Markets and Micro-markets

by Neale Martin published December 12, 2005 in Telephony Telephony

Communications companies are embarking on a bold, expensive plan to recreate themselves to serve customers in the 21st century. At the forefront of this ultimate makeover is the mass deployment of new broadband technologies, including fiber-to-the-premises, ADSL2, 3G and WiMAX. To justify the level of investment necessary to challenge cable and other competitors, these projects must become mass-market success stories.

Unfortunately, mass-market success is the end result of having successfully served innumerable micro-markets along the way. Traditional telecom companies do not have a particularly stellar track record of serving niche markets, but they can't get to the masses without going through these gatekeepers.

Those of us in high-tech marketing focus tremendous energy on understanding the early markets for any new technology. The simplistic view of innovators and early adopters tells us almost nothing about the actual customers who will become either the harshest critics or most enthusiastic supporters of new offerings.

The importance of early-market success is further magnified when we consider that the technology choices we make will inexorably alter the services we can offer. Incumbents pursuing the triple play of voice, high-speed Internet and video are making a huge gamble that IPTV, with four video streams (only one of which is high-definition), will be all the market requires.

In addition to technology choices, communications companies must understand the business models that will appeal to customers. We are currently in uncharted territories in understanding how customers will choose to interact with digital information in a broadband world.

To illustrate, Apple's new iPod and iTunes service makes it easy to buy downloaded video content from ABC and Disney. A customer can choose to buy a show for $1.99 and watch it on a computer or video iPod. This led to CBS and NBC making their shows available for 99ยข in the video-on-demand format over enhanced cable systems. It is likely that both models will be successful for different markets, but which will be preferred?

Let's review some truisms about how high-tech markets evolve.

Rule 1: Markets always take longer to develop than expected. It took roughly 50 years for telephones to penetrate 50% of U.S. households. Although cell phones grew at a much faster rate, their 50% market penetration took more than 15 years. Cable television existed as a niche service for decades before being a mass-market success, and broadband is just now at 40% penetration.

The reason markets take so long to develop is that countless micro-markets must go through their own product-adoption curves. For example, one of the first groups to see the value in cell phones was Realtors, but not all Realtors rushed out to buy cell phones. A handful of innovators bought first, followed by a larger group of early adopters. A similar process happened with other professions. When prices came down, the service crossed over to micro-markets in the consumer arena.

Rule 2: Applications create value, not technology. Technology companies get excited about technology, but customers are not clamoring for 100 Mb/s throughput, EV-DO or even IPTV. Markets grow as the value of applications that technology enables becomes more obvious. Can you identify the value you are creating for the micro-markets that will be your innovators and early adopters? At this year's Supercomm, I asked numerous vendors selling IPTV-related solutions to explain what they offered that an upgraded cable platform did not. The only answer I got was the ability to offer caller ID on the television screen. Somehow I doubt this will lead to rapid mass adoption.

Rule 3: Early micro-markets determine future success. Much attention has been directed at the idea of market tipping points, an almost magical threshold that marks rapid market adoption. This is an illusion. Market success occurs by companies winning a succession of battles, creating a value proposition for groups of influential customers. Sometimes this is done by luck with a company not understanding the value it creates for customers. But if success is to be a repeatable process, a company must understand early micro-markets and how to replicate and accelerate the value proposition to other micro-markets.

The major challenge for communications companies making these huge investments is not technological, it's marketing. Success will not be the result of picking the right technology but creating value for a cascading assortment of micro-markets.