Creating Shareholder Value with Speech Technologies
By Tim Swift, Director, Communications Market Source Services, Unisys Corporation
It is hard to tell which way the wind is blowing if you are a network service provider contemplating investment in speech technology. The market is full of testimonials, case studies and analyses that seek to convince us that speech technology either is leading a resurgence in shareholder value creation, or conversely, that it died on the vine.
Let’s summarize the debate.
Due to the relatively simple speech application design of call centers and directory assistants, these applications are clearly creating shareholder value for investors. One Unisys client, Telenor Business Solutions of Norway, has compared the cost of transferring calls via a manual switchboard with the automatic attendant it developed in conjunction with Unisys. The automated service cuts costs at least in half. There are many other success stories that testify to the cost savings and the rapid ROI achievable through use of speech technologies.
However, limitations in current speech technology are suppressing growth in other areas of network-based speech solutions. For example, penetration for voice portal solutions has been somewhat muted because voice commands and an audio interface give Internet surfers access to only a small subset of Web content. Further, Web browsing via voice command exposes the weaknesses in today’s speech technology, such as poor diction, accents, background noise and bad grammar.
Accordingly, a key takeaway is that speech-enabled solutions are working in limited applications—when the need for simple voice interfaces can help users perform selected tasks more efficiently. Viewing speech-enabling technology as a sort of all-encompassing panacea that increases Internet services penetration, drives up the telco’s revenue per subscriber, and provides all users with personal assistants may be a mistake.
In today’s world, the telecommunications industry must invest in only those opportunities that provide clear and compelling opportunities to create shareholder value (in the form of positive free cash flow) - and create it quickly.
One approach for assessing the risk is to describe an attractive market in value-based planning terms: what are the value-drivers in speech? What levels of investment are required to provide speech-enabled solutions? What levels of revenue and demand are required to generate attractive returns on speech investment?
Let’s look at the following value-drivers:
- Churn improvement: Every time a network service provider acquires a new customer, it incurs costs in the form of a promotional pricing offer (e.g.: free first month’s usage), sales channel expense and provisioning expense. Telcos can greatly improve their cost structure by reducing churn and thereby reducing “winback” expense. Speech solutions enhance customer satisfaction, increase subscriber stickiness and reduce churn.
- Subscription fees: Particularly in the U.S., network service providers rely upon subscription fees to create shareholder value when investing in value-added services. This is because many types of network service are un-metered in the U.S. Early value-added speech solutions are generating subscription fees of at least $1 per month in the U.S.—adequate for quick recovery of a speech technology investment.
- Call center efficiencies: Speech-enabled auto-attendants can handle routine customer service center inquiries at a fraction of the cost of live customer service representatives (see case studies, above). Network-based speech value-added service infrastructure is highly extensible into the call center.
- Premium voice portal content: Even if it is infrequently used, a per-event charge for accessing premium Web content (such as local traffic reports) using a voice portal can be lucrative.
- Increased network usage: Speech solutions drive up the average length of a call. Users are more engaged in the call. The ease of use of features compels subscribers to access more features (such as voice-controlled call-back). If the subscriber is using speech solutions on a metered service, this drives up billable network service. In the U.S., some connect time will occur in non-metered rate bands such as the user’s free local service area. For that reason, U.S.-based network service providers also charge fixed subscription fees for their service. On networks where all calls are metered, incremental network usage is extremely lucrative.
An important pricing consideration for U.S. based network service providers is:
What is the optimal mix between network usage revenue per minute and fixed
subscription fees that maximize shareholder value creation?
The Shareholder Value Model
Before any network service provider invests in advanced value-added services, they ask a fundamental question: “How many subscribers must we add to this service in order to be successful?”
Let us assume that all network service providers require a 24-month discounted payback period. That is, network service providers must generate enough new free cash flow to recover their initial investment in speech, plus their required return on that investment, within two years.
We have developed a shareholder value model that can quickly evaluate the tradeoffs between speech solutions subscriber demand and price. We can determine what subscriber volumes are required to generate adequate incremental shareholder value over a range of different subscription pricing.
In the following scenario, we assume:
- The network service provider sells only one speech solution. The economics become much more favorable if the telco is successful in selling new subscribers more than one speech service.
- The network service provider charges $0.20 per minute of network usage.
- The speech solution subscriber places an average of 0.5 calls per day using speech.
- The percentage of subscribers on the speech solutions platform at the busiest hour of the day is 9.5%.
In the graphic above, the higher the function on the vertical axis, the riskier the investment. For example, at a 75¢ monthly subscription fee, roughly 102,000 subscribers are required on voice-activated dialing in order to have a positive return on investment (ROI) in 24 months. By comparison, almost 140,000 voice portal subscribers are required at that same subscription rate. This is because voice portal is more capital intensive and will require more operations and maintenance support because of its more robust infrastructure.
Most compelling of all is the required threshold by selling a three-service bundle. Only 60,000 subscribers purchasing a three-service bundle are required to generate a positive ROI in 24 months. This is because of the tremendous value created by upselling and cross-selling existing customers.
This analysis is dependent upon a few key variables. As these change, so too does our risk assessment.
The peakedness of network traffic (the percentage of subscribers who are on the solution at one time during peak busy hour) can greatly affect required capital expenditures, because any network platform must be able to handle peak loads with minimal blocking. If most of the speech services users access the service at the same time of day, then a very large system that is built to handle a high amount of concurrent sessions must be deployed for use during that short time. This large platform remains relatively dormant for the rest of the day, generating little value.
The amount of incremental network traffic generated by subscribers using speech solutions is critical. Incremental network traffic from an existing customer is highly profitable, because it generates no incremental provisioning or sales expense, as does incremental network traffic from a new subscriber. In addition, the number of speech services the average subscriber purchases is critical. Customers who subscribe to two or three speech solutions are extremely valuable when compared to a subscriber using only one.
Our baseline scenario assumes:
- Growth to 200,000 subscribers by the end of year three.
- Subscribers are using voice portal, voice activated dialing and speech
- controlled messaging.
- The speech technology is extended to automate the telco call center.
- The percentage of subscribers on the network during busy hour is 9.5%.
- The average subscriber generates 0.5 incremental calls per day.
Clearly, we see the solution is highly sensitive to the number of speech services the customer purchases as well as the amount of incremental billable network traffic generated.
Choosing the Speech Solution
This analysis is helping our clients understand what is required to be successful in speech. Before we recommend making the investment, we advise our clients to:
- Define their target market segments.
- Identify what solutions their primary competitors are offering currently to these same segments.
- Develop a wide array of potential speech solutions that their subscribers may wish to purchase.
- Conduct primary research on their target subscribers to estimate the real demand for these services at a variety of price points.
- Determine what mix of pricing maximizes shareholder value for them.
- Based on primary market research survey results and capital expenditure and operating expense simulations, determine if adequate shareholder value will be generated.
- Launch customized speech solutions targeted at their high value clients.
The news isn’t all bad in telecommunications. Better and better technology, coupled with increased insights into subscribers’ burgeoning needs, help us to continue to find new ways to grow the business profitably.
To learn more about creating value for your business through speech technologies, contact Unisys today.
Tim Swift, Director, Market Source Practice Tel: +1-215-986-6578
Unisys Global Communications Industry Tel: +1-585-742-6780, ext. 467
Tim Swift serves as director of Market Source Consulting Services for Unisys Global Communications. In this role, he is focusing on providing Unisys clients guidance and advice on marketing and investment strategy – particularly as it relates to value-added services. Tim draws on his professional experience in the industry as well as the experiences of dozens of Unisys clients worldwide to help his customers develop the best plans for driving revenue uptake in the telecommunications market. Among other offerings, Tim and his team develop new service marketing plans, financial business cases to justify investment, case studies and competitive assessments.