AT&T vs. MCI: Subscription Billing as a Competitive Weapon

June 2, 2008

K. V. Raoby K. V. Rao

 

As we launch Zuora with the vision for creating a new platform for subscription companies, lots of people have asked, why billing? Is billing really the most important thing for a subscription company? To which we emphatically reply: absolutely!

 

Many of these conversations have centered on how subscription businesses can be difficult to run without a recurring billing system, but the true value of a billing system is not just streamlining operations, but giving you a tool to create competitive advantage. One of the best examples of this is the infamous MCI overtake of AT&T’s market share with the introduction of the “Friends & Family Plan.”

 

If you were making long distance calls in the early 90s, you probably recall this story. AT&T was still dominating the long distance calling market. Rates were ridiculously high. Remember your mother telling you to “keep it quick” on the phone with grandma? After all, this call was costing her 60 cents per minute.

 

Enter MCI. They said, “Hey, is grandma an MCI customer? If she is, then you can call her anytime you want and talk as long as you want, for as little as 15 cents per minute.” The nation jumped on this idea. All I have to do is switch to MCI for my long distance service, and then I can call anyone else in the MCI network for a fraction of what I was paying before? Voila! MCI rapidly began to steal AT&T’s market share. And here’s the kicker: it took AT&T nearly two years to build a program similar to MCI’s to compete effectively. Two years. Why so long?

 

AT&T was functioning on a standard single rate-plan model. In order to make it possible for customers to add a “Friends & Family” type option, or any additional option at all, they would have to completely restructure how these customers were provisioned and billed. They had to establish new systems on the back end to make this happen, and in the time it took them to do this, their competitors won over a large portion of their customer base.

 

A wise sage wrote “Those who don’t study history are condemned to repeat it.” When I was at WebEx, I guess we did not pay too much attention to history. Business was booming as we went to market with a very compelling product and a subscription-pricing model based on number of concurrent seats, which was very appealing to our initial customers. As a scrappy start-up, we could not afford MCI’s billing system, and built our own. Along came Citrix/GoToMeeting, with a pricing model that appeared to be significantly lower as it was based on number of “named seats.” We recognized the need to create new packaging for our products based on this model, but could not launch them quickly enough as our home grown billing system was not flexible enough. WebEx started losing market share in certain segments to GoToMeeting. Overall, it took over a year for WebEx to catch up!

 

What a lot of people don’t realize is that running a subscription-based businesses is very difficult from a billing standpoint. The ability to bring new packaging and pricing options to the market, and keep up with competition takes a lot of time, money and manpower, as evidenced by these stories.

 

Imagine what WebEx and AT&T could have accomplished had Zuora been around during these times?