How Our Phone-In-A-Box Competed With Cigarettes and Beer

Success in creating new markets is often not selling bleeding edge technology, but selling a good enough solution to a segment of customers who don’t have a next best alternative.

In 1997, an angel investment group I managed, Capital Insights, invested in Carolina Phone, which planned to introduce a new wireless phone service in the face of massive, entrenched competition. The company’s leadership frequently discussed how to get new customers to try a new service from an unknown company for the first time.

The company could not compete directly with the robust, built-out networks of incumbent providers. Who were potential customers who wanted phone service but weren’t able to get it? Why not?

In the early, high growth phase of the cell phone market, almost all of the early leaders focused on affluent customers at the high end of the market. To get a cell phone contract, customers had to have credit. At the time Carolina Phone was founded, there was a large segment of potential customers at the low end of the market who had no credit.

Carolina Phone pioneered a pre-paid phone-in-a-box, which was marketed primarily through convenience stores, a new sales channel for cell phones. The company’s vice president of marketing insightfully noted that the competition was not other cell phone providers, who wouldn’t sell to these customers, but cigarettes and beer. A customer walking into a convenience store with $20 in his pocket had a choice of a pack of cigarettes, a six-pack of beer, or a pre-paid card for his cell phone.

The company planned a very large purchase of equipment necessary to deliver its new wireless service. The equipment could be acquired from a number of large, established vendors, or excellent new technology could be acquired from a start-up vendor. Carolina Phone’s leadership reviewed their alternatives and decided to stick with an established vendor and not risk buying equipment from the start-up. The quality of the phone service is not what distinguished the product in the marketplace. Carolina Phone was not motivated to be an early adopter of new technology to create a competitive advantage. The company was a pragmatic, mainstream customer when it came to buying its equipment.

The difference between early adopters and mainstream customers was perhaps never more clearly demonstrated. Carolina Phone, in making internal buying decisions, was rightly conservative, buying proven equipment from an established vendor even at the risk of not having the most advanced technology. The company’s consultants had good, prior experience with existing vendors’ equipment in other situations. The company felt existing vendors would provide better installation and support services as well as better financing terms. These services were essential to the complete solution that Carolina Phone needed to succeed.

Yet when Carolina Phone introduced their product to the market, they were asking their customers to make a different decision, to buy a new product from a new company. To do that, they didn’t target existing customers served by incumbent market leaders. At the high end of the market, incumbent providers had a solution very close to completely satisfying customers, leaving little room for a new entrant to the market. Instead, Carolina Phone launched a novel way of meeting the cell phone needs of new customers not well served by incumbent providers at the time.

The quality of Carolina Phone’s wireless service actually wasn’t all that great. A friend who was a real estate agent called me exasperated that the service was spotty. That was because the infrastructure was still being built out. She returned her phone and got a phone contract from a larger wireless company. She could, because she had credit. Carolina Phone’s target customers couldn’t. What distinguished Carolina Phone was where you purchased the phone, at a convenience store, and how you paid for service, pre-paid phone cards. If you otherwise couldn’t get phone service, spotty service was good enough.

Architectural innovation

Harvard Business School Professor Clayton Christensen, in The Innovator’s Dilemma, observed:

“Scholars have shown that in the initial phases of an industry’s history, most technical energy is expended on architectural innovation, using materials and technologies that are generally available in the market place.”
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This is a lesson from my career about seeing around the corner to find opportunity in the turbulent times we are living through. How can my experience help you take your organization to the next level by defining what is essential, attracting an outstanding team, holding them accountable, and letting go? Contact me at j3warner@gmail.com and let’s find a time to talk. John Warner