Niche Players Among First to Face Competition

Posted: 02/1998

Niche Players Among First to Face Competition

By Casey Freymuth

For decades critics have said that the United States doesn’t know what war means
because it has never been invaded by armed forces of a foreign nation; that, with the
exception of its own, brief civil war, blood has never been shed on American soil; and
that, even though the United States has suffered losses from conflicts in other lands, it
cannot comprehend the tragedy of war until its women and children are driven from their
homes and executed by occupying forces. Some even say that it is unfair for a country like
ours to be a superpower–that we haven’t earned the right to yield life-and-death power on
a global scale. (These critics obviously haven’t watched "Cops.") Photo
composite by Dolores AhlesWhile an argument could be made that the home-soil war
experience would make ours a better-rounded society, most Americans are not anxious to
achieve this higher education. We leave that to telecom guys. Though they won’t be
brandishing any high-powered or biological weapons, they certainly will be engaged in a
fierce battle of marketing strength for the loyalties and dollars of the American

In a review of the World Trade Organization (WTO) accord published in the March 1997
issue of PHONE+, readers were advised that as the largest telecom market on earth, the
United States will be targeted by global giants. Almost immediately thereafter, an offer
was on the table from British Telecom to purchase MCI. Homegrown WorldCom managed to foil
this first major post-WTO invasion attempt by a major foreign competitor, but many more
have set their eyes on the New World.

Enter Telmex

The first giant is here, and it’s targeting an ethnic marketing segment. In other
words, it’s taking on the little guys, primarily niche resellers. In November, the Federal
Communications Commission (FCC) and Telefonos de Mexico (Telmex) struck a deal that
provides Telmex with the ability to market long distance services in the United States
through a two-year-old joint venture with Sprint. In return, the company agreed to cut
settlement rates to U.S. companies by more than 50 percent by 2000.

The target market of the Telmex/Sprint venture is the Mexican-American community of the
United States, now approaching some 20 million strong. This means that the venture’s
primary geographical target areas are in the southwestern United States, with a major
emphasis on California, which accounts for more than a third of the country’s Hispanic
community. Under the partnership, Sprint will provide the network and Telmex will provide
marketing and customer service.

Marketing Strategies

According to a report on ethnic marketing by Boston-based strategy consulting firm
ATLANTIC*ACM, AT&T is the only telecom company among the top 10 advertisers to the
Hispanic community. This provides substantial opportunity for Telmex to launch media
campaigns, and accompanying telemarketing campaigns, targeted to this market. Expect to
see a major TV blitz on Galavision, Univision and Telemundo; spots on prominent radio
stations such as KLAX in Los Angeles; and print advertising in publications such as
Selecciones, Mas and La Opinion, as Telmex attempts to leverage its market presence in
Mexico to capture customers in the United States who either are former customers of Telmex
or have relatives in Mexico that are currently using Telmex services.

Deep Pockets and Shallow Commitment

With annual revenues in excess of US $6.5 billion, Telmex has to be viewed as a serious
competitor if for no other reason than its ability to fund massive marketing campaigns.
Its weakness could be its reputation for poor service.

Several Wall Street analysts have concluded, erroneously perhaps, that Telmex service
must be improving because the company held on to more than 50 percent of its customers
during this year’s presubscription process. Certainly, the knowledge of inevitable
marketplace liberalization has forced Telmex to improve its service quality and delivery.
(Consumer complaints have been reduced dramatically over the past five years, and Dow
Jones reported that the company’s network is now 90 percent digital, compared to less than
30 percent seven years ago.) However, citing Telmex’s customer-retention levels during
this year’s selection process as evidence of consumer loyalty fails to take into account
that Telmex was automatically awarded customers who did not fill out or return ballots.
Viewed in this context, its customer-retention levels paint a less rosy picture. Even
given the advantage of being the default carrier, Telmex held on to less than 60 percent
of its customers, which indicates that less than half of the company’s customer base
actually selected Telmex as its carrier of choice. By comparison, it took 10 years for
AT&T to experience a comparable loss of market share in the United States, using a
balloting process that assigned customers to competitive carriers proportionate to
returned ballots in their areas.

All things considered, it would not be surprising to see the niche players in the
Mexican-American market become acquisition targets of new foreign players such as Telmex
as an easy method of market entry. At least one California-based provider to this market
has already entertained a lucrative offer from one of the major emerging multinational
carriers. If the cross-border traffic of these specialized players is of significant value
to large companies with traffic patterns all over the globe, it should be worth even more
to a venture between giants that was formed to serve the same niche.


Despite its problems with service delivery, Telmex’s significant marketing money makes
it hard to imagine that the company, in partnership with Sprint, would capture less than
20 percent of its target market over the next several years regardless of acquisition
activity. Thus, the many small resellers that have built all or large parts of their
businesses around this segment will be the first to face serious attack from foreign
players in their own territories. It is only fitting that this is the case. After all, it
was the small resellers that made the first strike against market giants to get the global
ball of competition rolling in the first place.

Casey Freymuth is a broadly recognized authority on strategic and operational
issues affecting global telecommunications and utility service providers. He is also the
president of Group IV, a consulting and publishing firm to high-tech service industries.

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