Why are incumbents so afraid of being truthful? (part 1)

The Novatel U998 wireless modem "Up to" 21 Mbps

Passive eyeballs staring blankly at the TV screen from potato-like, humanoid forms draped across the couch are part of the cool business models no longer. Welcome to the Age of the User Experience. Unless you happen to be an ISP.

The other day I got another piece of junk unsolicited mail from Bell, this one promoting its Novatel U998 wireless modem, aka the Turbo Stick. (Apparently you are deemed by Canada Post to have “solicited” a piece of mail as long as it’s addressed to you as “The Resident.”)

The front of the card talks excitedly about “One extra-large, super-fast, anytime, anywhere connection – to go.” The back of the card then throws the Legal Dept’s wet blanket all over the deal, in nearly 200 words of fine print – enough for a short blog post. Just in case you actually read all the footnotes (which among other things make it clear the Stick does not work anywhere), take heart. Sign up now and you’ll get a $20 Starbucks Gift Card – free!

“Other conditions apply”

Let’s start with this simple-minded and bankrupt giveaway, the world’s second most annoying marketing gimmick after Enter to Win.  Here’s the math.

The card says you can get the Stick free if you sign up for a 3-yr term (to save the $174.95 retail hardware cost). The minimum plan goes for $30/month – but that’s with a Bell Bundle and without the extras. For no bundle: according to footnote #2, that’s $35 over 36 months or $1,260. Then add the $35 activation fee and ballpark the 9-1-1 fee at $1/month (“Subject to change without notice”), making the total $1,331. If you don’t happen to know about the paper bill surcharge, add another $2/month for the 36 months – $1,403. Add taxes: $1,571.36.

How do you like that Venti Frappuccino now? The Starbucks giveaway represents 1.3% of the value of what you’re comitting yourself to on a 3-year plan. According to the baristas in my Starbucks office, the average customer ticket is about $4 a pop. So this free gift might last you a week, on a deal that commits you to Bell for 156 weeks.

And the Stick? At the full retail of $174.95, you stand to save a whopping 12% of what you’ll owe Bell over the 156 weeks. And remember, we’re looking at the lowest quoted rate plan and we haven’t checked what happens when you start behaving like a bandwidth hog.

Is ARPU a stupid metric for business success?

Incumbent carriers (by which I mean North America’s ILECs, wireless providers and cablecos) are masters of the fine-print shell game. The Bard [oops] Mark Twain must have been thinking of his ILEC when he said “Familiarity breeds contempt.” The more you get to know about your incumbent service provider, be it telco or cableco, the less there is to like. As we peel away the layers of that big, stinkin’ ISP onion, grown men are reduced to tears of frustration and remorse. Been there.

Why? Why do the deciders at Bell and other incumbents make their every word and deed (except in the big print) so goddam hostile? Why is telco and cable service so notoriously awful? Is it greed? Poor management? Old habits dying hard?

Incumbents abuse their customers for two reasons. First because they can. And second because obscurantism generates cash. Ambushing customers with hidden and under-explained charges, for items like bandwidth overages and roaming, pads out a firm’s ARPU. Average revenue per user is a vital metric in the ISP, BDU and wireless industries. I’m sure investors and analysts love it. But it’s a crappy way to build a business. ARPU is a revenue model entirely alien to the user experience and the Web 2.0 customer relationship.

No loyalty in the walled garden

For companies with sufficient market power, customer loyalty doesn’t matter. What does matter is the ability to exercise gatekeeping control, so that customers become contract captives, switching costs remain high and service charges are unrelated to user value. For years, we paid our mobile carriers the infamous “system access fee.” Last September, CBC News reported that Rogers Wireless cancelled the system access fee – and promptly added a “regulatory recovery fee,” while increasing the base rates for its plans by $5.

That same month, Peter Nowak posted a related wireless story demonstrating that “Canada’s big three far outstrip global peers in margins and monthly revenue.” A Merrill Lynch study reported that our three largest mobile carriers had a combined profit margin of 45.9% – the highest in all 23 developed countries examined. Does this have anything to do with ARPU? You betcha…

“Rogers, Bell and Telus arrived at the high profit margins by bringing in correspondingly lofty revenue from customers. In the wireless industry’s key measure of monthly average revenue per user, or ARPU, Canadian carriers came in not just second-highest among developed countries, but second-highest in the world. Of the total of 53 developed and emerging countries tracked by Merrill Lynch, Canadian carriers’ monthly ARPU of $60.83 US was second only to Ireland’s $62.97 US. Among developed nations, the average ARPU was $44.24 US.”

How did we get into this mess?

Please click here for Part 2.