February 1998: More Competicism
When is 3 companies enough?
A couple of recent announcements in the press bring the radar blip of competition a little closer to the screen:
- The long distance cartel is being challenged by Qwest Communications, Inc. (sounds like a breakfast cereal to me), which has announced it will "break the 10¢ barrier" by offering competitive national long distance service for 7.5¢ per minute. The company is sure that customers won't mind dialing an extra 11 digits of access codes and such to get the savings. It started service in January in a handful of West Coast cities, expanding to 125 cities by the end of 1999. A scoffing executive of AT&T revealed his lack of education in physics, or in metaphors, claiming "2 years in telecommunications might as well be 2 light years."
- The city of Somerville, MA, has announced it is granting a competitive cable TV license to RCN - a flesh-and-blood Convergence company, offering cable TV, Internet access, and (resold) local phone service. RCN has already pre-sold one of its discounted service packages to some 2,300 Somerville subscribers, but a scoffing Time Warner executive warned that RCN's agressive marketing is turning off many customers: "They're pressing people really, really hard."
(New slogan idea: "Stay with Time Warner, and we promise not to bother you.")
(On the other hand, RCN's ads are slamming Time Warner customer service: "They don't answer the phone fast enough!")
Anyway, I just got through paying my own telephone and cable bills. Being in the field, I try to look at these things before I pay them (a distinct minority approach, I'm sure). With MCI (no endorsement implied), my national long distance rate plan averages out to around 10¢ per minute (5¢ Sundays, 12¢ other times, with various Friends and Foes discounts built in).
Would I be willing to dial 11 extra digits to save 3¢ per minute? Put it this way: with all the international calling we do, I signed the company up for a similar discounted international calling service, programmed all of its access codes into the speed dialer, and used it about once before I saw an MCI ad for their own low-price international calling plan. Were MCI's rates 3¢ a minute higher than the other service? I have no idea, because we haven't bothered to use the other service again.
The point is, a discount of 30% sounds impressive, and it will probably lure me to the appliance store. But 30% off 10¢? Do all the customer surveys, test marketing, demand elasticity regression analyses, and I can tell you the collective answer you'll get, especially from residential customers: "Who cares?"
Another competitor, LCI, has been advertising that its advantage over the Big Three is that it doesn't "round up to the next minute" the time charges on your calls, but instead bills in 6-second increments. Notice the stampede to save that 4¢ per call? The latest FCC figures had LCI serving about 1.4% of the U.S. long distance market.
This all reminds me of politicians who run around boasting about the massive multi-billion dollar tax cuts they'll pass, which will amount to about $37 per family after all is said and done. One flat tire in a pothole can wipe out all the "savings" from such penny-ante schemes. Most consumers don't even balance their checkbooks, anyway.
So what accounts for MCI's and Sprint's relative success? That's a topic for another ComView, but it's enough to point out that Americans care less about price competition at the margin than they do about "choice". If there is a Coke, there has to be a Pepsi, and a little upstart RC Cola for the truly rebellious, even if they all taste and cost the same. If there's a McDonald's, there must be a Burger King and a Wendy's. Does anyone bother to "price shop" these commodities? Of course not: you choose your loyalty based on your brain's biochemical reaction to the subliminal messages in their advertising, and you stick with it. The same is true of long distance companies, toilet paper brands, lite beers, and movie candy.
What does this say about the prospects for RCN, MediaOne, and the other fledgling integrated communications competitors, hoping to break both the cable TV and local phone monopolies? Not surprisingly, it suggests they may have a shot, in the long run.
First of all there would appear to by more room for significant price competition in cable service. While Time Warner announced an average 9% rate increase for its other systems throughout Massachusetts, it said it would hold off in Somerville, and "restructure" its prices. The cable bill I just paid is higher than either my local or long distance phone bill, and the only alternative today is satellite service, which costs more and doesn't include local channels.
Of course, the incumbent phone companies have wanted to get into cable for years, and have been successfully fought back at the policy level, so far. As one advocate againts cross-ownership once put it, "if municipal governments are having problems with their cable monopolies, they're going to love dealing with the telephone monopolies."
But whether it's newcomers like RCN, the Baby Bells, AT&T, or Microsoft, somebody's going to break into the subscription-based television market in a big way, some day soon. Will it last? That depends on the other forces of Convergence: e.g., whether I will be able to download real-time 100 channels over a residential phone line for no usage charge . . . but that's a fairy story for another day.
Meanwhile, the people of Somerville (no longer playfully called "Slummerville") may have the privilege of squeezing the Charmin of RCN before the rest of us. And then we can all decide whether watching the Sci-Fi Channel is more satisfying when the cable company leaves us alone, or answers the phone on time.
David N. Townsend & Associates
17 Lawrence Road
Swampscott, MA 01907 USA
tel: 1-781-477-9356 fax: 1-781-593-4707
©1998 David N. Townsend