Just when they thought it was safe…

The telephone industry has had its ups and downs over the last twenty years, but the wireless business has helped it survive nicely.

Telephone customers are changing how they buy phone service. For the last several years, customers have been migrating away from land line phones to cell phones. Many of the under-35 set rely exclusively on cell phones for their phone service.

The largest telephone companies, including AT&T and Verizon, solved the problem of the lost land line business by buying cell phone carriers and expanding the cell phone business. This move kept their profits intact. These companies make most of their cell phone profits with voice communications. A secondary source of profits for them is data communications. Today the combination of land line and cell phone services produces an attractive business for both AT&T and Verizon.

They have had their challenges, though. One of these challenges has come from the internet calling unit of eBay, Skype. For the last several years, Skype has offered very low-cost telephone service using Voice/Over Internet Protocol (VOIP) to allow its subscribers to use the internet for their phone calls. The company claims to have over 400MM users worldwide. This low-end product has certainly had an effect on the land line businesses of AT&T and Verizon.

Now Skype is coming to the cell phone business. Skype has developed a service that allows its users on mobile phones to make calls and send instant messages on mobile phones, with Apple phones and BlackBerrys. This new service has the potential to allow customers to use data plans, rather than more expensive voice plans, to make calls using Skype.

This is an example of a low-end competitor posing a challenge to the leading products of the industry leaders. If industry leaders, whom we call Standard Leaders, do not stop or slow the growth of low-end Price Leaders and Next Leaders, these companies can eventually become Standard Leaders in their own right. (not likely in a Hostile market. See the Perspective “Commodities and Hostile Markets” on StrategyStreet.com.) Consider the following examples:

~ Dell began its career in the personal computer industry as a Price Leader.

~ Enterprise Rent-a-Car grew to become the largest automobile rental company, starting from a low-end base.

~ Today’s LG appliances compete against the GEs and Whirlpools of the world. They began as Price Leader Lucky Goldstar products.

~ Dean Foods grew to become the largest dairy producer in the United States beginning from its roots as a private label supplier.

~ Gallo entered the mid and high-priced segments of the table wine industry, from its beginning, with such low-end products as Thunderbird wine.

~ Southwest Airlines has become a leader in the airline industry from its roots as a discount air carrier.

~ VF leads the denim industry, where it once was a cut-rate competitor of Levis.

~ Nucor is the second largest steel manufacturer in the United States. It began its life as a seller of one of the industry’s cheapest products, rebar.

~ Toyota and Honda both entered and grew in the American automobile market, starting with the small car segment. Is Hyundai next?

~ Wal Mart has become the largest department store and grocer in the U.S., surpassing Sears, Macys and Kroger.

~ Charles Schwab has become a powerhouse in the brokerage industry, starting from its original base as a discount broker.

Posted 4/13/09