Thursday, June 16, 2005

Bluephone Christmas

James Enck


After more anticipation than the Jackson verdict, BT today unveiled BT Fusion, its converged product. To be honest, there's not much here that we didn't know before: first iteration is Bluetooth, WiFi comes later, with six WiFi UMA handsets to be launched in around 12 months (some models will be available for the corporate market before that). There is also a BT Fusion version of the Motorola RAZR in the pipeline for release by year-end. As expected, the handsets will authenticate on BT hubs outside the home if the user registers with a PIN number issued by the owner.

What was new and interesting was the pricing, and here BT has come out swinging. A 200 cross-network minute plan costs £14.99 per month at launch (future pricing officially unclear until launch), which is 50% below typical mobile packages in the UK. In "fixed line" mode, call pricing is in line with existing BT plans. One interesting tidbit, which seems a potential flaw in the product, was revealed in the last question of the session. An analyst asked about the billing mechanism involved when the handset hands over from Bluetooth to GSM: does the charging structure reflect the technology being used on a per second basis? The response was that, in order to preserve transparency for BT customers, whatever technology the call started on, the relevant call charge would remain in place for the remainder of the call. For the cynically-minded, this opens up possibilities for interesting fun and games, as consumers initiate calls to fixed lines at home and then roam out onto the GSM network, paying 5.5p for up to an hour. That's transparently a good deal for the consumer and network partner Vodafone, but of debatable value for BT.

I could see this product having significant appeal for SMEs who have DSL access in the office and are currently being stung on mobile call charges for calls originating within the office. With the availability of WiFi-enabled handsets for the corporate space (apparently in something less than 12 months), I could also see this being an interesting proposition for larger enterprises (BT has access to 7,800 hotspots in the UK, and 30,000 globally) over time. However, in the consumer space, I don't expect a lot of traction in the near term.

Firstly, the product is only going to be marketed to BT Broadband customers, of which there may be something like 2.5m by year-end (of which c.2.0m will be residential, the remainder being business). Of those customers, either existing or new, how many will be looking to change mobile service providers? In the past, this might have been a more straightforward calculation under 12-month contracts, but UK operators are pushing 18-month contracts, which makes the phasing of renewals more complicated. Additionally, BT is rightly selling this as a "household" solution, in which a wireless hub can accomodate up to six handsets, and three concurrent calls. This is wonderful in principle, but how many households have mobile subscriptions which are in sync? As these effects wash through, I can see some pent-up demand being unleashed further down the road (there appear to be around 2.4 mobile phones per household in the UK), but not in the near term.

One obvious target in the residential space would be the 250k consumer MVNO customers BT is likely to have by year-end. However, the law of averages suggests that maybe only 7 - 8% of these will be BT Broadband households (similar to the overall proportion of households in the UK with BT Broadband by year end), so maybe there are 20k raw candidates there, plus whatever churn is generated within the other mobile businesses in Q4. For the sake of argument, let's say that 500k contract customers churn every month in Q4, which would represent about 200k household conversion opportunities per month. Of these, based on our law of averages figure, maybe 15k (45k over three months) will be existing BT Broadband households.

This doesn't take into account new converts to broadband who may also take Fusion at point of sale, nor does it capture prepaid mobile subscribers who may opt for contract on these terms. However, even notionally adjusting for this effect (which I think will be small) and factoring in a more enthusiastic uptake among SMEs, I'm struggling to see BT gaining more than around 70k customers on the service in Q4. No doubt the marketing message will be everywhere, and BT management today alluded to using conventional retail sales channels as well as direct and online acquisition channels. If BT can up the take rate to 100k per quarter beyond that (the sort of level Carphone Warehouse has achieved with a much more straightforward CPS offering), then we may be looking at 500k customers by year end 2006, which is almost immaterial versus the total line base of 29.6m.

What could really kick off consumer demand for a product like this is naked DSL. However, in the current scenario, the residential consumer still needs to fork over £43.50 per month to BT just to get started (a PSTN subscription of £10.50 minimum, BT Broadband at £17.99 minimum, plus £14.99 for Fusion). Apart from the attractive GSM subscription pricing (and whatever loopholes there may be in billing for Bluetooth/GSM handoff), the only real differentiator in the short term is in the single device aspect. WiFi may change that, but not for a year. This is the sort of product which BT has to launch to defend its position, but it should not be viewed as transformational in the near term, and possibly not ever. What will be perhaps more interesting to watch is what response this provokes from the mobile players, and what other converged products appear from the likes of Wanadoo or AOL to challenge this.

UPDATE: It is my understanding that after an initial promotional period, pricing on Fusion will rise to reach parity with similar packages from competitors, which I think will make driving demand even more challenging. Also, there has been some sense of outrage (understandable) that BT is taking a termination revenue share (undisclosed) from incoming calls in what appears to the user to be an IP "fixed line" setting. However, the IP portion is on outgoing only, and the handset is assigned a mobile number, so incoming calls will be GSM. However, to a consumer this is a less than trivial distinction - i.e., I think BT has a significant consumer education challenge ahead here, and it looks like Martin (in inspired form) seems to agree. As one Double Platinum Class value reader observes: "The customer just doesn't see the divide that the network provider sees."

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