TEAM 5

The Omnitel caseTeam Members:

Amin Haj SaidAtef ZouariIkram EllouzeKhaled Ben AbdeljalilMohamed Salah Ben AmmarNeil FouratiReyad Mohamed Hobba

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Company Background

Omnitel was able to obtain GSM license after liberalization and paid Lit.750 bn in Dec 94 to become Italy’s second GSM operator and launched its commercial service in Dec 95.

The existing competitor is the state-owened TIM who’s in a monopoly situation.

They started with a network coverage of 40% of Italian territory.

Market share was 4% of the total Italian telecom market.

Initially they offered plans similar to TIM but prime focus was on its high-quality customer service, which led to happy customers and low churn rates.

Financially, Omnitel was not as strong as their competitor i.e TIM, hence they wanted to avoid getting into a price war situation.

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Our vision is to position the cellular phone in a manner akin to the positioning of the wristwatch…

Omnitel’s vision 1995

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Omnitel’s competitive advantages when launched in 1995:

Superior customer service quality (compared to TIM’s)Polite operators with personalised assistanceMinimum customer waiting timeOne-stop calling without transfersSpeedy account activation

Only one existing competitor + big market to penetrate

Question 1: What was Omnitel’s advantages when the service was launched in Dec 1995 ?

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6 months after launch, Omnitel had a market share of 4% only.

Main reasons of under-performance: Omnitel offered essentially plans similar to TIM’s (no real

competitive advantage: no differentiation) Existing TIM customers were not service sensitive (Studies for customer

dissatisfaction showed that only 5% of dissatisfied customers register complaints leaving little room for Omnitel to capitalize on its superior service)

Customers viewed the monthly fee as a tax and disliked it Cost for call setup not popular with consumers TIM's strong distribution network and aggressive incentives Cellular phones were viewed as status symbol rather than a

necessity

Question 2: Why did the launch not perform to expectations ?

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Question 3: How do the revenues from Libero compare to those of existing plan ?

Existing plan Libero plan

Monthly call setup fee Lit. 10,000 Lit. 10,000

Monthly fee Lit. 10,000 Lit. 0

Price per min (peak) Lit. 1,524 Lit. 1,595

Price per min (off-peak) Lit. 170 Lit. 195

Handset subsidised ? Yes No

Existing plan vs. Libero plan:

Existing plan Libero plan

Outgoing peak hours calls 13 min 13 min

Outgoing off-peak hours calls 75 min 90 min

Incoming peak hours calls 25 min 25 min

Incoming off-peak hours calls 75 min 75 min

Statistics / Forecast: average monthly usage time per customer

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Existing plan Libero plan

Monthly call setup fee Lit. 10,000 Lit. 10,000

Monthly fee Lit. 10,000 Lit. 0

Outgoing peak hours calls Lit. 19,812 Lit. 20,735

Outgoing off-peak hours calls Lit. 12,750 Lit. 17,550

Total revenue Lit. 52,562 Lit. 48,285

Monthly per customer revenue comparison:

Assumption: Incoming call are not charged.

Conclusion: revenues per month per customer will drop by Lit. 4,277.Yet, Omnitel hoped to offset this and increase revenues because Libero would attract many more customers (bigger penetration rate / market share).

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Why is churn rate so high in European countries?The handset subsidies attract customers and encourage them to switch

operatorContract costs are high, so customers tend to terminate the contract

once it expiresChurn rate is high mostly among low-end customers that are price-

sensitive (especially in countries where a war price is waged and /or exit barriers are not important)

Would Libero increase or decrease the Churn rate?Churn rate will most certainly increase because:

Handset subsidies incentives will disappearCustomers not bound by contract (exit barrier) anymoreTIM will most likely fight back by either reducing its prices or offering

similar services / promotions

Question 4: Why is the churn rate so high in some Eurpoean countries ? Will the churn rate increase with Libero ?

Learnings from consumer research and conjoint analysis:

Consumer interviews Consumers happy with Omnitel’s customer service Consumers unhappy with monthly fee and the call set-up charges Consumers used fixed phone lines until the off-peak periods start (at 20:30) Consumers perceived cell phones as a status symbol rather than a necessity

Conjoint Analysis Consumers prefer to have different tariffs for local, long-distance and international calls Present consumers sensitive to service are unwilling to switch to private operator Consumers sensitive to peak charges and fixed costs are willing to switch to private operator

(about 30%) Prospective consumers who mainly use fixed line phones consider handset cost as a big barrier Cost and service sensitive prospects are willing to switch to private operators Largest proportion of rejectors are sensitive towards monthly costs

Exhibit 5 to 8 show that the size of cost sensitive market is significant: 35% of current users, 30% of the prospects and 61% of the rejectors.

Exhibit 8 shows that individuals who have considered cellular phones before rejecting them are extremely sensitive to costs – monthly cost, traffic cost, and an activation cost.

Question 5: What do you learn from consumer research in Exhibit 5 ?

LIBERO and Price War?

At this stage, No risk of a price war:

Omnitel is not targeting TIM’s customer segment

It is more of a positioning war

Price sensitivity varies across segments

LIBERO has the potential to enhance the market (presently 7.5% penetration) for cellular so TIM can also take advantage.

Since Omnitel’s resources are still growing there is going to be enough market for two players

Question 6: Will Libero lead to a price war ? How can Omnitel avoid one ?

S W

O TSWOT

• Innovating / visionary plan• Good consumer research• Targets a large segment with a big

growth potential• Aggressive advertisement campaign• Create own distribution channel

• Unchartered territory• Not all customers are interested

(brand loyals, etc..)• No strategy for reassuring TIM• CEO not convinced (yet)

• TIM might perceive this as price war• Net loss in case revenue shortfalls not

offset by an increase in market share• Might become a very low-end

customer company (customers having phone but not using it frequently)

• Distributors might not be convinced

• Draws new customers inc. “Rejectors”• Attract existing customer willing to

switch• Free up handset subsidies budget (can

be used for advertising)

Question 7: Would you Launch Libero ? Why or Why not ? What changes to make and why ?

Omnitel should proceed with the Libero plan.

Some suggested adjustments though: Different pricing for local, long-distance and international calls Might introduce bundled offers / different prices during different

periods Might increase off-peak prices to Lit. 200 instead of Lit. 195 (customers are

willing to pay this price) Introduce pre-paid cards to target low end consumers (students, etc..) Incentives to distributors for volumes of sales without giving an

impression of waging a price war

How to convince the CEO ?

Demonstrate that Omnitel is not waging a war price against TIM

Show him that Omnitel is not losing money by giving up the fixed price

Make it clear to him that Omnitel is targeting the mass not only a niche. And that the way to implement Omnitel’s vision: Cellular = Wristwatch

Thank you