Direct competition is a concept in the strategy literature that is often overlooked, but plays out every day in competitive markets. Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions. In other words, direct competition occurs when companies know they’re battling for the same kinds of customers with relatively similar products or services across a number of different markets.
Mobile phone companies - Verizon, AT&T, Sprint & T-Mobile - are a perfect example of direct competition. They compete nationwide in all of the same markets, and they constantly act and react to each other’s strategic actions. One cuts prices, the others likely follow. One introduces a new feature or service, the others eventually copy it. Attack to create an advantage, wait for a countermove. When you’re attacked, respond with a countermove to minimize the advantages of the attack. Wash. Rinse. Repeat.
One of the challenges of direct competition is creating sustainable differentiation. Why? Because direct competitors typically have similar resources. Any technological advantage is usually temporary. Same with costs. Same with services. Eventually, if you’re behind, you can catch up. If you’re ahead, your competitors will catch you unless you continue to outperform them or keep introducing new points of differentiation. It’s not unlike an NFL receiver and cornerback. When Seattle’s star cornerback Richard Sherman is glued to your team’s top receiver, you need to look for other ways to move the ball down the field. That’s usually the case with direct competitors - it’s difficult to create and then maintain separation that’s meaningful enough to get customers to switch.
That’s why T-Mobile and it’s bombastic CEO (read below for some examples or, even better, just follow him on Twitter @JohnLegere like I do) are so interesting. Instead of the classic, move/countermove approach that we usually see, Legere has T-Mobile introducing new points of separation every 3-4 weeks in an avalanche of never-ending attacks:
- Unlimited minutes, texts and data, meaning no overage charges. Once you hit your data cap, instead of charging you, T-Mobile just slows down the data feed (Legare tweets that they rarely do that).
- No roaming charges for international plans in 120+ countries. It’s 3G unless you pay extra to get 4G, but travel abroad and email, texts, web, and navigation apps all work at no extra charge to you. Calls back home are a reasonable 20 cents a minute. This not only save you a ton of money each time you travel internationally, you get to use your phone without doing gymnastics to make sure you don't accidentally forget about some cellular-based service that is running in the background spinning the meter on your data usage. It's happened to me.
- Stream all the music you want via Pandora or other music streaming services. Streaming does NOT count against your data usage.
- Upgrade your phone whenever you want by trading in your old phone and receiving credits for remaining payments (up to half of the original cost).
- Quit your current carrier and T-Mobile will pay your termination fee, allowing you to switch at no cost.
- All T-Mobile customers are eligible for new deals, plans, and services, not just new customers, which is usually the case at AT&T, Verizon, and Sprint.
And, it’s working, as T-Mobile has gained nearly 4 million new customers in the last 18 months and has now swung to what appears will be strong profitability (time will tell). When I took an international trip this year and AT&T indicated that I’d lose my unlimited data plan if I selected a 1-week international data plan, I had had enough and switched to T-Mobile. My wife and I would like better coverage in northern Indiana where some of our relatives live, but in Indianapolis, and when we travel in the U.S. and abroad, the coverage and service have been super solid. And, at least for us, T-Mobile’s 4G speeds are much faster and the quality of cellular calls is like we’re standing next to whomever we’ve phoned.
In addition to this avalance approach to direct competition, Legere has brought an in-your-face attitude via Twitter. For example:
And that’s the tame stuff - well, not the last one. As someone who follows business like sports, I find Legare’s tweets fascinating and fun because he’s always promoting T-Mobile and making direct - and damaging - comparisons with the competition. As a textbook writer and business professor, it’s wonderful stuff for teaching. Personally, as a customer, it’s great.
We’ll see if the traditional pattern of direct competition recurs, such that Verizon and AT&T begin to copy some of T-Mobile’s differentiators, reducing them to just temporary advantages. Right now, that’s not happening and for the next few years I’m rooting professionally and personally for T-Mobile and John Legare.