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Telecom's Dangerous "Pricing Game"

It's a new world for Solomon Trujillo, CEO of mobile operator Orange. Formerly chairman and CEO of regional Bell operating company US West from 1995 until its merger with Qwest Communications (Q) in 2000, Trujillo came out of retirement last March to take the top job at France T?l?com-controlled (FTE) Orange, Europe's second-largest mobile provider.

Trujillo spoke with BusinessWeek's Andy Reinhardt on Oct. 13 at the ITU Telecom World 2003 trade show, held every four years in Geneva and sponsored by the International Telecom Union, a global organization that coordinates telecom networks, services, and standards (see BW Special Report, 10/20/03, "The Wireless Challenge"). He discussed the similarities between the U.S. and European wireless markets and his concern that commoditized pricing for cellular service in America will make its way across the Atlantic. Following are edited excerpts of their conversation:

Q: You've got pretty stiff competition with Vodafone (VOD) and other rivals in the many countries where you operate. What's your plan?

A: We have a really interesting strategy. We're trying to use a different model. If you think about it, the amount of retail real estate given to this industry is totally disproportionate to its size. Walk down any street in London, and you see shops everywhere selling services from a half-dozen companies. But all they're doing is talking about tariffs [e.g. prices and rate plans] and handsets. And then people wonder why this business is seen as commoditized! It becomes a pricing game. We've seen the ruining of the industry in the U.S. because of that.

The fact is, these days people only do voice calling and some text messaging on their mobile phones. I want to do something else: I want to add value to peoples' lives to ask them: "What do you need?"

Q: What does that mean?

A: I want to put intelligence in devices and in the network. I've seen some of this movie before in the fixed-line world, where telcos host applications in the network and serve them up. You can recognize who the user is and give them what they want. For instance, say you're Joe or Jane Worker, commuting 30 to 40 minutes to and from work, and you end up having to finish your e-mail when you get home. The spouse and kids don't like that.

But say I give you voice-activated e-mail in your phone instead, and you can have it read to you over the phone while you're driving? You can finish your work before you get home.

Q: I don't know if I'd want that...

A: My bet is that there's a segment of the marketplace that would. We know it, in fact, because we've done the research. I'm a market-based guy. We're segmenting the market into needs, according to what different customers want. It's market-based management. That's how we're going to operate.

Q: What has been the biggest surprise to you since you moved from the U.S. to Europe?

A: Probably the biggest surprise is that it's not all that different. The needs are the same. Young, married people with children aren't different in San Francisco or Paris -- they center their lives around their kids. It's about addressing segments of the market. Frankly, the biggest neon light for me was to see the mentality here of selling tariffs and handsets. The price wars we've seen in the U.S. risk coming to Europe.

Q: A lot of European countries are on the verge of introducing number portability, where customers can switch to another carrier and keep their phone number. How's that going to affect Orange?

A: Some people will move because they perceive they're getting a lower price or a better deal. It will create more customer churn, which is expensive for carriers. The solution is to create sticky relationships -- not by precluding people from moving but by giving them the things they want and need. Then they'll stay. Competitors could offer them tariffs 50% lower, and they still wouldn't want to change.

Q: Orange has a pretty high-visibility relationship with Microsoft (MSFT) because you were the first carrier in the world to introduce a "smartphone" using Microsoft's Windows software. How well do you think Microsoft is doing in its efforts to get into the telecom business?

A: People are always leery of Microsoft. I don't think that will ever change because you can't undo the past. But Microsoft is working very hard to build new relationships. They now understand that you can't capture all the value and leave your partners in the lurch. They're definitely making progress in telecom.

Q: This morning, Bill Gates announced a relationship with Vodafone to use its .Net Web-services technology in Vodafone's network and service offerings. What's your reaction to that?

A: It's not clear to me whether there's a great, medium, or low need for .Net in the mobile market today. I think it will depend on the segment. For some users, it will make things simpler, but others don't need it. The main point is that if you have to give up something else to get it, they may say no. Microsoft has to keep things open.

Q: A power struggle is going on these days between operators and handset makers. In some cases, companies like Nokia (NOK) have more brand power and customer loyalty than the operators. Operators want to reclaim that customer relationship -- and increase stickiness -- by having manufacturers build phones to their specifications. Orange led that charge with the Microsoft SPV phone. So where do you see Nokia fitting in?

A: Nokia has not manufactured signature devices for us -- that is, handsets with our logo, screen design, software, and special features built in. My message to the industry is that over the long run, those who want to play our game will have the best relationships with us.

Q: France T?l?com has announced that it plans to buy back the 16% of Orange that it doesn't own. Did you know about that before you took the job as CEO, and how do you feel about it?

A: It's a logical thing to do. We did something similar with a partly owned subsidiary when I was running US West. It's easier if you can control all the decisions. You can move faster if you own the whole thing. And it helps accelerate our plan to consolidate all the different Orange companies into one company. That strategy is common to us and to Vodafone. The question is: Who does it quickest and best?

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