Qwest Revisits Its History to Find Its Future

As the man tapped to lead Qwest Communications' resurrection in the wireless market, Paul Golden was between the proverbial rock and hard place. The rock was the inescapable fact that Qwest was losing the scant regional wireless customers it had to national carriers, and the hard place was the impossibility of Qwest acquiring one of those carriers, or enough of its own spectrum outside its regional markets, to right its ship.

However, Golden and the Qwest management team discovered a potential path out of the predicament. It was a path that few had tried, but it appeared to be the lowest-cost method of creating national wireless coverage for Qwest's existing customers.

That option was to buy wholesale time from an existing carrier to allow Qwest to become a mobile virtual network operator with national reach, and it just so happened that one of the existing national wireless carriers, Sprint, had recently decided that leasing network capacity to MVNOs wasn't a bad way to enhance its own revenue.

Qwest of course took the option, inking an exclusive arrangement with Sprint to resell service on a national basis.

“From the last statistics I saw, about 40% to 50% of all calling plans sold today are national in nature,” said Golden, Qwest's VP of product management. “The fact that we weren't able to offer national plans before says that almost 50% of our market wasn't able to buy wireless from us. We decided it was important for our customers to have a choice.”

After forming a partnership with Sprint last fall, Qwest launched its new national wireless offering last month, promoting the service primarily to its existing wireline and wireless customers with calling plans starting at $24.99 for 200 minutes. The carrier also offers bundle discounts to customers who already use Qwest wireline service.

Qwest's new plan appears to be just the thing a dying wireless franchise needs. However, from the first day the strategy was announced, it has been hammered by analysts who have called it a half-hearted effort.

“Qwest has failed to truly meet the needs of the market by omitting several key components that are now commonly available — and worse, the basis of most competitive marketing — from the major carriers,” Jeffrey Rickard, senior wireless analyst for Current Analysis, wrote in a research report after the announcement.

“By failing to include unlimited mobile-to-mobile minutes (the latest hot topic in wireless) and unlimited nights and weekends (last year's hot plan), Qwest's offering is poorly positioned and will not prove to be competitive,” he said.

Bob Egan, principal analyst with Mobile Competency was even more critical, saying that it might not even be in Qwest's best interest to get into the MVNO market because of its role as a large mass-market brand on the wireline side of the world.

“Wireless MVNOs tied to wireline operations could go the way of the CLECs,” he said. “They don't have a clear value outside the bundle option. The power of an MVNO is not only the brand, but also the distribution model. It has to speak directly to the customer niche.”

Egan argued that traditional telecom carriers such as Qwest have always taken a one-size-fits-all approach to customer service. Meanwhile, the mark of a successful wireless MVNO is the ability to get close to customers and offer products and services that are personalized to specific user segments, he said.

Virgin Mobile USA, which recently reported 1.75 million customers after just two years in business and is widely viewed as the most successful wireless MVNO thus far, is a perfect demonstration of the model's potential, Egan said.

Perhaps most conspicuous in its absence is Qwest's ability to add any kind of new value to wireless, according to several analysts. After all, the whole idea behind MVNOs is to give consumers additional content or services wrapped around a brand that they know well. But although Virgin USA does have an enormous amount of content at its fingertips, the MVNO market has not been flooded by the famous consumer brands (Disney and Microsoft, for example) that consumers would seemingly flock to.

Golden, of course, doesn't see things quite the way analysts do. Instead of getting wrapped up in what could be, and who he might be competing against in the future, he's focused on the here and now, and with a decidedly telco view of the world. Wireless, while likely the highest growth component, is still just one part of the bundle of services. And he's not really all that caught up in — or seemingly affected by — all the critics' barbs.

“What we've launched to date is the first step in a long journey,” he said.

Prior to the deal with Sprint, Qwest was limited in its ability to compete with the big six national players, and its limitations showed up in its quarterly numbers. At the end of 2003, the company had 871,000 subscribers and a quarterly revenue of $137 million. While some might consider those solid numbers, they were headed in the wrong direction. At the end of 2002, Qwest had 1.03 million subscribers and $144 million in quarterly revenue. In a market where growth in the single digits is considered a failure, Qwest's 15.8% drop in customer numbers was anemic.

As Golden sees it, Qwest had little choice but to figure out a way to offer national service plans in part because everyone else was doing the same.

Indeed, it appears that despite the pounding it's taking from critics, who point to everything from the company's lack of camera phones to its inability to add any kind of content a la Virgin USA, Qwest is taking a walk-first approach.

Under terms of its deal with Sprint, the former RBOC will begin transitioning existing customers off its own network and on to Sprint's in the second quarter. Though Qwest has yet to unveil all of its plans, the company will have access to virtually every service in the Sprint catalog including its PCS Vision services and Sprint's new Ready Link push-to-talk service.

“We're interested in that market,” Golden said. “It is a product that Sprint offers on its network, and we are already exploring it.”

In fact, Golden doesn't even necessarily classify what Qwest is doing as an MVNO in the classic sense, if something as new as MVNOs can have a classic definition. It also isn't a pure reseller because it plans to do a lot of the difficult back-office work that will allow for unspectacular but necessary things like single bills for wireless and wireline service. Instead, it's something in between.

“We have a fairly unique setup with Sprint,” he said. “Sprint sells us wholesale time, but every other aspect of the service is provided by Qwest.”

And while providing elements like a single bill isn't likely to excite customers — or analysts — in the same way that serving up a video of Beyoncé might, it's a basic “blocking and tackling” element that can't be ignored.

“We have a product roadmap that has a variety of different services, but we're really trying to cover some of the key things first,” Golden said.

As part of the Qwest plan, the company is giving discounts to users who buy multiple services, which in and of itself is a significant draw, Golden insists. Also, the company is counting almost exclusively on drawing off its base of existing users, which may appear limiting. However, given Qwest's low single-digit penetration rate of wireless in its local serving territory, the company has plenty of market to target.

“Consumers want their lives to be easier,” he said. “Having to deal with multiple providers just makes life more difficult. We'll do features that bring together their home and away services, whether that's a service like a single bill, one number or integrated voice mail.”

In fact, Qwest went through a significant evaluation before throwing its lot in with Sprint. Included in that was whether or not it made sense to buy more spectrum or try to merge its operations with another national wireless provider via acquisition.

“This was a very well thought through strategy,” Golden said. “There was an analysis that said, ‘What will it take for us to build our own network? That's a very large capital investment in an industry that is already crowded with other players.”

It also was a decision that followed the path of least resistance, a conduit that it would appear Qwest is following in its entire wireless operation, according to Martin Dunsby, vice president of operations at wireless consulting firm inCode Telecom.

“This was actually a much easier way for them to get into the business than reacquiring spectrum,” he said. “The fact that they are focusing on existing customers makes it more likely they will succeed. They know their customers. If they convert just 10% of their wireline customers to wireless too, they can suddenly leap-frog a lot of wireless carriers' subscriber numbers.”

While rare, that type of positive analysis is music to Golden's ears.

“It was strategically a sound decision to get in a position where we could buy time off a partner,” he said. And despite Qwest's past customer service image, Golden believes its brand can be leveraged in a wireless market that is crowded and likely to become more packed with consumer brands, though not with actual network operators.

“Virtually everyone in our 14-state region knows who we are,” he said “Frankly, I don't even really consider [the number of competitors] on a day-to-day basis on what I'm trying to do.”