New Landscape in China’s Telecom Market (5) Fee Rates of 3G Services
The key of the attack and defense between operators is the fee rate.
[+] Fee rates reflect the mindsets of operators
Telecom services are basic services. The prime goods involved are "fee rates" (and "terminals" too). Selling communication services is like selling bottled water. It is difficult to target at the right market segment. Why do consumers have brand preference even when they cannot tell the difference between the tastes of bottled water? Since any operator can ensure uninterrupted communication, why do consumers prefer specific brands?
Players offering homogeneous products would be trapped into an endless price war, which would eventually erode the profit margin of everybody, if they do not differentiate their brands and fee rates. So far, few researches on the telecom restructuring mention the price competition strategy. Fortunately, I have the experience of working at a 3G mobile operator as the one in charge of service package pricing. Therefore, I do have something to share with my readers.
The first challenge in the post-restructuring 3G market is to attract subscribers of others while ensuring successful migration of the existing customer base. The key is the fee rate. As is shown in the following chart, operators adopting strategy D tend to have strong brands. Therefore, their 3G fee rates would be at the same level of 2G and no discount is expected.
Such operators would choose to gradually migrate their 2G subscribers to the 3G network. With the same voice fee rates for both 3G and 2G services, the migration will not reduce their revenue. However, why should consumers switch to 3G if there’s no discount? Do you really believe that the "rich portfolio of value-added 3G services" is the cause?
[+] No price cut v.s. deep price cut
In fact, only a small number of people would switch to 3G for value-added services. For the vast majority, they neither know nor care about what 3G is. But they will consider anything "that’s cheaper". "Price cut" is capable of boosting sales without having to explain to the customer what 3G is.
Operators adopting strategy D have enough confidence that their subscribers will not betray them for lower rates. Therefore, they are patient enough to sell 3G as value-added services of 2G. Nevertheless, they will need to give the subscribers something real. So they begin to cut the prices for mobile Internet services deeply to cater for those who have switched to 3G really for value-added services.
It seems that only New China Mobile has the ability to adopt such a strategy. However, New China Unicom and New China Telecom are waiting to launch a price war. For them, strategy B is milder and worth trying. However, the real price killer is strategy A. Low 3G rate packages plus simple, affordable handsets, seem to be ready to sweep across the market.
Anyone who triggers a price war would get hurt, too. At least with its own 2G subscribers flooding into 3G, its revenue would decrease. However, with its CDMA, New China Telecom doesn’t have to worry, for its existing PHS service is cheap enough. If New China Telecom’s 3G fee rates could be as low as that of PHS, it would be powerful enough to drive all rivals out of the market.
[+] Ways to cut price
Direct discount, e.g., the offering of a 3G rate based on the discount of a 2G rate, is the least desirable way for a price cut. Powerful as it is, there’s no tactics to say. Imagine this: how about 50% off for calls between 3G users of New China Unicom? As communication between subscribers of the same operator consumes only internal resources and does not involve settlement with other operators. This would be a useful and low-cost way.
It would enable New China Unicom to maintain 2G fee rates for 3G services, while offering 50% off for communication between its 3G subscribers. In addition, it would attract consumers in couples or in groups. For example, lovers or family members would switch to the service together to benefit from the 50% off discount. It enables operators to build up their customer bases fast.
You might want to ask: "aren’t lovers’ or family packages very common in today’s market?" The fact is most packages available in the market require the payment of an additional fee monthly. What I mean, however, is automatic availability without the need to pay for an additional package. The practice, which offers different fee rates for "on-net" and "off-net" calls and favorable rates for the former, has been popular around the world for years. But it has never appeared in China. For example:
A 2G subscriber of New China Unicom calls a 2G subscriber of New China Mobile (off-net): RMB X/second;
A 2G subscriber of New China Unicom calls a 3G subscriber of New China Mobile (off-net): RMB X/second;
A 3G subscriber of New China Unicom calls a 2G subscriber of New China Mobile (off-net): RMB X/second;
A 3G subscriber of New China Unicom calls a 3G subscriber of New China Mobile (off-net): RMB X/second;
A 3G subscriber of New China Unicom calls another 3G subscriber of New China Unicom (on-net): RMB 0.5X/second;
A 3G subscriber of New China Unicom calls a 2G subscriber of New China Unicom (on-net): RMB 0.5X/second;
The above fee rates would have a number of results. 1) It would attract groups of subscribers of other operators to use the 3G services of New China Unicom to benefit from its favorable rates; 2) existing 2G subscribers of New China Unicom will speed up their migration to 3G for the favorable rates, without causing substantial loss to the revenue of the operator. In fact, if it is New China Mobile that adopts the above practice, the result would be even more stunning, as it has a formidable customer base. The problem is New China Mobile might think it is an unnecessary act.
Maybe you would ask: "why 50% off instead of 20% off?" Mainly because 50% off is more impressive.
What if New China Unicom and New China Telecom both use the same weapon? How would New China Mobile respond? It could simply offer 50% off for calls between its 3G and 2G subscribers, while maintaining the rates for other services. It would enable faster migration of existing 2G subscribers to 3G, and allow the operator to respond calmly to the price war waged by rivals.
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Next : New Landscape in China’s Telecom Market (6) Insight into 3G Price War in Taiwan
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