Yahoo and AOL's Two-tiered Email Service -- A Big Mistake (YHOO, TWX)

Includes: AABA, TWX
by: ClearFish Research

Just when you begin to think that old players in a new market might get it, they do something to show you that they hate their customers, think of them as entitlements, and their strategic managers are either from the monopoly era or spreadsheet thinkers.

There is a concerted push on right now for bandwidth providers to try and pull more revenue from their services, regardless of the long term consequences of that change. In Europe, internet access lagged the US by years and years, because internet usage was charged as a measured rate, rather than a flat rate. That is, the more you download, the more you pay. It killed the business. The same was true in the US for cell phone service, where adoption rates were much higher in Europe and Japan for the same reason (bucket plans, i.e. flat rate pricing). But measured service is what some telecom players are trying to adopt here, both with broadband access (BellSouth is the fool here), and e-mail (Yahoo! and AOL are the fools here).

What is up with Yahoo! and AOL and two-tiered email service? They are starting to look like spreadsheet management rather than strategic management. It's akin to what happens in Congress with static versus dynamic scoring. Take a snapshot of revenue sources on a spreadsheet, decide to increase one of them, make a projection on final revenue, based on the implemented change. The difference between the two approaches is between how you make that projection.

In spreadsheet management (and static scoring) you assume that the change you just implemented will have absolutely no unintended consequence or any other sort of effect to your business outside of the line item you targeted. In strategic management (and dynamic scoring) you assume that the change you implemented will have some effect on the remaining aspects of your business, and you trickle that effect throughout. That is a much harder exercise to do, as it requires some intimate knowledge of your business and customers. Hired talent often doesn't have the necessary vision. For small changes, static spreadsheet management can be fine. But for big changes, it can be radically wrong, and dynamic strategic management is needed. Uhhh, pricing of one of your core services? I would call that a big change.

Both AOL and Yahoo! are making strategic moves (e.g. forcing a shift from dial-up customers to DSL, buying Web 2.0 companies, respectively), so it's not that they completely lack vision. What they miss is the intimate relationship between the desirability of their products and pricing. No matter how good your product, you can kill it by mispricing it. And once you make one of your core services undesirable, customers look elsewhere for your package of services. Look at the cell-phone business before bucket plans in the US, or the current problems with data plan adoption rates, or the VoIP adoption rates. The market clearly likes flat-rate fees. It's why the US has a robust internet sector.

Tiered pricing is retrograde, foolish, anti-empirical, and a bad idea.

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