channel strategy 2

8/4/2019 Channel Strategy 2

1/41

Distribution Channel Strategy

Madrid, July 17th, 2001


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1

1. Introduction

2. The Spanish mobile market

3. Channel Strategy

- The role of distribution channels

- Trends and emerging issues

4. Clients main challenges regarding Channel Strategy

5. DCs Channel Strategy approach and methodology

Contents


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2

1. Introduction


3. Channel Strategy





Contents


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3

Introduction

The wireless industry globally is facing significant changes:

High license cost that have to be recovered.

Constant pressure by the stock market.

Slow growth due to market saturation.

Falling ARPU as consequence of decreasing tariffs and commoditization of voice services.

The challenge for the operator is to capitalize on GPRS/UMTS technology by launching mobile data

services to generate additional revenue streams to stop ARPU decrease.

Data services are far more complex than voice services, thus the sales and service organizations of the

operator have to adapt to that increasing complexity.

Due to market saturation, the marketing focus of the operator shifted from customer acquisition to

customer retention.

Todays distribution channels are poorly prepared for selling and servicing data services, as their

traditional function was mere dispatching of products to cope with high growth rates.

The future distribution channel must be able to sell complex services and play a important role in

customer retention.


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1. Introduction


3. Channel Strategy






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The Spanish mobile market has experienced a strong growth in the past threeyears and is now entering a maturity stage

According to EMC, by February 2001, the total Spanish mobile market reached 25.847 thousand subscribers and a

market penetration of aprox. 63%.

The high growth rate verified since 1999 is related to the entry of the 3 rd GSM operator Amena.

Evolution of Total Mobile SubscribersSpanish Market (Un: 1000 subs)

9442.996

4.337

7.051

15.005

24.052

Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00

CAGR = 490%

Source: Comisin del Mercado de las Telecomunicaciones

0

20

40

60

80

100

120

AlternativeStage

ComplementaryStage

SubstitutionStageSaturation

Stage India

USA

Spain

Sweden Finland

No fixed lineavailable

Mobile as acomplement forfixed voicecommunication

The mobilestarts tosubstitute thefixed telephonyfor voicecommunication

Mobile telephonydominates andextends itself todata and videoservices

Mobile Voice Lifecycle

Penetrationrate(%)


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As a result of the penetration of low-end market segments and decreasingtariffs, ARPU is constantly eroding

ARPU and MOU have constantly

decreased due to the penetration of low-

end market segments. The market

converged into a mass market where

sales volume is key to success.

Fierce competition and the consequent

reduction of voice tariffs had an

additional negative impact on the ARPU.

High market growth rates have so far off-

set the ARPU decrease. Thus the total

revenue of each operator is still

increasing.

However, that situation will dramatically

change due to market saturation.

Summary ARPU Assumptions

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003 2004 2005

ARPU(EUR

permonth)

Airtel Vodafone EMEA

Source: Lehman Brothers


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Despite the entrance of a 3rd operator in 1998, Client was able to maintain itsmarket share. However, recently Clients market share is decreasing

Amena was able to capture significant market

share right from its launch in 1998.

Despite the entrance of Amena, Client was able

to maintain and even increase its market share

during 1998.

In 1999 however, Amena gains caused equal

losses in market share of both, Client and

Telefnica Mviles Espaa, thus Clients market

share suffered a decrease by 4 % points.

This trend is partly due to the fact that Client

started shifting its focus on retaining its valuable

customers rather than acquiring additional low-end customers.

Market Share GSM M arket

0%

20%

40%

60%

80%

100%

1.1.98 1.7.98 1.1.99 1.7.99 1.1.00 1.7.00 1.1.01

amena

Airtel

Telefnica

Source: Expansin directo


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The entry of a 4th player, combined with the launch of GPRS / UMTS services, isslowly leading the Spanish mobile operators to change their market approaches

Client has structured its short-term strategy around three main axes:

Focus on high value market segments

Retention policies

Adding value through data services

Being the market challenger and Spains first convergent operator (wireless, wireline, Internet), Client hasadopted a positioning rather similar to Telefnica Mviles, targeting all market segments with main focus on highusage customers. This is a different market approach from the other two alternative operators (Amena andXfera), which have chosen to focus on young dynamic customers mainly through the launch of innovative

products with competitive pricing schemes

Costumer retention has made Client and Telefnica Mviles Espaa adopt a variety of loyalty programs mainlybased on the accumulation of points - with the objective of decreasing churn, while keeping its most valuable

clients. On the other hand, Amena and, after Fall 2001, xfera will sti ll be mainly focused on customer acquisition.

UMTS service launch in 2003 (after an initial postponement) will allow all four operators to offer a broad variety of

rather complex solutions to their end customers. The early launch of GPRS this year represents a way of dealingwith UMTS delays and a test bed for UMTS applications, while locking in the client.


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In conclusion, the operators are facing a unseen series of challenges to whichare being forced to react accordingly

Competition is stronger than ever before

Tariffs are eroding

ARPU is decreasing

Market growth is slowing down

Voice services become a commodity

Data services get more and more complex

Investments in licenses reached exorbitant levels

Capex requirements for infrastructure are enormous

New technologies are not mature, causing significant delays

Develop new products and services

based on 2.5G/ 3G technologies

Focus on customer profitability andretention

Conversion of distribution channelsfrom dispatchers to customerservice centers

KEY ISSUES


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Key issues (I) - Develop new products and services based on 2.5G/3Gtechnologies

Within the 2.5G/ 3G value network,

the operators ability to extract value

and maintain ownership of the

customer is threatened by a variety

new market enablers and competitors.

While costs associated with advanced

wireless services are clear and

substantial, the revenue generated by

these services and who captures this

revenue is less clear.

There are still no proven economic

models, product profitability is the

overarching issue.

DistributionChannels Internet Direct / indirect

Customers

Terminal Device Suppliers WAP handsets Bluetooth or MExE - enabled devices

PDA / other devices

Hardware/Network Vendors GPRS providers UMTS providers Supporting software

Consumers Corporate MVNO

3rd Parties

Content Providers & Merchants Infotainment

Merchants Vertical market Aggregators

SolutionIntegrators System integrators Hardware vendors

MobilePortals

Direct competition

for customer

ownership

Mobile Network Operators Existing mobile operators Greenfield operators MVNOs

Application Providers Horizontal applications (e.g. E -mail, CRM)

Vertical applications (e.g. Mobile banking,Telemetry)

Customized mobile internet servicesTransaction/Settlement

Processors Financial institutions Mobile wallets

TechnologyPlatform Vendors Browsers OS (e.g. EPOC/Palm/Symbian) Internal OSS Gateways

Source: X Consulting Advanced Mobile Services Solution Set


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Key issues (II) - Focus on customer profitability and retention

The churn rate was very high in

1999, mainly due to the entry of the

3rd new entrant, Amena. It has

subsequently decreased.

The first challenge would be to keep

churn low through customerretention to minimize churn-off to the

4th new entrant, xfera.

Another associated challenge would

be to retain the most valuable

customers to turn around ARPU

decrease.

Source: Bear, Stearns International Ltd; EMC Database

Client vs. Telefnica Moviles EspaaChurn (%)

15

20

25

30

35

1999A 2000E 2001E 2002E 2003E

Churn TelefnicaChurnClient

%40

32

28,2

24,5

22,2

20,8

37,2

23,2

20,6 20,618,5


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Key issues (III) - Conversion of distribution channels from dispatchers tocustomer service centers

The distribution channel strategy in the past was designed to achieve a broad coverage

of the population to support strong subscriber growth.

The basic function of a distribution channel was to dispatch handsets or pre-paid packs

and activate basic voice service.

Given the low level of growth, the current distribution channel network is over-

dimensioned.

Due to the complexity of future data services, distribution channels have to convert from

mere dispatchers of handsets to customer service centers that offer a wide range of

services ranging from technical assistance, product configuration, installation and

maintenance, training, help desk, etc.

The products offered will have to include PDAs, handheld computers, PCs, software,

and a wide range of accessories.

Future distribution channels also have to assume customer care functions to play an

important role in customer retention.

Distribution Channels

Own shops

Sales Force

Contact Center

Web Channels

Agents

Franchises

Small retailers

Major Retailers


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1. Introduction


3. Channel Strategy






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1. Introduction


3. Channel Strategy






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CRITICAL SUCCESS FACTORS

As in other european countries, strong client / service orientation will be keyfactors to effectively address the future challenges of the Spanish mobile market

High churn rates

Lower voice MoU

Decreasing ARPU

Strong weight of SAC on cost structure

Lower operational margins

INTERNALISS

UES

MARKETISSUES Market saturation / massification

Maturity stage for mobile voice

Heavy competition

Lower tariffs

Lower product differentiation / commodity

CLIENT ACQUISITION STAGE CLIENT RETENTION STAGE

Data traffic growth

Increased product complexity

Increased product variety

Increased Competition

Individualised / non-standard customer needs

Increased replacement of SAC by SRC

Different costumer profiles

Decrease on churn rates

Expected increase on value per subscriber

Higher focus on customer service asdifferentiation factor

Client knowledge

Client segmentation

Internal process efficiency & cost control

Broad scope of service offer

Customer care

Integrated salesapproach

Non exhaustive

time


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Therefore, client-related activities, mostly developed by the distribution channels,are gaining overall importance in the process of achieving competitive advantage

Client knowledge

Client segmentation

Customer care

Integrated salesapproach

Internal processefficiency & costcontrol

Broad scope of serviceoffer

Information

Education

Pre-qualification

Promotion

POS marketing, Merchandising

Prospection

Product/service selection

Sales

Credit scoring

Financing

Ordering / Provisioning

Contract negotiation

Billing and paymentprocessing

Service activation

Product configuration

Installation

Costumer care

Customer monitoring

Detection of cross-selling

opportunities Training and technical support

Customer training

Help Desk

Maintenance

Problem/complaints handling

Customer retention

Core Distribution Activities towards the customer

ACQUISITIONTRANSACTION /

DELIVERY

SERVICING /

MAINTENANCE

Direct channels

Agents Small Retailers Major Retailers Franchises

Own Shops Sales Force Contact Centers Web Channels

Non exhaustive

CRITICAL SUCCESSFACTORS

Indirect channels


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Distribution channels main characteristics (1/2)

Web Channels

Own Shops

Sales Force

MAIN RESPONSABILITIES

Contact Centers

Directly owned by the operator or by a V-Partner;

Bi-directional, interactive, personalized low-cost channel;

Increasing spectrum of activities; may allow self-provisioning;

Constraints regarding information availability, customer usage

(depending on Internet penetration rate).

Directly owned or outsourced to a 3rd party (specialist);

Lower operational costs than previous 2 channels;

Generally focused on after-sales activities;

Problems regarding staff turnover and training;

Can be combined with other channels, namely web, media and

mailing concept of contact center;

Less personalized contact, though allowing a proactive behaviortowards the costumer in terms of monitoring, promotion;

campaigns, etc.

Directly owned and managed by the mobile operator; High initial investment associated; high maintenance costs;

Location is a key issue central/ commercial urban areas;

Promotes operators brand awareness, allows end-to-endservicing.

Directly employed and coordinated by the mobile operator;

Covers almost all distribution activities;

High set-up and maintenance costs associated;

Personalizes client / channel relationship;

Generally suited to high value customers.

Non exhaustive

5 5

DESCRIPTION

5

2 4

3 5

Legend: from Major role to1

Less important role


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Distribution channels main characteristics (2/2)

Agents

Small Retailers(Kiosks; Gas Stations;

Stationary Shops)

Major Retailers(Store-withina-store;

Department Stores;Supermarkets;

Electronic Shops)

MAIN RESPONSABILITIES

Franchises

Exclusive distribution of the service of a single operator;

Works as an extension of the operators own shops, acquiringcostumers and giving technical support;

Close relationship operator / channel: investment sharing,strong level of control, transversal branding / promotion.

Generally non-exclusive agreements;

Broad coverage, low cost and good time- to-market;

Limited range of activities, focus on selling pre-paid products;

Requires strong distribution relation management efforts.

Generally non-exclusive agreements;

Strong channel negotiation power; risk of lack of control;

Broad coverage, high sales rotation ideal for fast growing

markets with standardized products/services;

Main focus on selling activities to mass market.

Not exhaustive

5

2

3

5

2 2

3

5

1

DESCRIPTION

Independent sales representative;

Low cost, good time-to-market;

Allows broad coverage of disperse customers;

Exclusivity is a major issue, as generally distributes services ofmultiple operators;

Risk of lack of control - alignment with operators sales &marketing and commission strategy can be a major issue.

Legend: from Major role to1

Less important role


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Channel mix choices often reflect a specific mobile operators strategic positioning,service offering and life-cycle stage

Contact Centres

Directchannels

Web Channels

Agents

Franchises

Small Retailers

Mass Market

Indirectchannels

Own Shops

Major Retailers

Sales Force

Product differentiation

Average channel cost per costumer

Costumer loyalty

Average revenue per costumer

More important

Less important

+-

Niche playerStrategic Positioning


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Costumer-related costs, including the ones directly related to distributionchannels, have a strong impact on the total cost structure of a mobile operator

Operational service costs (2000)- mobile operator -

Source: X Consulting Survey

Costumer service, Biling and other MS

support represent aprox. 42% of the total

operating costs in a standard mobile

operators cost structure.

Therefore, distribution is one of the areas

where cost reduction and process efficiency

would have a major impact on overall

business profitability.

Interconnection Fees

26%

Customer Service

22%Network Maintenance

and Operations

22%

Biling

10%

MS support other than

biling

10%

Other

10%


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1. Introduction


3. Channel Strategy






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The changes in the Spanish mobile market are shaping the evolution of bothdistribution channel roles and mix

GPRS / UMTS

Non-standardized costumer needs

TECHNOLOGY

MARKET DEMAND COMPETITION

Non-standardized complex solutions

Increased product varietyIncrease on Internet penetration and usage

Commoditization of voice needsEntry of a 4th operator

MOBILE OPERATORS DISTRIBUTION CHANNELS

Retention cost

Revenues per client Acquisition cost

Customer relationship

New client acquisition

Customer loyalty Customer/ Channel profitability


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Technology is changing the economics of distribution channels, while allowing rolesharing by broadening the range of activities performed by non-physical channels

5 %

80 %

30 %

50 %

5 %

15 %

20 %

20 %

20 %

5 %

35 %

10 %5 %

15 %

70 %

Operations

Increase in transactions1998 2002 (CAGR)

Channel mix

Currentaccount status

Tranfers Informationrequests

Sales

10 - 20 % 5 - 7 % 10 - 20 % 2 - 5 %

Agencies

Call center

ATM

Mailing

Web

Average reductionon channel costs

- 82 % - 37 % - 33 % - 15 %

15 %

5 %

80 %

30 %

50 %

5 %

15 %

20 %

20 %

20 %

5 %

35 %

10 %5 %

15 %

70 %

Operations

Increase in transactions1998 2002 (CAGR)

Channel mix

Currentaccount status

Tranfers Informationrequests

Sales

10 - 20 % 5 - 7 % 10 - 20 % 2 - 5 %

Agencies

Call center

ATM

Mailing

Web

Average reductionon channel costs

- 82 % - 37 % - 33 % - 15 %

15 %

Internet has broadened the

channel mix, by increasing the

usage potential of a set of non-

physical low-cost channels,

namely the web.

Additionally, IT improvements -

mostly related to internal systems

integration - have contributed to a

overall decrease in channel costs,

as well as improved channel

control.

In the near future, the extent of

utilization of the web channel will

depend upon Internet penetration

and e-commerce rates, which are

still low in the Spanish Market.

Impact of technology in channel mix and distribution costs

(Financial Services / Banking system France)

Illustrative

Source: X Consulting - France


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As a result, overall customer-related costs will tend to decrease in the folowingyears, while investments will shift from acquisition to susbcriber retention

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005

SAC's SRC's

Evolution of SAC and SRC as a percentage of revenuesD2 Vodaphone

%o

fRevenues

Source: Lehman Brothers estimates

0% 20% 40% 60% 80% 100%

Profitability

Quality of

client service

Increase No Change Decrease

Source: IDC 2000, Datamonitor 2000

Effects of the Web call center(French Mobile Market)

The slow down on mobile market growth will result on a major shift from customer acquisition effords to costumer retention

Non-physical channels will play a major role on achieving profitability, while maintaining high standards of customer service for

basic customer needs


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As the voice market matures, the link between channel strategy and CustomerValue Management will need to increase

280%

70%

30%

-180%

Profitable

Non-profitable

CLIENTS PROFITS

280%

70%

30%

-180%

Profitable

Non-profitable

CLIENTS PROFITS

Illustrative

Client Profitability Mobile Market -

Effective segmentation and continuous assessment of client/channel profitability will become major issues

The alignment between client needs/value and channel capabilities/costresults on the migration of less attractive segments to lower cost channels

- +Sales force / Own shopsWeb

CLIENTVALUE

-

+

CHANNEL COSTS

Pre-paid

Low Usage,No Features

Post-paidhigh usage

PROFITABLE

NON-PROFITABLE

- +Sales force / Own shopsWeb

CLIENTVALUE

-

+

CHANNEL COSTS

Pre-paid

Low Usage,No Features

Post-paidhigh usage

PROFITABLE

NON-PROFITABLE

Source: X Consulting analysis


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Wireless Unique Solutions

Enterprise Extensions

CRM/ERP/SCM Custom legacy applications High-speed dial-up

Enterprise Extensions Standard Corporate Applications

(PIM, E-Mail, messaging) Limited intranet access

Consumer Extensions

Mobile advertising Personalization (customized information) M-wallet

Basic Wireless Data Services

Consumer Wireless POS Location based services Personalization

(customized services)

Enterprise Field sales & service Inv. management ASP Services Telemetry

channel strategy 2

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