Research Brief

Study Consumer Behavior to Sell More Broadband Abstract: To make a lasting success of consumer broadband services, providers need more detailed knowledge of customers and their buying patterns. Services tailored to the needs of specific types of user will increase revenue. By Bhawani Shankar

Recommendations for Network Service Providers ■ Invest in data gathering, mining and analysis techniques that will give a better understanding of

how households spend their money, to promote broadband services. ■ Encourage communities of users to shape the services they want and facilitate service creation. ■ For greater commercial success, look at other products and services that households spend on

and how broadband may replace or cannibalize some of them. ■ If services and applications are conceived and developed without involving the customer, there is

a high risk of commercial failure.

Publication Date: 5 December 2003

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Study Consumer Behavior to Sell More Broadband

The "Customization" Illusion Customization has been a fashionable marketing term in competitive markets. Customers across many markets have benefited from services and products that recognize their specific needs, as opposed to precompetitive, vanilla offerings. But the degree of customization available today is a far cry from the "individualization" that was promised between 1995 and 2002. From a product management perspective, customization often means quite the opposite. What network service providers (NSPs) typically want is to package different combinations of similar products — which are mass-produced — in such a way that users believe it is personalized. How and what to combine in this "mass customization" is a matter of segmentation strategy. When it comes to addressing and targeting organizations, NSPs, like other service providers, use established methods. Segmenting the market vertically, or by economic activity, dictates the kinds of challenge a company faces and its sensitivity to factors like price, time, service quality, geography and security. Most NSPs appear to do an acceptable job of segmenting large companies. They are able to model the client and the services they need. This is also a workable strategy for increasing revenue across vertical markets with similar packages. But chaos reigns when it comes to marketing services to smaller companies. Most NSPs can be justifiably accused of paying lip service to the needs of small companies, and gaining a strong foothold in midsize business markets still evades the majority. When it comes to residential markets, carriers lack credible strategies that understand the factors that create favorable changes in market behavior toward new products and services. Most broadband access services suffer because they are marketed purely on the basis of price and products, which can only achieve marginal success compared with their market potential.

Mass Market, Big Complexity Private consumers — the mass-market opportunity for broadband services — present the kind of volume that product managers hope for. While penetration of this market is growing, long-term profitability and commercial viability is questionable, given the lack of a harmonized marketing and product strategy. Initial NSP marketing strategies have rallied around price and always-on features. Some NSPs, particularly cable broadband service providers in Europe, have conducted research that identified where the premium households were, and how they spent their money. But, this knowledge has not had a tangible impact on broadband marketing plans. Most carriers do not segment this market to the same degree as business markets. Commercial success in the broadband market will elude NSPs as long as they believe that the consumer market is a simple and unsophisticated one. Nothing could be farther from the truth. There are more types of consumer than there are vertical business markets. Households can be segmented by size; age; geography; ethnic origin; income; credit risk; marital status; family size; mix of ages; sexes in the family; nationality; "regionality"; political affiliation; education; community and user group; profession; and a host of other likes and dislikes of the household. ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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This tactic has not been lost on more sophisticated retailers, such as supermarkets in developed economies. Over the past 10 years, they have undertaken extremely complex data mining and customer modeling to attract higher customer spend and to predict how it might change. Loyalty cards, for instance, have helped to keep track of customers and their buying patterns and to customize offers almost down to an individual level. Gartner Dataquest believes that although consumer adoption of broadband may hit mass-market levels, roughly 30 percent penetration, this will not necessarily bring profitability, nor will it significantly add to household spending. In Western Europe and North America, average household spending has remained at between $75 and $120 per month on telecom and information services for a decade, depending on household size and income. This is despite competition and more services being offered. Increasing use of broadband for telecom in the household will yield only modest incremental revenue for broadband services. Consumers have generally become used to using services more when they become cheaper, but not necessarily spending much more. The most notable exception to this has been the introduction of mobile services. This gave many so-called "premium" households a wholly new expenditure. Although, given usage trends, statisticians in several countries would probably put mobile phone expenses in the fashion or entertainment categories. Appreciable gains in revenue can only come from a pragmatic segmentation of the mass market. This gives carriers recognizable sectors with predictable patterns of spend and behavior. The number of such sectors could be large enough to make it seem daunting to even the most ambitious operator.

The Value in Value-Added Services The NSP industry often mistakes quantity for quality. This is another reason why it has failed to create as many commercially viable services as it promised. When it comes to mass-market content services, the general belief is that the more partnerships with content providers and the more the content, the better. Again, a rudimentary check on the behavior of the professional household will show that 500 TV channels are far from value. In reality, the value of the content is not in the content itself, but in how it is, or should be, customized for a particular palate. So what is "value"? Unfortunately for carriers, the strategies employed in the business sector for identifying and targeting value will not work in the residential sector. The differences arise from seemingly obvious issues, but which have nevertheless not been addressed. ■

Telecom services are marketed in the business sector as being essential and can make business more efficient. Basic services are a necessity for residential consumers, but it is not easy to quantify how more than basic services enhance lifestyle.

■

Organizations can justify spending more, or less, as a business case. In contrast, private consumers have shown great reluctance to change the way they buy telecom services.

Because of the size and complexity of the residential market, NSPs need to identify common behavior patterns, slice by slice. Once this slicing of functional groups of users is done, NSPs need to analyze household expenditure by "cost center." The way that households spend their money and how their budgets are organized in

©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

5 December 2003

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Study Consumer Behavior to Sell More Broadband

cost centers is described in "Broadband Economics Kick In at 2 Mbps," TELC-WWDP-0626. It is clear that households can spend several times more in one cost center relative to another, even though both may be acquiring similar products. The most obvious example that cable operators and NSPs witness is the buying of entertainment in cinemas or theaters versus in an online environment. Families can spend over 10 times as much in viewing the same content at a movie theater as they could on a pay-TV network. Often, a visit to a movie theater is accompanied by an exaggerated spend on dining out, a further loss to the telecom cost center.

The Way Forward A Consumer Brand Culture Mass-market broadband services must be designed from meticulous, frequent and detailed market research that can identify specific community groups and subsegments for some practical degree of customization. There are lessons to be learnt from the way branded and consumer goods are positioned and marketed for various customer segments. This can only happen through comprehensive data gathering aimed at profiling demographics, buying behavior and other dimensions of the consumer market that will help to create the subsegments. Data mining and customer modeling techniques will then yield insight on applications and services that will appeal. Broadband service providers should foster the creation of communities of users who share common interests. Mobile operators, for instance, are targeting specific community user groups with tailored packages — such as for teenagers lured toward a package of custom-designed handsets capable of supporting interactive games and gaming services. These communities will, over time help to define consumer subsegment and the kinds of service and applications might succeed. Analyzing and segmenting the market will provide the foundation for commercial success. But this will not necessarily define the services that will make money for NSPs. The greatest commercial success will come in environments where the analysis is supported by a framework that allows users the freedom to demand and refine the services. The classic example here is DoCoMo's role in facilitating the development of services that were relevant to young gamers by bringing them together and giving them the tools for shaping the services that they wanted. NSPs that conceive and develop services and applications without engaging the customer run a high risk of commercial failure.

Look Beyond the Telecom Cost Center Understanding how households organize their budgets will be key to increasing revenues from broadband services. NSPs need not address the telecom cost center alone. Just as remote working helps to cut back transportation costs, there will be the potential to draw money away from the entertainment or fashion and clothing cost centers. The model for doing this, and the subsegments for which to do it, will be defined by the market analysis and segmentation.

Bottom Line Many NSPs will achieve reasonable penetrations of their addressable markets over time. But deployment and increasing penetration is only the first phase of ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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broadband services rollout. Real success can only result from luring customers' spending away from other services and products. Such behavioral change can only come about through a detailed understanding of the various, discrete subsegments and communities of users in the mass market. Key Business Issue How can service providers capitalize on opportunities in content distribution, commerce and application rental?

©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

5 December 2003

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Study Consumer Behavior to Sell More Broadband

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