Are Cellphone Carriers Like Gas Stations?

from the Liger-In-Your-Tank dept

Thu, May 14th 2009 4:43pm — Derek Kerton

It's a simple lesson from Kindergarten: Share. You probably don't think of oil companies as being particularly good at this - except perhaps in the sense of sharing oil price hikes at the pumps - but it turns out they have another hidden sharing skill that they'd rather you didn't see. They share gas and pipelines, run by pipleline firms called "common carriers". Although not widely known, there is very little difference between the gas you buy at competing fuel stations in the US. The gas is a commodity product based on quality specs, and the differences are mostly marketing.

The privately-owned national gas/oil distribution infrastructure is quite formidable (offering a massive legacy advantage over any future fuels). There are pipelines that cross the country, refineries, trucks, equipment, tanks, catchments, reserves - all to deliver fuel to a growing economy (yes, growing...over the long-term at least).

But it would be prohibitively expensive to build such an infrastructure for EACH of the gas station brands. So instead of separate pipelines snaking the country, one each for Chevron, Shell, Texaco, Philips, etc...they share. Tanker ships deliver a standard grade of oil to refineries where it is refined to standard grades of fuel. And while the refineries may be owned by a specific oil company, the fuel they produce is put in common pipes to transport across the nation. Thus, the premium gas that Shell puts in the pipe in California could be taken out by Texaco in Nevada. Since it is a commodity product, it doesn't matter whose batch of fuel is taken out of the pipe, it only matters how much. This pipe is quite "dumb", but the network is shared, and the commodity that is transported is a standard package - sound familiar to any telco people?

The Fair Trade Commission in the US has stopped gas companies from making false advertising claims, and if the companies are selling the same gas, they can't claim it to be better. Thus claims like "More powerful" get replaced with the metaphorical, nonsensical "Put a tiger in your tank!" Is shared infrastructure and a standards-based product killing the gas companies? No. How do they compete if the product they sell is EXACTLY the same as their competition? What's the value of brand?

The answer lies in a small trick. The FTC won't allow them to say their gas is better if it's the same. But if they inject some small amount of "additive" just before selling the gas to customers (This additive can be anything...even a secret formula of 11 herbs and spices) that's all it takes to claim a different product. And with a different product, the gas companies can claim to have a "cleaner running" product, or "burns better" or whatever angle they want to promote with their brand. It works. They have been sharing pipes for decades, so maybe their case is instructive for telcos.

There IS money to be saved from sharing a single infrastructure. Especially when the product is standards-based. GSM, EDGE, 3G, HSPA, LTE are all pretty standard. As are Metro Ethernet, IP backhaul, etc. So I believe the carriers are on to a good idea in reducing their CapEx by sharing common network elements. Even more so because of the frequent 2G-3G-4G-... upgrades needed to compete. They can easily continue to differentiate by offering special "additives" to their product.

And while the gas companies' additives are mostly snake oil. The telecom "additives" are quite important, and can truly differentiate a mobile subscription over the raw bits inside the dumb pipe: Customer service, retail presence, data services, location platforms, fixed/mobile integration, easy-to-read bills, the iPhone, fave-5, rollover minutes...these are all very important parts of the service mix, and are true differentiators about which customers care. The things that subscribers don't care about might as well be shared. Amazon.com and buy.com both ship with UPS - do you care that they share the delivery mechanism?

Sol Trujillo, outgoing CEO at Australian cellco Telstra, is making the opposite gamble, detailed in a speech at MWC. He thinks the differentiator is the network infrastructure, and is piling money into it to be the first carrier to offer high-speed LTE technology, contrasting his approach to the common-carrier approach of Telfonica and Vodafone. While LTE is great, thinking that the network is a differentiator is wrong, and shortsighted. No customer has ever cared about the technology or the infrastructure. And while Telstra invests in a brief technology lead with LTE, their higher costs of upgrades may eventually make them technology laggards compared to competitors that share.

I can see it now: "Cleaner burning Vodafone Wireless", or "AT&T. Put an Apple in your tank!"

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Filed Under: common carrier, gas stations, utilities, wireless

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another Marketing Guy, 14 May 2009 @ 5:35pm

telco marketing
I used to work for a telco doing network management. I left about 8 years ago because they were just too stupid! There is one branding technique that you're likely to see them continue using: advertising against themselves. They often point out "industry flaws" and claim that they are the company that is different when in fact they are the company most likely to hear that complaint. It's like they take the consumer complaints most commonly applied to them and then say "We don't do what you know we do."

The strongest differentiation for wireless? Have the coolest icons and don't screw up the battery life.
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Hulser, 14 May 2009 @ 5:46pm

People don't care about speed?
While LTE is great, thinking that the network is a differentiator is wrong, and shortsighted. No customer has ever cared about the technology or the infrastructure.

Huh? Maybe you're trying to say something different, but from how I read it, you appear to have the position that people don't care how fast they can browse the Internet or upload pictures using their cell phones. This makes no sense.
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Hugo, 14 May 2009 @ 6:08pm

The MVNO efforts which haven't been successful use the "network doesn't matter" approach in this article. While I'm intrigued by the pipeline comparison I'm not sure that the standards and openness is there yet in the wireless world. I'm also pretty sure the carriers don't have the intestinal fortitude to offer this concept up to their investors either. That said, is still is a very interesting concept that should be looked at.
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yet another marketing guy, 14 May 2009 @ 6:08pm

Don't care about networks?
If AT&T was as good in my area as Verizon I'd have tried an iPhone. But AT&T is not as good as Verizon, so no iPhone.

And in gasoline, while the underlying commodity may be the same, my experience has been that the gas from the cheap places clogs my fuel filters.

Nowadays, I have a major's credit card that gives me 5% back on gasoline purchases from their stations. And my fuel filters never clog. YMMV.
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Alan, 14 May 2009 @ 6:19pm

Re: Don't care about networks?
"If AT&T was as good in my area as Verizon I'd have tried an iPhone. But AT&T is not as good as Verizon, so no iPhone."

The point is, with a shared network then AT&T *would* be as good as Verizon, and competition would be solely based on the service extras.
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Derek Kerton, 14 May 2009 @ 6:20pm

Re: People don't care about speed?
What I'm saying is that they don't care if it's 4G or 3G; LTE or WiMAX, GSM or CDMA, WiFi or HomeRF. They don't care if it's femtocell or better coverage from a big cell tower, repeater or picocell. Technology and architecture are irrelevant to customers.

They just care that it works, and meets their needs.

No, I'm not saying that people don't care "how fast they can browse the Internet or upload pictures". That's precisely what they DO care about. But what you just cited are not network specs or architectures, they're services and a user experience, aren't they?

But I will go one further, and say this: Customers not only don't care about the technology or infrastructure, but they also don't care how fast their network connection is in Kbps.

A great example is the runaway success of RIM. Starting in 1999, they offered email from anywhere in "real time", and it was a runaway success. Users didn't just like it, but were enchanted. So, how fast do you think the RIM network was for ALL Blackberry devices until around 2006? Would you believe around 8Kbps? Yep, it ran on the old Mobitex technology. But everyone thought it was lightning fast. It's the user experience that matters. Blackberry hid the latency and slow network inside a great UE. People didn't care about the specs, just the experience.

In the original post, I meant that Telstra can launch 4G if they want (and it is a good step forward), but unless their network can do the things customers want to do better than the 3.5G networks of their competitors, customers won't care. Telstra has a big marketing campaign around having "the LTE technology of the future". Do you think that resonates with the mass market?

And then the competitors will also upgrade to LTE, so where's Telstra's differentiation then?
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Derek Kerton, 14 May 2009 @ 6:33pm

Re: Re: Don't care about networks?
And I DO think that Verizon is a unique case, since years ago they chose to make "the network" their competitive differentiator. They have been successful with this, both in actual network quality and coverage, and also with public perception of network quality - which is separate.

But VZW could still share network resources, AND still maintain their branding message. They could share networks in well-populated areas, and keep their network to themselves in less dense areas. Thus, protecting their "Coverage" advantage, which is the core of their "better network" messaging. By better network, their advertising tends to focus on lack of dead zones, not necessarily network technology. This is good marketing, because it is a real user experience issue, not a tech issue.

Telstra is going about it the other way, advertising the technology, not a user experience.

PS: Currently VZW is actively building their LTE network alone, and there is no indication that will change.
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Joel Coehoorn, 14 May 2009 @ 6:36pm

additives
Some of the additives do help more than others.

I meticulously check (and log when, how much money and miles, and where I got it) the gas mileage on both family vehicles, and the Aveo consistently gets 1 1/2 miles better from Shell. It doesn't seem to help our minivan, though. The jury's still out on the new "Invigorate" from BP.
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Bamika Easterman, 14 May 2009 @ 6:36pm

You don't want gas that is different. When I fill up I want stardard unleaded petrol that is exactly the same no matter where I buy it from. That's what my car is designed to burn.

There are people coming around to my house every week trying to sell me "better" electricity, here in Melbourne, Australia. Better how? Does it make my lightbulbs burn a different color?
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Hulser, 14 May 2009 @ 6:41pm

Re: Re: People don't care about speed?
But what you just cited are not network specs or architectures, they're services and a user experience, aren't they?

I guess the way that I'm looking at it is that the abililty to browse the Internet is a service, but the speed at which I can browse is a function of the network. If everyone allows you to browse the Internet, wouldn't it make sense to differentiate your product by increased speed? Isn't this what cable and telcos do with high speed Internet access, differentiate by speed? I don't think I'm alone in caring about the infrastructure in this case.

A great example is the runaway success of RIM. Starting in 1999, they offered email from anywhere in "real time", and it was a runaway success. Users didn't just like it, but were enchanted. So, how fast do you think the RIM network was for ALL Blackberry devices until around 2006? Would you believe around 8Kbps?

Point taken. You can overcome an infrastructure limitation with a good user experience. But, I'm still left with the idea that it seems like a sound business decision to differentiate based on the infrastructure. It may be irrational, but even non-technical people could be swayed by the appeal of having a phone that uses the latest and greatest. Perception is reality.
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Anonymous Coward, 14 May 2009 @ 6:51pm

Re: Re: People don't care about speed?
The best part about the Telstra network here in Australia is its reach. They don't want to hand it over to competitors (for any less than they sell it for retail anyway) because they had the balls and the dollars to actually build their network in rural areas. 4g/LTE is going to be good, especially in contrast to alternative technlogies - you can't run cable/adsl out to rural areas but you can run mobile/wireless broadband instead.

In metro areas the competition here is between Telstra, Vodafone, Optus & 3. If you never go rural telstra is the most expensive choice, but its network is reliable. After that the Vodafone network is good and not overly congested and quite cheap comparatively. The optus network is disgustingly slow and congested, but they have better regional coverage than vodafone, but their coverage is still useless in rural areas compared to Telstra Next G(3g). After that poor old 3 has no coverage outside metro, and instead uses Telstra network in limited areas. Soon 3 will merge with Vodafone so who knows what will happen then with the roaming agreement. All 4 telcos are as bad as each other on customer service expect to be given the run around and suffer terrible phone queues.

As far as MVNOs go around here the only big one is Virgin which is an Optus reseller, they are cheap but the service is terrible. And because of the problems with the optus network they don't do so well either on the performance front. There are a few that also run off the vodafone network, but none that are notable.
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Paul`, 14 May 2009 @ 8:43pm

Re: Re: People don't care about speed?
Telstra have a long history of getting everything wrong.
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Eldakka, 14 May 2009 @ 9:27pm

Re: Re: Re: People don't care about speed?
because they had the balls and the dollars to actually build their network in rural areas.

Not true. The government agency Telecom Australia that had a legislated monopoly and legal requirement to provide telephone services built the network. Then it changed its name to Telstra and was privatised. Telstra inherited the network and maintain/upgrade it from the monopoly income they derive from the inherited network.
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Anonymous Coward, 14 May 2009 @ 9:58pm

Re: Re: Re: Re: People don't care about speed?
Not true. The government agency Telecom Australia that had a legislated monopoly and legal requirement to provide telephone services built the network. Then it changed its name to Telstra and was privatised. Telstra inherited the network and maintain/upgrade it from the monopoly income they derive from the inherited network. I wouldn't agree about that with the NextG (3g) network. You could say that about the copper network, GSM network and maybe HCF. But the NextG network didn't start till '05/'06 and the goverment sold off the last of its shares in T3 in '06 too. You could say it was built under government control (as it was one of the conditions for the T3 sell off that nextG became rurally sufficient) but it was still 49% privately owned at the time, and is now 83% private (and thats only if you count the 17% the gov't still has in their fund but the don't get that much voting/control now really).
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CR, 14 May 2009 @ 10:01pm

@Eldakka:

That is simply not true. Not 1$ of government money was spent on building the Telstra NextG network. Not one. That is a matter of public record. And for the record, "Telecom Australia" ceased to be in 1996 - 10 years before the NextG network was launched. And another thing - Since GSM was introduced in Australia there has always been at least 3 mobile networks - how can you claim Telstra ever had a monopoly?
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CR, 14 May 2009 @ 10:08pm

Also, as to the original story: What incentive is there to innovate if it is shared by everyone?
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Techsupoort, 14 May 2009 @ 11:04pm

Cell Phones
In case you do not know, there was an incident where a driver suffered burns and his car severely damaged when gasoline fumes ignited an explosion while he was talking on his mobile phone standing near the attendant who was pumping the gas. All the electronic devices in gas stations are protected with explosive containment devices, (intrinsically safe) while cell phones are not. READ YOUR HANDBOOK! Mobile phone makers Motorola, Ericsson, and Nokia, all print cautions in their user handbooks that warn against mobile phones in "gas stations, fuel storage sites, and chemical factories." Exxon has begun placing "warning stickers" at its gasoline stations. The threat mobile phones pose to gas stations and their users is primarily the result of their ability to produce sparks that can be generated by the high-powered battery inside the phone.
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Andrew, 15 May 2009 @ 12:39am

Premium fuels?
Following your link to the Longhorn Pipeline shows that the highest octane they carry is 91, but you can buy premium fuels with higher octane than that (e.g. 93). So, are the premium fuels also commoditised?
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Chuck Chandler, 15 May 2009 @ 3:15am

Cell Phones and Premium Fuels
@Techsupport: The cellphone manufacturers place those warnings in the handbooks to avoid litigation. If someone gets out of their vehicle when done fueling and causes a spark that ignites the fuel vapor while talking on the cellphone the mobile phone company can point to the warning. The cellphone didn't cause the spark, the person getting out of their vehicle without grounding themselves then touching the pump handle did. Both the Cellular Telecommunications Industry Association and American Petroleum Institure state there is no risk from cellphone usage while fueling.

@Andrew: Ethanol adds approximately 2 octane at a 10% concentration.
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Paul, 15 May 2009 @ 4:32am

Interesting point, but wrong
It might seem counter-intuitive, but even though the oil companies share the pipeline, they don't share the fuel. Texaco puts product in and take their own product out.

The pipeline companies use 'plugs' to separate the product.
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Paul, 15 May 2009 @ 4:40am

Also, additives added at the refinery
I could be wrong, but due to quality control as well as the process itself, I am fairly sure fuel additives are added in at the refinery, not at the fueling stations.
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eclecticdave (profile), 15 May 2009 @ 5:53am

Advertising
> Thus claims like "More powerful" get replaced with the metaphorical, nonsensical "Put a tiger in your tank!"

The one that gets me, and you see this everywhere ...

"No other brand is better/faster/more powerful than ours!"

They're absolutely right - no brand is better, because they're all exactly the same!
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ed, 15 May 2009 @ 6:06am

I'm not sure where some of the facts to this article came from, but they are contrary to what I've read in several different places over the years.

For one, there are more formulations for gas then there are states. For example, Chicago has a specific formula for its gas that doesn't apply in the rest of Illinois. Therefore, you can't simply dump some gas in a pipeline in California and pull it out in Texas. This might be possible in a pre-refined state, but this article states this post refinement.

Of course, having all these different formulations is foolish, but that's a different article.
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Anonymous Coward, 15 May 2009 @ 8:34am

Re: Interesting point, but wrong
That is cool! Anyone have links to how they do this?
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Derek Kerton, 15 May 2009 @ 2:38pm

Re: Cell Phones
Nope. That's a frequently repeated falsehood.

http://www.snopes.com/autos/hazards/gasvapor.asp
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Derek Kerton, 15 May 2009 @ 2:44pm

Re:
That's a good point. If all providers shared a single infrastructure, there would be ample competition at the service layer, but little competition at the core.

We'd need to be sure there were alternative network providers to the shared network to ensure ongoing innovation. This could partially come from fixed ISPs, new technology wireless vendors (Cox cable, Clearwire), or a separate coalition running a second network.

I wonder what the optimal number of cellular carriers, and cellular networks is. Society would prefer an economy with a balance of the most competition with the least infrastructure costs. There's no single right answer.
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Derek Kerton, 15 May 2009 @ 2:59pm

Re: Premium fuels?
Really, I saw three grades (actually many more sub-grades):

RVP Sub-Octane Conventional 84.0 (R+M)/2
RVP Conventional 91.0 (R+M)/2
RVP Conventional 87.0 (R+M)/2

Bear in mind that there are multiple ways to calculate Octane. They go into detail at Wikipedia:
http://en.wikipedia.org/wiki/Octane_rating
...be sure to read the "Regional Variations" section there.

And Wikipedia also notes that:
"Most fuel stations have [only] two storage tanks (even those offering 3 or 4 octane levels), and you are given a mixture of the higher and lower octane fuel."

So that should address your questions.
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Anonymous Coward, 15 May 2009 @ 3:08pm

Re: Interesting point, but wrong
Yes, in fact the plugs are called "pigs" and are basically moving corks. They separate two grades of petroleum products.

See a pig: http://www.inlineservices.com/oil_gas/foam_polyurethane_pigs/

However, your suggestion that they remove the exact same product that they put in the pipeline is not necessarily true. This is why, for example, the pipeline company I linked to calls it a "Fungible Batch". See page 2:

http://www.longhornpipeline.com/attachments/wysiwyg/226/LPPSpecsJanuary82009.pdf

Longhorn calls a Fungible Batch: "a batch of petroleum product meeting Longhorn’s established specification, which may be commingled with other quantities of petroleum product meeting the same specifications."

Thus, they don't put a pig in between different producer's product of the same grade, but they put a pig in between different grades.

I suppose every pipe company can do things a little differently, but really, there is little advantage but real cost to making sure Texaco takes out Texaco product.
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Derek Kerton, 15 May 2009 @ 3:17pm

Re: Also, additives added at the refinery
At the refinery, fuels are formulated to meet the industry specs. Additives and blends done here are not proprietary, but are done so as to qualify for shipping as a standard product.

I don't know exactly where each company puts in their additives. I would imagine it would not be at the station precisely, but at a local distribution point, just before it goes in the trucks on local runs. Here's a distribution point in San Jose, CA:
http://maps.google.com/?ie=UTF8&ll=37.389723,-121.911045&spn=0.005907,0.009613&t=h& amp;z=17

I repeat, I am not a oil industry expert, but I'd guess that the tanks there of different sizes hold different mixes, additives, grades; possibly destined for different gas station brands, too? I dunno. I just know that I used to work near there, I wondered where the @#$ all those trucks were coming from when they pulled in front of me on Montague Expressway.

Notice that there is a second tank far across the creek, too.
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Derek Kerton, 15 May 2009 @ 3:27pm

Re:
Nothing in the article is contrary to what you have written here.

Click on the hyperlink "quality specs" in the article, go to page 3, and you'll see the many standard grades of fuel required to serve some regions of just Texas, New Mexico, and Arizona.

The point isn't that there is only one formulation of gas - rather that there are trivial differences between the fuels sold by different brands in any given town.

As you said, local fuel specs are ridiculously complex, so I didn't go into great detail on local varietals in the article. After all, I'm really interested in the telecom angle, not the oil side (although it's fun to see the similarities).

I'll leave by noting that mobile phone regulations, like fuel, are ridiculously complex and vary widely from state to state, too...so thanks: another way the metaphor matches!
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Anonymous Coward, 15 May 2009 @ 3:31pm

Re: Advertising
You're right, and what a deligthful example of what a marketing team can come up with when shut in a conference room for a week. I wish I had remembered that one for the article.

If they said:
"No other brand is as powerful as ours." That would be a lie, and busted. But phrased just as you have it, it's as true as it is misleading.
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Markus Hopkins, 15 May 2009 @ 3:38pm

People don't care about routers
What I think he means is that people do not care about the underlying technology and haardware, what makes the network run. People definitely care about the speed, but if you only have the faster network for a little while, dumping money into the infrastructure that got you the temporary lead - instead of sharing costs between other providers - will hurt you in the long run, because customers could not care less about why the network is reliable and fast, but only that it IS.
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Chuck Chandler, 15 May 2009 @ 8:47pm

Re: Interesting point, but wrong
Pigs have not been used for many years. The fuel mixes slightly in the pipeline but this is taken off at the terminal and sold as transmix. Transmix is usually separated into its different parts and placed right back in the pipeline.
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Jay Cuthrell, 16 May 2009 @ 10:22pm

No. Not really.
Derek,

This is totally inside baseball but... the carriers already share infrastructure heavily -- and you will see a lot more of this going forward. In fact, Verizon has already started offering access on their mobile (IP/fiber) backhaul network (my comment on this could be an entire series of articles on the reasons behind this).

I'm not sure what you were trying to set up with the petrochemical analogy but one thing you have glossed past is the distribution is of little matter if you are contrasting what is on the roads -- gasoline engines and diesel engines. To continue this crude analogy (no pun intended), we could consider diesel the GSM vs. gasoline the CDMA in the US. Diesel and GSM are more prevalent worldwide.

Lastly (but not really), gas station in the title of your article make very little margin on the actual sale of the fuels be it gasoline or diesel. They make most of their margin on the vices (beer/wine/tobacco), snacks, soft drinks, and generally catering to the short window of immediacy when a consumer walks in the door.

-Jay
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Derek Kerton, 18 May 2009 @ 2:40pm

Re: No. Not really.
"Lastly (but not really), gas station in the title of your article make very little margin on the actual sale of the fuels be it gasoline or diesel. They make most of their margin on the vices (beer/wine/tobacco), snacks, soft drinks, and generally catering to the short window of immediacy when a consumer walks in the door."

This is particularly interesting, since US carriers, similarly, make very little on the commodity voice product. They now make most of their profits from the add-ons, too, such as SMS.

And yes, the carriers share lots of infrastructure, but less so on the RAN (Radio Access Network) side. There are lots of precedents for RAN sharing, though, like T-Mo and Cingular (ATT) in California. Meanwhile, it's extremely common for all cellular companies to use backhaul and core services from a local incumbent...although they're trying to move away from the expensive and limited T1s.

"what you were trying to set up with the petrochemical analogy " Meh. Fun discussion? Let people know about tricky marketing for "top quality" gas? Telco pipes as a common carrier utility? Whichever.
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