What Was Omnitel's Competitive Advantage When the Service Was Launched in December 1995?

1. What was Omnitel's competitive advantage when the service was launched in December 1995?

Omnitel believed that their competitive advantage was their customer service focus. Their sole competitor, Telecom Italia Mobile (TIM), offered impersonal service, long waiting time and often sent customers to several operators for problem resolution. Omnitel positioned itself as the customer-friendly alternative, offering American-style, personal service, including polite operators, short wait times, and one-stop calling. A market study conducted six months after Omnitel's launch confirmed that customers were dissatisfied with TIM's service and extremely satisfied with Omnitel's service. One respondent summed it up by stating that "...I like the way Omnitel has positioned itself because I have never heard a polite word from TIM's customer service..."

Secondly, Omnitel expected to maintain a lower than average churn rate of 10%-15%. Churn rate is a major cost driver for telecoms. Decreasing the churn rate will decrease Omnitel's operating costs and therefore represents an Operational Efficiency that will translate into another competitive advantage for Omnitel. Omnitel can re-direct the cost savings to financing future growth (expansion, advertising, subsidies, etc).

Lastly, as an upstart against a possibly complacent and cumbersome former monopoly, Omnitel should have the advantage of being a more agile and market-sensitive company.

2. Why did the launch not perform to expectations?

By May 1996, Omnitel had only attracted 180,000 customers and a disappointing market share of only 4%. Although customers viewed Omnitel's customer service very favorably, there was no commensurate increase in market share. Market research conducted later revealed that service ranked only 6 of 8 and 6 of 7 in relative importance with Users and Prospects (exhibits 6 & 7). Activation charges, monthly fees, call tariffs and special tariffs all ranked much higher in importance and customers considered the monthly fees to be a tax. Yet Omnitel did not differentiate itself from TIM in its pricing structure. It simply copied TIM's structure and used the same distribution network, but with less coverage area than TIM.

Omnitel's vision statement announced that Omnitel wanted the cell phone to become as ubiquitous as the wristwatch (in contrast to TIM's 'Status Symbol' strategy) - to change the rules; yet Omnitel simply copied TIM's model, effectively marketing to the same market segment as TIM. It's not clear how Omnitel expected to take market share away from TIM by copying TIM in the areas most important to customers. Although customers lauded Omnitel's service, it seems more likely that good service will allow Omnitel to retain customers, rather than convincing them to switch or sign up for cellular service.

3. What are the economics of LIBERO?

No monthly fee; one-time Lit. 10,000 set-up charge; no Handset subsidies and no increased dealer incentives; tariffs of Lit. 1,595 / 195 for peak /off-peak, an increase of 4.7% / 14.7% over previous rate plan. At an average of 193 total minutes per month, this would result in a monthly tariff increase of Lit. 6,543 (90,835 vs. 84,262). However, without the monthly fee of Lit. 10,000, actual revenue per subscriber would decline by Lit. 3,427 (90,835 vs. 94,262). All things being equal, Omnitel would have to increase its subscriber base by 3.8% (6,800 subscribers) just to offset the revenue loss. In addition, Bona wants to spend Lit. 40 billion on an advertising campaign. Omnitel would have to obtain an additional 36,700 subscribers in order to pay back the advertising expense in one year.

Omnitel will therefore have to increase its subscriber base to 223,500, or by 24%, to offset revenue loss and recoup the advertising expense (in one year), assuming that no additional capital expenditures or administrative expenses are needed to handle the additional subscribers. With the subscriber base in Italy projected to double to over 8 million by 1998, this seems to be a reasonable and attainable goal.

4. Why is the churn rate so high for many European countries?

1) Handset subsidies give consumers incentive to switch to another carrier in order to get the latest gadget as soon as their contract expires. With the rapid technological evolution of cell phones, obsolescence comes quickly. Two of the countries with the highest churn rates - the UK (28%) and Sweden (20.5%) - offer subsidies; the country with the lowest churn rate - Finland (12%) - does not.

2) Incentivizing dealers to sign up new customers, as opposed to retaining existing customers, (i.e. poaching customers) will increase churn rate. The UK and Sweden both incentivized their dealer network to sign up new customers. Finland did not.

3) Recent liberalization of the telecom industry introduced competition for the first time.

4) Customer switching costs must have been relatively low, or incentives to switch relatively high.

5) Telecoms offer a relatively undifferentiated product/service. New tariff schemes are easily replicated by competitors and all offer the same phones - resulting in low brand-loyalty.

5. Do you expect the churn rate to increase or decrease with the launch of LIBERO?

With the introduction of LIBERO, a rate plan targeted at the concerns of cost-conscious / fee-averse customers, many of whom are already dissatisfied with TIM, the churn rate is likely to increase for TIM. Meanwhile, assuming that LIBERO is successful, the churn rate for Omnitel will likely decrease as new customers come in and current customers stay with Omnitel.

We expect that Omnitel's aggressive advertising and distribution campaign will attract relatively more first-time customers to Omnitel rather than siphoning off current TIM customers. In other words it will increase market penetration (currently only around 7%). Because the denominator (avg. customers) will increase more rapidly than the numerator (lost customers), the churn rate for Italy as a whole will likely decrease in the short run. However, we believe that TIM will eventually counter LIBERO with a similar rate-plan to reverse market-share erosion and 'steal' Omnitel customers, so that in the long run the churn rate will increase again.

6. What do you learn from consumer research? What do you learn from the results of the Conjoint Analysis presented in Exhibits 5 to 8?

Consumer research can lead to the development of effective marketing strategies

...