a few RA people working in the region. If the you disagree with the content you should blame them, but if you like it you can thank me. The article will be translated into Spanish and mailed to TMF members. For those of you who do not read Spanish, or are not members of the TMF, I have included the English version below. Enjoy! (and do not tell the TMF you read it here first…)
Revenue assurance, the practice of detecting and preventing avoidable financial leaks from business operations, has entered the telecoms mainstream. In a few years it has changed from being a little-known niche into a permanent feature in almost every telco. Is revenue assurance the same all over the world? Yes and no. Technology works much the same everywhere, and people do not differ greatly. So you can find similar causes of leakage on every continent. What differs are markets, governments, products, and attitudes. These create different challenges and priorities in each part of the world. Latin America, where each country is at a different stage of liberalization and many show signs of “leapfrogging” to mobile telephony, poses some special challenges for the revenue assurance executive. At the same time, it has become one of the most dynamic regions in adopting revenue assurance best practice. Dr. Gadi Solotorevsky, leader of the TM Forum’s Revenue Assurance team and Chief Scientist at cVidya, a revenue assurance software and consulting business that supplies several Latin American telcos, commented:
“We find Latin America, even in strong and well-established revenue assurance departments, to be very open to new ideas. Until recently there was limited knowledge of the revenue assurance guidance published by the TM Forum, but now there is a lot of interest in the team’s work. I have spoken with quite a few Latin American operators, some customers of cVidya, some not, and all of them want to learn more.”
The typical Latin American tier one or tier two operator now has a dedicated revenue assurance function. Some of the issues they deal with are more practical or physical than those faced by European or North American revenue assurance practitioners. The difficulties of collecting cash from payphones, managing the impact of power outages and implementing adequate physical security over copper wire are just some of the problems that often fall within the broad remit of revenue assurance in Latin America. However, the risks that need to be managed expand as markets grow. According to the International Telecommunications Union, Latin American mobile subscriptions are now roughly double the number for fixed lines. Such rapid growth in the market poses problems for the wireless service provider, which has to counter fraud, maintain control over prepaid top-ups and ensure everyone accessing their radio network is associated with a bill or prepay account. At the same time, they need to try to ensure systems and processes are scalable and efficient to keep pace with demand. Fixed-line traffic has also grown, driven by strong economies and off-shoring of services. Customer numbers are rising overall. Coupled with the introduction of new products, this has forced telcos to change their systems to cope. When systems are changed, resources need to be allocated to manage the migration of data and avoid the introduction of any errors. Many find at this point that they are confronted with the extra task of cleansing old and corrupt data that had been maintained in their legacy systems. This all contributes to a greatly heightened risk of costly errors going unnoticed.
Fidel Aponte, Regional Revenue Assurance Manager for the Americas & Caribbean in Cable & Wireless, summed up the biggest challenge for revenue assurance: “change is constant”. He explained how revenue assurance in the region is evolving to keep pace with change.
“In the past, revenue assurance was not part of the business culture. By demonstrating the benefits to the business, and by helping meet the goal of rapidly bringing new products to market whilst assuring they are accurately rated and billed, we have changed that perception. We used to be seen as a kind of road block, creating delays. Now we are seen as people who add value.”
Fidel and his peers have gradually shifted the understanding of the role of revenue assurance in Latin America. The increasing pace of change puts the burden on revenue assurance to work well with the rest of the business. This means two things. First, revenue assurance needs to work hard to communicate its purpose and integrate with other activities. Second, revenue assurance needs to encourage a modification of the business culture, where implementing controls to prevent leakage is treated as an objective to be realized as change takes place, not as an obstacle. Whilst Fidel has seen great improvements in how revenue assurance is regarded, he recognized that the hard work is far from over: “we need to continue to evolve in order to keep up to speed.”
Increased competition has made revenue assurance more difficult in many Latin American countries. Competition encourages a more rapid change of prices, the making of special offers and promotions, and sometimes leads to more complicated tariff schemes. If changes in prices are not tightly controlled, from the maintenance of reference data right through to the publication of marketing materials, it can lead to costly or embarrassing miscalculations. As customer expectations rise, it can be hard to ensure that billing integrity and presentation keeps pace. Whilst billing integrity is rarely a factor in prompting customers to first switch providers, it can be a major reason for why customers switch back to their original provider. In some ways, the reputation damage caused by over billing can be worse, and is certainly harder to measure, than the losses suffered from under billing.
Growth in the retail market has had the knock-on impact of increasing the revenue assurance burden on wholesale traffic carriers, whether domestic or international. As markets get liberalized, telcos find themselves needing better systems and processes to manage billing and settlement with an increasing number of other providers. They are simultaneously under regulatory pressure to open up and connect networks in the shortest time possible. Telcos setting up a new operation have the difficulty of trying to ensure that all their new systems work correctly and that they can keep a track on what they owe their partners. Established carriers need to be able to manage more partners using their network. Many of them will have no previous credit history so care is needed in managing the relationship. Failings in a partner’s systems may make reconciliation and agreement of balances more difficult, so it is vital that the carrier has complete confidence in their own numbers. In addition to managing debt and payments with other telcos, more attention must be spent on preventing mistakes. A flaw in the management of number ranges or of inter-carrier prices, if identified and exploited by a rival business, can very quickly result in large losses. That means extra attention must be paid when businesses upgrade their interconnect and wholesale billing systems, often as a direct consequence of market liberalization. Unlike in Europe, where new revenue assurance departments often spent several years focusing on retail and corporate products before broadening their scope, Latin American providers have had to take a more balanced approach. All revenue streams need to be included in the scope of the Revenue Assurance department from the outset.
One topic that cannot be generalized is the influence of laws and regulations in each country. However, it is key that each Latin American telco defines its own revenue assurance strategy with their national obligations in mind. Whilst learning from the experiences of others is a good way to drive improvement, it is a mistake to simplistically follow a generic strategy written by an international consultant with no local knowledge. Priorities and policies need to be aligned to the needs of each specific country. In the worst cases, following a generic model can lead to the purchase or development of inappropriate revenue assurance tools and systems. Dr. Solotorevsky explained:
“Regulation and law varies significantly between Latin American countries. In countries where providers cannot issue back bills, revenue assurance needs to be more proactive and prevent leaks before they occur. In countries where it is hard to terminate a customer’s service, more emphasis must be placed on the integrity and quality of data used in customer acquisition.”
The more things change, the more they stay the same. Liberalization and increasing penetration are driving the Latin American market forward, and adding to the burdens of revenue assurance. Meanwhile, revenue assurance managers are learning from and sharing information with colleagues in other parts of the world. The knowledge they gain is reapplied to create a model for revenue assurance tailored to their particular needs. They are not waiting for mistakes to happen, but are leading the way in explaining the financial consequences of allowing leakages due to operational weaknesses. The Latin American revenue assurance experience is to learn from the past mistakes of others, to better prepare for future challenges.
Posted by: Eric in Opinion
There is a bundle that most mobile operators offer but that rarely gets described as a bundle. The bundle is the combination of a service with a handset. The extent to which the handset is subsidized corresponds to the extent of the commitment the customer makes to pay for a service. Bundling is hardly a new business concept and it features widely in the media and telecoms sector. Bundling can also generate some fascinating blind spots for busy-body regulators. Whilst the EU feels compelled to stop the cost of local and national wireless calls being subsidized by roaming, they are strangely silent about the common practice of subsidizing handsets. This is because it is also very popular. The funny thing about subsidies is that subsidizing something is popular with customers but overcharging something else to pay for a subsidy is not ;) Popular though handset subsidies may be, they are still a distortion of the market. Customers with little or no interest in changing their handsets are made to subsidize, through higher usage and subscription costs, more fickle consumers prepared to churn to whichever provider offers the most fashionable handset.
The thing with subsidies that regulators usually get upset about is that it means people do not pay a fair price for what they get. They pay too much for some things and too little for others. The justification for business is that it all works out fair on average, but that is little comfort to the customers who do worse than average. The business rationale is even more straightforward: it influences people to buy more than they probably would otherwise. Think of switching mobile service provider to get a new handset and signing a new contract as entering a loan arrangement, but where the interest rates are not clearly explained. The aim is to present the price in a way that looks more attractive to a customer, whilst actually being more expensive, or in such a way that as to encourage the making of a purchase or commitment they otherwise would not. Sometimes, though, selling things cheaply may be an inappropriate strategy. Charging a lot may reinforce the impression of quality. This is true of Apple’s iPhone. The last thing Apple wanted is a subsidy from service providers. Much better that the customer pays the full price and Apple’s iPhone retains the cachet associated with that price. Even better still that the product is guaranteed to sell well despite being much more expensive than competitors. So Apple have used their unique market position to reverse the normal economic principles governing the relationship between handset manufacturer and service provider. Instead of wanting the service provider to subsidize the handset, Apple has insisted on receiving 10% of ongoing revenues in its recent deals to provide iPhones to European providers. The upside for the service providers is they do not have to pay a fixed amount for each handset. This eliminates some of the risk associated with subsidized handsets; customers may not make enough calls to generate the revenues needed to compensate the provider’s initial outlay. Think what Apple’s revenue share means for the customer. They do not know it, but they pay for their mobile phone not once but over and over. As well as the price of the handset, 10% of every call charge will go to Apple. What is Apple really doing to earn this money? It is not as if they are bearing any of the costs associated with connecting the call. Not that I expect this pricing oddity will generate any interest amongst the regulators either – they have no chance of beating Apple in a popularity battle if the implication is that the iPhone’s price would be even higher. That is the implication. The true cost of an iPhone = the price people think they pay for the handset + 10% of the cost of usage. So buying an iPhone is just another kind of loan arrangement, where the initial price is held low but the customer has to pay more in the long run.
The moral of the story here is that, in a free market, you can charge whatever you like, and however you like, if people are happy to pay for it. And what people think they are paying for, and what they actually pay for, may be quite different. And that there is no such thing as a free market, which is why businesses do exclusivity deals like those being made between Apple and service providers in each country. So there are lots of morals to this story ;) Some people are so keen to get an iPhone they simply do not care who provides the network and hence what their phone service is like. Apple knows this and is exploiting it. Service providers will happily pay the extra to Apple if it secures them revenues from otherwise unattainable customers. They will try to enforce the exclusivity element of their deal, as demonstrated by AT&T’s robust response to a Belfast firm offering to unlock iPhones. If regulators really cared about ensuring free markets work correctly, they would question the purpose of exclusivity deals between handset manufacturers and service providers. But regulators rarely pick a fight they think they will lose and this fight is not likely to make them more popular either.
Because some people will suffer any network service to get Apple’s handset, one question is when, not if, Apple will enter the market as a virtual network. If Apple’s brand continues to be so much stronger than the brands of the networks it deals with, it might as well spin the Apple brand into the virtual supply of the service as well as selling the consumer electronics. This would fit perfectly with the Apple mantra of exercising control over the complete customer experience through proprietary rights over all the elements of the products and services that contribute to the experience. All they need to do is to build up market share and when they reach the critical point, just port all their customers to the new Apple service provider. They have already begun down this path, as demonstrated by Apple taking over the ownership of service activation. Instead of this being done by AT&T, new iPhone users initiate their service through Apple’s iTunes portal. If Apple were to become a service provider, an even more intriguing question would follow. All and sundry, including Arun Sarin, have pointed out over the last few years that usage charging will eventually be eliminated in favour of eat-all-you-want subscription charges. If customers are not paying for usage, and are keen to have their handset upgraded at regular intervals, it also follows that Apple would not need to levy a subscription fee either. They could simply offer a contract where the customer pays for the handset and is given a year’s worth of service inclusive in the charge. Then, when the year is up, if not sooner, the customer would be encouraged to buy the latest model of handset. By getting all its charges paid up-front, Apple would have a huge cashflow advantage over other providers. The worst that could happen would be that people unlock their iPhone and take it to another network, but this would be of little concern to Apple who would already have banked all the revenue they were expecting to earn from that customer. Apple would also be safe in the knowledge that the customer who churns will incur extra service charges to be on another service provider, and that the churning customer will not be able to get a new Apple phone without once again paying a full, service inclusive, charge. In addition, some of the features would only be supported on Apple’s network. So customers who buy the phone and integrated service can be expected to stay loyal to Apple so long as the phones continue to be more desirable than those offered by rivals.
It is possible to continue this thought process a few steps further still. So far, we have envisaged a world where the service for your calls and data is included in the cost of a new telephone. As we can see in the evolution of television and other entertainment services, everything could be supplied down the same bitpipe. Apple, with good reason, are aware of this and already sell a television product. If the cost of a telephone service were bundled into the one-off charge for a handset, why not apply the same model to all forms of entertainment? Many television providers already charge for both the customer’s choice of channels and for rental of a personal video recorder. By the same logic, why not bundle the cost of the channels into the charge for the recorder or whatever the device employed to manage the download and replay of content? The industry will simply have returned to the same business rationale as when Japanese hi-tech firms went on a spree of buying Hollywood movie studios: make money from the hardware, and treat the content as the way of enticing sales. If the content is free because it is user-generated, like YouTube, all the better for making fat profits. So in future I expect you may see something that would currently be unimaginable. Interactive television would encourage viewers to make a voluntary payment to the makers of a television show they particularly enjoy. They would just need to press a button and call up a donation screen during or after the show. This approach to raising funds would not be that different to the way PBS public service television in the US depends on donations. Leaving a tip would be the viewer’s way of showing appreciation, like paying for service at a restaurant. Such tips would be voluntary, but it would be the one way to really show viewers appreciate the creativity of the artists, or the objectivity of the reporters, that made the program. Otherwise the typical customer will note that their bills for hardware state that service, including artistic creativity, is included.
What would this mean for revenue assurance? Well, it would make retail billing very very simple, so the risks of leakage at that end would fall. However, it may also lead to more complicated revenue sharing arrangements, with lots and lots of risks for everybody either paying or receiving a share. Do I really think this will happen? Yes and no. I doubt this exact series of events will happen, but I do think that pricing and revenue sharing arrangements will get more varied. Traditional assumptions about who pays who for what will be overturned at least sometimes if not most of the time. A lot will come down to bargaining power – which is why Apple is able to get unique deals. That bargaining power is inextricably linked to the customer’s perception of what they are paying for. To increase their influence, service providers will need to do a better job of selling their service, rather than relying upon handsets to do it for them. So far they are losing the battle. Paying mega-bucks to Apple may help win more customers, especially useful with a flagging brand like T-Mobile in Germany, but it reinforces the idea that customers should be indifferent to who provides the service. That will suit the handset manufacturers fine. They in turn will continue to branch out to be seen as an element in the supply of content, as in the case of Apple’s iTunes and Nokia’s new online music service. The big manufacturers are levering their brand loyalty in order to force networks into a secondary role in terms of managing the relationship to customers, and so far it looks like the networks are struggling to respond and build more loyalty. Even the Taiwanese handset manufacturer HTC, little-known to consumers but makers of extremely popular devices that are typically supplied under the service provider’s brand, has changed its business model in response. Now HTC has reorganized its business in order to make and promote HTC-branded handsets. I can personally sympathize with their business logic. Why make a great little device and put the service provider’s logo on it, when customers who contact the provider about the device just get informed that they should contact the manufacturer instead? In my case I contacted T-Mobile UK about unlocking the HTC-manufactured, T-Mobile branded handset known as the MDA. T-Mobile UK responded by sending me a letter with a pin number and stating I should contact the manufacturer for instructions on what to do with it. That is pretty poor brand management in itself, but what made it hilarious was that they even directed me to the wrong manufacturer – for some reason they mistakenly told me that Sony Ericsson made the device! Luckily I knew better so wasted no time because of T-Mobile’s incompetence.
Who will win this struggle with brands to get the greatest bargaining power? In my opinion, the handset manufacturers have already won and Apple’s revenue share deal is only the first sign that the war is over. On the Interbrand index of the top 100 global brands in 2007, Nokia ranks 5, Apple is at 33, and even LG makes it to the list in 97th place. There is not a single service provider on the list. The only businesses that can realistically compete with the manufacturers are the other big players in the software/internet/technology world – the Microsofts and Googles – and the makers and owners of content. Given how Apple is currently bashing the music industry into submission, it looks like the content makers are faring little better than service providers, although if Apple lost share in the download market to rivals like Microsoft and Nokia that might help the content companies get on a more even footing. Even so, this struggle between hardware, software and content is where the real action is. Communications service providers have turned themselves into the technology world’s equivalent of airlines – unloved and only able to compete on price. Which only leaves one question in my mind: now that they get a share of service usage, who assures the revenues of Apple?
Posted by: Eric in Opinion
Most media and telco businesses are constantly trying to find ways to generate more revenue from advertisements. The rise of the Googles of the world is nothing more than a bid to steal ad revenues that would otherwise be spent on traditional media. Customers, though, do their best to avoid them. Both sides are using increasingly sophisticated technology to win this battle. Ofcom’s 2007 review of the UK communications market hints at a vital sign that customers may be getting the upper hand over traditional media. It reports that 15% now have a digital video recorder (DVR) and up to 78% of adults who own them say they always, or almost always, fast-forward through the adverts when watching the shows they have recorded. That undermines the prospects of using traditional ad breaks as a way to promote products, and hence inhibits the revenue potential for broadcasters.
The likely retaliation from television broadcasters will be to weave more advertising into the actual content of the show, like the infamous Zero Halliburton case that featured prominently in the television show Lost. That was no one-off for Zero Halliburton. Placement in television and films is a key element of Zero Halliburton’s promotional strategy. Several episodes of Lost revolved around how the case was durable and virtually impossible to break into. National laws to prevent such aggressive product placement were stretched to their limit when handling the inclusion of a product that was also so deeply and repeatedly embedded within the plot of a popular program. The EU solved the problem of US shows featuring product placements by giving in – instead of trying to stop them, it changed course and gave the broadcasters the right to charge for them like any other adverts.
Other tactics will be to offer more interesting ad campaigns where the consumer pulls the ad rather than having it pushed at them, or spreads the content by choice, on a viral basis. However, only so many campaigns will be able to get the attention of the public meaning that the traditional forced push of unavoidable adverts will still be key for many companies. So rather than putting money into traditional television, expect more money to go into internet-based campaigns, where the power of computing offers more options and can force eye-catching adverts to be placed precisely alongside content. One of the factors driving companies, including traditional broadcasters, to offer IP-TV is that it will give them increased control over placement and prominence of adverts within and alongside the television stream. Although I say that adverts are placed ‘alongside’ content, a lot of internet advertising appears right in the middle of the content, so can hardly be avoided. There has always been a large segment of the internet/computing universe which is altruistic/open source/anarchistic in nature. The question in my mind is whether they are looking for ways to write browser code to strip advertising content and suppress its display. And if they succeed, where would that leave the business model of the Googles of the world?