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Siber's Space: Global And Local

Very few people navigate the global wireless industry the way Richard Siber does. As managing director of Accenture's worldwide wireless practice, Siber gets around. Racking up more than 200,000 airline miles per year, he meets with top government officials as well as executives at wireless carriers, manufacturers and financial institutions in far-flung locations.

The easy-going consultant who initially planned on being a pediatrician now doctors telecom policy for presidents of countries and fixes strategies for corporations aiming to provide advanced wireless services or incorporate them into their business plans.

Last year, Siber spent much of his time in Asia, where Accenture (formerly Andersen Consulting) has advised NTT DoCoMo since the early 1990s. Wireless Internet Magazine's Editorial Director, Judith Lockwood Purcell, recently talked with Siber about industry globalization and consolidation, changing metrics and whether U.S. carriers can keep up with DoCoMo and its wildly successful i-mode data service.

WIM: What is your macro view of the consolidation and globalization trend in wireless telecommunications? What happens next?

Siber: First, there will be further consolidation in the industry. The stronger brands will prevail. The companies with better distribution channels, alliances, volume and economies of scale [will flourish]. There are big, big bets being placed on the future, especially when we look at third-generation services, licenses and spectrum requirements. The outpouring of cash [for 3G licenses] also is creating further consolidation because multiple companies will not be able to compete for the same customer in these markets. Second, consolidation will actually create opportunities for other players. When six carriers come together as they have in Verizon, you have a considerable amount of chaos. A lot of internal consolidation must occur with billing systems, call centers, customer care, distribution capabilities and so forth. Other companies can help serve those needs.

WIM: How are the huge cash expenditures for spectrum affecting megacarrier metrics?

Siber: Carriers will not be able to reach their economic thresholds for return on investment providing 3G services without creating new business models. Selling airtime or any metric traditionally associated with the industry will go away. Carriers absolutely must be involved in the transaction side of the business and they're not set up for that.

Because the spectrum is costly and there will be excess spectrum, it appears clear that virtual mobile network operators--a fancy name for resellers--will emerge. In two or three years if there are 2,000 of these operators in the United States, I would not be surprised at all.

WIM: Which metrics in particular will go away?

Siber: Typical metrics today include average revenue per user, minutes of use, churn, POPs and adjusted POPs. Accenture and others for several years have been saying, why not look at profitability per customer? We expect to move away from the per-minute paradigm to the per-packet or profitability realm associated with per-packet. To measure carriers on who they can potentially cover doesn't make sense because there is an unlimited expense associated with that. Why would you want to cover every single person in the U.S. population? Not all of them are potential customers--some already have service, some can't afford it, some don't have a need. We count the same person, even if that individual is covered by seven different carriers in a particular market, which fundamentally doesn't make sense. Of course, DoCoMo really set the bar when it introduced the nine percent commission on transactions through its i-mode service. Capturing a percentage of every transaction going across a network for a good or service makes sound economic sense, but most carriers today just aren't set up for that.

WIM: How should profitability be computed? It's revenue minus the cost of acquisition and what other expenses?

Siber: You need to amortize and depreciate the network because you have that capital outlay, other costs including COA and overhead. In 1997 we interviewed 18 carriers around the globe and results indicated that 18 percent of their customers were generating well over 85 percent of their revenue. What's happened in the last three years is the prepaid market has become stronger globally, [and the industry is] getting involved in market segments that are buying phones for social or emergency, rather than business, purposes. [By now,] it could be 30 percent of customers generating 70 percent of the revenue, but the point is carriers have highly profitable and highly unprofitable customers. They typically don't have an understanding of who is which.

WIM: Exactly how will Bluetooth technologies affect profitability?

Siber: We believe Bluetooth is a very disruptive technology and we're big fans of its capability. Projections are for 600 million Bluetooth devices within four years based upon a price point of $5 per chip. The first chips are coming out at $25-30 per chip so that will influence the uptake. If 30 percent of subscribers are the most profitable, Bluetooth could have a major impact by skimming off those profitable customers from the carrier.

WIM: Please describe a scenario that illustrates this point.

Siber: If you and I are in the Denver airport and go into one of the frequent flyer lounges, our PC or phone will be notified that we're within a Bluetooth hub. At that point, we're not accessing a wireless network. We are bypassing the carrier and capturing high value by accessing a 1 Mbps network for free. Those minutes of access typically would be through wireline by plugging in or through wireless by dialing up. Bluetooth has vast potential, but it could also have a dramatically negative impact on the carriers' bottom lines.

WIM: Are wireless carriers adequately prepared for this effect?

Siber: Bluetooth could siphon off profitable minute or packets, but carriers are not paying a lot of attention to it. They have their hands full with building out a 2.5G network or making commitments to 3G. It will be interesting to see if carriers are caught with their pants down when Bluetooth really emerges.

WIM: Where do you see further consolidation occurring soon?

Siber: It's not limited to carriers. It affects manufacturers and portals, too.

We've been saying for a long time that the handset business is a tough one to be in and there, too, the metries must change. According to a recent Lehman Brothers report, the average margin for all devices manufactured by Motorola was somewhere around 9.6 percent. With an average wholesale price of $140, you have to sell a lot of phones to make any money- 100 million phones a year making $12 per phone to develop a significant business. Earlier this year we saw Motorola pull out of U.S. device manufacturing, which was incredible. That would be like some of the Detroit auto manufacturers just throwing in the towel. Ericsson said the same thing and outsourced all its manufacturing to Flextronics to save $1.8 billion per year.

There also will be consolidation in the portal side. How many portals can a customer base sustain? We have Yahoo, AOL, Lycos, InfoSpace and many others. In February, three of four top InfoSpace executives stepped down, the company laid off 250 employees. The chairman said a year ago this would be the first company with a $1 trillion market cap. Is that arrogance? Possibly, but the point is, within all segments of the industry, pressures are affecting corporate viability. Three years ago if you had bet me $10 that Motorola would pull out of U.S. manufacturing and AT&T Wireless Services would be the third or fourth largest wireless carrier, I would have taken that bet all day long.

WIM: Monumental economic forces are pushing not only on wireless, but also on other industries as well--banking, insurance and health care. How are changes in these segments affecting wireless?

Siber: You're absolutely right about these forces affecting all elements of all industries. Having met with perhaps nine of the top 10 banks and financial institutions in the world, [I have heard their] executives say they don't view their future competition as coming from their own industry. Rather, they view Vodafone or Sprint as competition. If the device becomes the wallet-a vision we fully support-you can see how the potential is there for a bank or credit card company to be cut out of the transaction. You can make the purchase through your device and have it billed through a third party.

Some of our leading carrier clients have engaged us to find out what it would take to become a regulated bank-type company. There is a crossover going on between various industries.

WIM: How is that blurring of business lines occurring?

Siber: Wireless is being used to get more market cap value. Schwab and Fidelity embraced wireless because it had a positive impact on their market cap. For a series of months, every company that added wireless either before Internet or public offerings saw Wall Street view it favorably. Wireless also gave those companies another vehicle for customer acquisition. In addition, some of these companies are looking at wireless as a way to reduce their cost structure. Something like 92 percent of a bank's customers contact call centers to check balances or move money within accounts [and wireless can reduce that number of calls].

Wireless provides a platform that will positively affect businesses in a variety of categories. On the other hand, it's a potential competitive threat. It's the same for retail and utilities.

WIM: If global businesses are adopting wireless for productivity and cost savings, what additional benefits can countries derive?

Siber: We have been fortunate enough to participate in the G8 Sununit and also the World Economic Forum in Davos, Switzerland. We are embracing wireless as the platform to conquer and minimize the digital divide. Wireless networks can go in cost effectively and quickly to serve a market as an alternative to wireline and they can create infrastructure in places where there is no alternative. Many countries are beginning to embrace wireless for social reform, not just voice communications and data.

Consider that half the world's population has never made a voice phone call and an even greater percentage has never accessed the Internet. You can start to appreciate that the first time many people will make a voice phone call or experience a Web environment will be through a wireless device. Emerging countries are looking at wireless as a way to improve educational systems through distance leaming and health care through telemetry, and the list goes on and on. Wireless will have a very broad impact on the businesses and cultures affected.

WIM: Let's focus on DoCoMo for a moment, because it obviously has been the global innovator the past few years. What is likely to happen as it combines efforts with AT&T Wireless Services in the United States? Also, how could the poor economic conditions in Japan affect DoCoMo's success there as well as in this country?

Siber: I agree that DoCoMo is the success story for the past couple of years. The company introduced i-mode in February 1999. The original projection was for 17 million subscribers by 2005 and DoCoMo hit that number in December, after 22 months. That's just fascinating and compelling. I-mode is built on compact HTML and some argue it's proprietary and closed, but we tend to argue the opposite. DoCoMo is very open to developers, so much so that on just about every block in Tokyo you can find four magazines on sale in most convenience stores. The publications list all the i-mode services available and even include a CD-ROM which is a developers' toolkit, so you and I could develop an i-mode service and launch it. Can you imagine that in a 7-Eleven store in the United States?

DoCoMo is the success story for mobile data and the success story for mobile commerce at this point. It has aggressive investments. DoCoMo went into KPN in the Netherlands, is a minority investor in several 3G licenses and has invested in AT&T Wireless.

WIM: Everyone wants to know whether i-mode applications will fly in the United States or Europe or whether they are too culturally specific to Japan. What's your view?

Siber: Will virtual fishing, karaoke, ring tones or off-track betting really be the killer applications in the U.S. market that they are in the Japanese market? On the surface we fully recognize the cultural differences among the various populations. However, we just completed primary research addressing that precise question. We interviewed people representing all demographics in different vertical industries in six different countries and the data indicates there are no cultural differences in wireless adoption. What that boils down to is there are some applications that may be unique to the Japanese culture, but you have to realize there are more than 1,500 official posted i-mode and 25,000 unofficial services available to the i-mode subscriber. DoCoMo suspects that latter figure could be as many as 50,000. Are 10 percent of them unique to the Japanese culture? Is it 1 percent? Because it's not 90 percent. There [apparently] are no cultural differences between the adoption and application use within wireless.

WIM: What did your research findings on privacy concerns indicate?

Siber: Older users (those over 25) are less concerned with privacy because they believe that the information already exists 'out there' about them. Those expressing issues about privacy were under 25, who thought information about them did not exist and sharing it would create an opportunity for that information to be manipulated both positively and negatively. There's much more mistrust from the younger users than older users.

WIM: Much has been said regarding the potential transfer of DoCoMo's service offerings in Japan to the United States. But it seems to me that DoCoMo's ability to astutely 'read' the Japanese market is the underlying skill that's highly transferrable to this country. For example, DoCoMo could rely upon AWS to have its finger on the pulse of the youth or business market segments and adapt accordingly. I don't see that level of skill as limited to one country's borders.

Siber: I agree completely. This company doesn't rest on its laurels. It is producing a ton of cash and is very profitable. DoCoMo will be the first company to introduce third- generation wireless, in May 2001. I-mode is wildly successful at 9.6 Kbps, not a fast service, and is moving to 64 Kbps for advanced services. In May that will move to 384 Kbps. DoCoMo is the founder of the 4G Special Interest Group and plans to launch 4G in 2007 at 20-30 Mbps. But the U.S. has not allocated spectrum for 3G. Our 700 MHz auctions have been delayed again, until Sept. 12. The point is we will launch 3G three to four years after DoCoMo launches full 3G.

WIM: The Bush Administration has been fairly quiet on this topic. There are few indications of a commitment to the momentum initiated by the Clinton Administration. What is your 'take' on U.S. readiness for 3 G?

Siber: There's been a lot of speculation ... Norman Manetta was the Secretary of Commerce [under Clinton] and is the only [key official] who remained from the Clinton cabinet. Now he's Secretary of Transportation. At least there's one voice still trying to drive this. It's too early to tell what will happen with this administration. It's been our argument that the U.S. was one or two years behind. Now it's easy for me to defend that we are two years behind Europe and four years behind Japan. The evidence is popping up all over the place. Countries will be launching 3G services when we will not even have had an auction of the spectrum ... In the United States, we are moving at a turtle's pace.

WIM: What is most needed to correct this situation? Is it spectrum, public policy, the regulatory climate or innovation on the part of carriers?

Siber: I think it's all of the above. It is having the ability to execute a vision strategically while still being able to concentrate tactically on your day-to-day operations. Take Verizon as an example. You have five companies coming together, each with a unique culture, diverse geography, different types of customers, billing systems, call centers, retail stores, employee training, signage-the list goes on and on and on. How do you consolidate and achieve financial advantages in a relatively short period of time? It can take years to achieve them. If you're Verizon, working in the middle of that and toward an IPO, it's difficult to focus on the year 2010. Verizon has had its hands tied with managing daily challenges from this vast undertaking.

WIM: What should carriers' objectives be then?

Siber: It's not just selling more phones and getting better penetration. It has to do with getting competitive again in education, health care and other aspects of society. Whoever you talk to--an educator, a Congressman or a parent-will tell you that education is in various states of disrepair. Instead of overhauling the infrastructure, why not just use wireless as the delivery mechanism to educate?

WIM: Exactly what do you have in mind beyond providing classrooms with wireless devices, which the industry has done for years?

Siber: Think about equipping every fourth grader with a PC and a Sierra Wireless card to access a network anywhere, anytime at 144 Mbps. [If a child is] home sick, instead of missing a day of school or exams, he could catch up over the weekend. Think about delivering homework or assignments or collaborating using some type of wireless device Things could improve exponentially overnight   ...President Bush is trying to make education his top-of-the-list priority, and there's a need for [this type of wireless service].

WIM: It seems ironic that Japan is experiencing severely challenging economic conditions and a lack of competitiveness attributed to govenunental policy that discourages competition. Yet DoCoMo has incredibly competitive and innovative offerings. The opposite apparently is true in the United States. We have a competitive, high-tech economy that has surged ahead of other countries the last few years, yet our carriers and the wireless industry apparently are following carriers abroad.

Siber: You summarized it eloquently. That's exactly the state of the market. We have a wide open marketplace. Years ago, the FCC and others said, 'let the market determine what the best technology is.' We wound up with four competing digital technologies [TDMA, CDMA, IDEN and GSM]. The European Telecommunications Standards Institute said, 'let the industry decide what the best technology is and then let's embrace and deploy it.' That of course was GSM. The Japanese market is fairly limited, but for some reason is the most innovative. The U.S. market is very open with opportunity at all levels and it's somewhat stagnant.

WIM: The incredible potential of China continues to make it attractive for wireless investment, but the market's diversity and uncertain governmental policy make it difficult to serve. How do you view that market for U.S. manufacturers and carriers, particularly in light of Qualconnn's trade mission there late last year?

Siber: I spent a week in Beijing in December with Irwin Jacobs [of Qualcomm] and senior executives of China's Ministry of Information and Industry. It was wild to hear that China had 70 million subscribers the first week in December, representing less than 5 percent penetration of the population. In January I heard that figure hit 84 million subscribers. By the end of the year, China could surpass the U.S. market, becoming the number one world market for subscribers. The [people I spoke with recognized] a need to be a part of the World Trade Organization and said they would not be able to achieve the growth projections without the help of foreign investment and leadership. They're recognized as a quick follower with a low-cost labor system. Having the leadership and wisdom that Qualcomm, Motorola and Ericsson bring to the table makes perfect sense. They're going to need dollar investment and people investment to train, educate and hand off.

WIM: What other trends and events are you tracking?

Siber: One, the market is big and getting bigger. Two, there are numerous nontraditional communications companies merging, moving into wireless to take advantage of wireless platforms. There's everything from Vodafone-AirTouch-Mannesmann to AOL-Time Warner to Vivendi Seagram. Three, the entire user interface is changing. It's no longer just a mobile phone, it's also the PDA with voice added, your car telematics, your refrigerator [enabled] through Bluetooth. We expect changes in user interfaces to occur very rapidly over the next several months or several quarters to the point where the introduction of speech recognition and interactive voice response will be common place. Companies like TellMe and SpeechWorks and BeVocal, many of them built on the Nuance platform, will be the natural user interface in any of those physical environments.

WIM: Let's elaborate on the third point. Take the vision a bit further.

Siber: Multiuser data will be a big play. Different segments of society will embrace wireless for different reasons-from adults who like to gamble, to kids who are hooked on video games. The device will become the remote control for all aspects of your life. It will manage your album of family pictures, let you play chess with someone around the world, access information based on your physical location, update your calendar, and the list goes on. The device becomes your wallet, your nanny-carn, the vehicle to manage all the things important to you.

WIM: Thanks for your time, Richard.

Interview conducted Feb. 9 and updated Feb. 26, 2001.