Sunday, September 19, 2004

What makes it feasible? Part 1

We've heard that LUS's recently released feasibility study showed that their entering the telecommunications market as utility can succeed. But what does that mean? I've been trying to figure that out myself while I read over the admittedly thin study.

Stripped down to the bare essentials feasibility is all about competitive advantage. A idea is feasible if it exploits your opponents weakness and builds on your strengths in ways that make it possible for you to get into the game and succeed.

So what are LUS' competitive advantages? What makes them think they can get into the game and succeed?

The somewhat paradoxical answer is that we can be confident LUS is in a position to succeed against Cox and BellSouth because our local utility is not playing their game. The incumbents want us to believe they are so panicky because somehow the playing field is not "level." Not so, that idea is just intended to distract us and motivate their troops. The truth is the incumbents are playing a game—largely against each other—that LUS does not want to succeed in, does not need to succeed in, and just won't bother to play. And that is what really so frightens BellSouth and Cox. The incumbent's fear is reasonable for they cannot hope to win in the game LUS actually will pursue.

The game Cox and BellSouth are playing is about maximizing profit, short term profit, quarterly reports, meeting earnings expectations and, ultimately, showing a steady growth in share price. That is the game in which they must succeed. It rough going out there. Both telcos and cablecos are actually loosing subscribers to their bread & butter services to similar services offered by cell phone companies and satellite TV. Their advantage is the greater capacity and reliability of their hardwired connection to the home. But to maximize that advantage and continue to grow they must take on each other. In the larger scheme of things we are witnessing a battle field truce between mortal enemies in which they join to try an swat a third party that threatens to reshape the game each expects to win.

LUS is by contrast wants to succeed at a different game. Their game is about maximizing service, creating long term value, gaining and maintaining the confidence of their owner/customers, saving the public and the city money, and ultimately, returning increasing value to their owners--the citizens of Lafayette.

LUS' central and crucial competitive advantage is that it is owned by its customers. BellSouth and Cox, rightly, seek to transfer customer money to owners in exchange for services. They do seek to maximize the profit they make here in order to send it off. That is right and proper—for them and is part of the game they play. But LUS does not need and is not particularly motivated to gather as much profit in as it can. It just needs to get enough to maintain itself and continue to improve service. It does need to benefit its owners. But they don't have to charge more for their services to do so. They can (and this must seem bizarre to BellSouth and Cox) decide to give more to their "owners" by charging their "customers" less. They can choose a plan that is most cost-efficient over the next 2o or 25 years instead of needing to show a profit in the next couple of quarters because their owners are less interested in current profit-taking than building long-term value in the community. LUS is motivated by its owners to serve them all...even in those areas of town that aren't "low-hanging fruit." It can sacrifice immediate profit-taking in order to provide universal service--and will. Any good economist will tell you that this long-term value-oriented approach leads to high "take" levels and ultimately makes for long-term profitability and market dominance. But the incumbents simply cannot do the smart thing here. .....They are playing a different, weaker, game.

LUS can play a longer, smarter game. Not because they are richer or smarter. But because it is in the interests of their owners that they do so.

And that, my friends, is the basic reason why LUS can succeed and why the idea of a publicly-owned fiber optic network is feasible.

Just how that principle plays out in practice, and in the feasibility study is interesting. And future installments of "What makes it feasible?" will explore just that.Check back.


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