Are Cellphone Carriers Like Gas Stations?

from the Liger-In-Your-Tank dept

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!"

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