Oops, I did it again!

I've decided to dedicate this column to those companies which just don't get it. It's really not that difficult to ascertain trends in any particular industry or the world at large. History is a marvelous teacher but it appears that some people have been skipping school. Either that or they've memorized the text without fully understanding the material. Intelligent application of lessons learned requires an appreciation of context. Sometimes innovation means breaking the established rules.

NEW! Another prime example was dropped in my lap by the good people at Excite@Home. In a daring game of brinksmanship, they managed to hasten their own demise by attempting to blackmail AT&T. There are a lot of stories on the 'net about this sillines, but suffice it to say that, after a judge ruled last Friday that the customers of partners could be disconnected if said partner refused to renegotiate their contract, Excite@Home cut off all AT&T customers. They didn't go after anyone else but AT&T, who had offered $307 million for the company. Insiders considered the intrinsic value to be closer to $1 billion (let's get rich!) and used the disconnections to try to force AT&T to up the ante.

AT&T responded by withdrawing the offer and transferring some 80% of their 800,000 customers using the Excite@Home network to their own network within days. They expect the remainder to be moved over by Friday. Now, instead of getting $307 million, bondholders will likely walk away with next to nothing. In their greed, they potentially harmed the entire high-speed internet market and generated nothing but hostile feelings. I'll get to the telcos in the next paragraph, but some of them smelled opportunity in the situation and made all kinds of offers for DSL (free installation, modem, etc.) The real problem is that you'd probably have to wait two weeks for installation; people were better off just waiting for AT&T to migrate them. Lots of people dropped the ball on this one!

Perhaps because they enjoyed a monopoly for so long, the Telcos continue to exasperate with their policies. They've brought us powerful technologies such as ISDN and ATM which haven't seen wide-spread deployment outside of the telephone network itself. The reasons? Pricing and availability. Telcos have never been good at identifying the "sweet spot", where the price encourages adoption yet there is still a healthy profit to be made from a large customer base. Whether you make $20/month from 1,000 customers or 20 cents/month from 100,000 customers, the net profit is the same. The difference is in the cost to the consumer. In the second case, the customer is paying $19.80 less per month.

Telcos seem to be forever caught in the "chicken and egg" quandary. They don't want to deploy equipment until they perceive sufficient demand, but they'll never generate the demand unless the service is widely available. Early adopters bear the brunt of paying for the cost of R&D and deployment, almost guaranteeing that the service will never become popular. When I moved within Atlanta a couple of years ago, Bell South wanted to charge me $350 for installation of ISDN and $80 monthly for limited channel hours. There was no relocation option since they didn't want to "grandfather" the unlimited service I previously enjoyed. They lost my business forever because of such tactics, a lesson seemingly lost on them.

Bell South is making the same mistake with their roll-out of ADSL. While they might be eager to install DSLAMs in areas like Alpharetta, ADSL is still a hit-or-miss proposition for most residents of Atlanta. Bell South seems to wait until they have some threshold of inquiries from a certain area before deciding to deploy equipment. This is self-defeating behaviour! If someone wants high-speed Internet access and Bell South informs them that the service is not available in their area yet (but they will push their ISDN service as an alternative) then people will look elsewhere. Thus, when the equipment is finally deployed to the area, the once potential customers are already using the services of another company. That's one reason why the number of cable modem customers is growing at twice the rate of ADSL customers.

Microsoft is a prime example of a company which has completely lost touch with the needs of their customers. What people desperately want is a stable platform. They don't want additional features ("bells and whistles") which most people will never use (or even find, for that matter!) They don't want to have to purchase an "upgrade" every other year on the premise that it will somehow be "more stable" than the preceeding effort. They just want something which doesn't hang or display the dreaded "blue screen of death" on a frequent basis. They want a word processor which doesn't become increasingly unstable after about twenty pages of text with interspersed graphics. If they want a package which can be used to create a manuscript, for example, Microsoft doesn't have a product up to the task. Why is that?

I find it revealing that Microsoft is attempting to move from a purchase to a subscription model for their products. With the subscription model, customers would have to pay an annual fee to use the software, whether or not upgrades were applied or even provided. This would do wonders for cash-flow at Microsoft yet they would be under no obligation to ever improve the product. This new model has already been introduced in New Zealand and Australia. An attempt to introduce it in North America was quashed by a huge backlash when the idea was initially floated. Remember the goal here: a steady income stream without the attendant costs of new development in an attempt to separate customers from their hard-earned dollars. Why spend billions of dollars in development and a flashy product launch when you don't have to?

It just doesn't seem right to charge people up front for software which could render your machine inoperative at any time. Yes, I know that the power company will cut you off if you don't pay the bill, but electricity is by nature a consumable resource. It's the same as natural gas and other fuels and something we're used to paying for on a usage basis. So how does an O/S become a consumable? Do the bits wear down over time? Do we need a regular refresh for the hysteris loop in case it starts to flatten out? Can you imagine if you took your laptop on a road trip to make a presentation to a customer or a potential customer only to find that your subscription had expired? How about if you try to boot your home PC one day and find that you can't work on that vital document since your system has been deactivated?

Microsoft has ignored the protests about their new activation mechanism, however. Taking the position that this will prevent piracy, it puts an unfair burden on their customers. If people don't have an Internet connection then they will be expected to make a telephone call in order to activate the product. When was the last time you called customer service and didn't wait on hold for at least half an hour? Yet Microsoft expects highly-paid professionals to do this in order to enable the product. Should said customers make the mistake of changing too many hardware components in their system, they will have to make another telephone call (no Internet shortcut here!) and explain their situation to a (no-doubt friendly) customer service representative. What happens if the hard drive in my portable gets toasted while out of the office and I have to replace it? Now I have to call customer support and wait on hold forever even though I've got the installation CD-ROM in-hand? How much longer does Microsoft really expect their customers to accept being treated like children? And misbehaved ones at that?

I'm amazed by the companies which have saved so much money by having us perform transactions by ourselves and now want to charge us for our largesse. The best examples here are the big banks. I remember when ATM transaction were free since it saved the banks a lot of money to not have us interact with a teller. I can't quote exact figures, but I seem to recall that ATM transactions cost the banks 25 cents while a visit to a teller cost $2.00. These were figures provided by the banks of course, partially as justification for closing branches and getting rid of vast numbers of human tellers. So why do they now want to fleece us for using the mechanisms which, by their own claims, cost next to nothing?

In Canada, the banks set up their own network for debit card use, separate from the existing networks (Visa, Mastercard, etc.) They can now extract cash from all points of interaction, charging vendors for the lease of the payment machines and transactional charges as well as the customers. While the per transaction fee might seem small ($0.75 after a small number of "included" transactions per month,) the numbers can add up if you'd prefer the increased safety of carrying a debit card instead of cash. Call it a "security" tax. No wonder Canadian banks are raking in profits exceeding CDN$1B/annum each!

In both Canada and the United States the banks have an evil mechanism in place for padding their profits via the ATM networks. Down here in the States it's become known as "double-dipping". If I have an account with Bank of America and use a Bank of America ATM to withdraw funds from my account, it costs me nothing. Should there not be a Bank of America ATM conveniently available and I use a SunTrust ATM then I will be charged $2.00 by SunTrust and $1.50 by my own bank. Given that the granularity for withdrawals is typically $20, if I take out only $20 (perhaps I don't want to carry a lot of cash on my person) then the charges work out to an astonishing 17.5% of the transaction amount!

Now, the banks are full of excuses for the charges, usually pointing to the "network" charges as the primary factor. Since I am not charged for using the Bank of America network when using their ATMs, and a SunTrust user is not charged for using the SunTrust network when using SunTrust ATMs, the only plausible explanation can be that the banks are charging each other for access to their networks. This by itself is somewhat understandable. So SunTrust charges $1.50 to Bank of America for use of their network while accessing my Bank of America account from a SunTrust ATM. Bank of America then charges that amount back to my account. So why do I have to pay SunTrust a second time? When I make a $20 withdrawal, why does it enter the network as a $22 withdrawal? Hence the term "double-dipping".

Manifestations of greed such as these can often generate a different result than that intended. Such is often the case when the opinions of "bean-counters" are given too much sway. In the case of the banks, people have a disincentive to use any ATM which isn't directly connected to their "home" network. Even so, SunTrust is well on the way to making (by their own admission) "record" net profit of around US$1.4B for 2001. A few years ago the Canadian federal government instituted a huge tax increase on cigarettes. They nobly claimed that it was an attempt to reduce cigarette use, especially by young people. As you can already guess (we're talking government here!) it was actually a major tax grab. The result was that cigarette smuggling from America became a huge business and it was estimated that fully 2/3 of the cigarettes being smoked in Montreal were purchased from the "black market." Hence, government revenues from tobacco plummeted, forcing a reversal of position.

And here we have to return to the math I mentioned earlier. If you charge too much for a service then your customer base is destined to be small. If you target your revenues at Z and X * Y = Z then ( X / n ) * ( Y * n ) = Z as well (where n is some constant.) If SunTrust had 100,000 customers accessing their network/month from other ATM networks and they were only charging $1.50/transaction then they would be generating income of $150,000/month or $1.8M/annum. Someone, somewhere, must have thought "What if we were to charge on both ends? We could double our annual income!" With dreams of bonuses dancing in his/her head, the suggestion was made and implemented. Bank of America customers could react to the "double-dipping" by avoiding SunTrust ATMs like the plague. All of a sudden, there might be only 25,000 network transactions/month. Even with charges of $3/transaction (total) the revenues would drop to $75,000/month or $0.9M/annum.

In Canada, the government boosted the price of a pack of cigarettes by almost CDN$2 overnight back in 1993. Given a rough per/capita consumption of 100 packs/year and a population of circa 25,000,000, that works out to a total annual consumption of 2.5 billion packs/year. An increase of $2/pack would have (theoretically) generated additional income of CDN$5B/annum. Even if the rate of smoking among young people had in fact dropped by 25% (a questionable premise) then the accountants figured that they were still going to generate an additional CDN$4B/annum in general revenues. If, however, usage remained relatively constant but people flocked to the black market for 60% of the cigarettes consumed in Canada then all bets are off, not to mention the increased costs of policing the border! Of course the "bean-counters" had no concept that the single event which cemented the power of the mafia in the United States was prohibition or that the Boston Tea Party was one step on the road towards the American Revolution. The outcome was sadly predictable.

I'll leave you with one final example. AT&T provides home telephone, cellular, long-distance, cable and Internet services. Even if the various divisions are separated for business reasons, for the sake of the customers they should be able to show a single face. Nothing could be further from the truth! For reasons unfathomable to me, each service has different telephone numbers (yes, plural!) and is functionally independent. I can no sooner call AT&T Cellular to pay my cable bill than I can call AT&T Broadband to pay my long-distance bill. The broadband group recently effusively informed me that I could now pay my bill via the Internet. So what's the problem? They've outsourced the service to a company which wants to charge $1.50 for the "convenience" of paying via the 'net. Let's see...$1.50 for doing it on the Internet vs $0.34 for a stamp...hmmm...let's just say that they don't "get it!"

Copyright (c) 2001 by Phil Selby