Questions & Answers

Questions & Answers

Developments in mobile apps, services and smartphones are clogging up network providers’ infrastructures with increasingly high data volumes. With a number of mobile operators eliminating all you can eat data plans, are we now watching the beginning of a new era in mobile tariff models?

   

Steven van Zanen, Acision head of mobile broadband:

The inevitable has happened. AT&T and O2 have bitten the bullet and introduced data caps to their previously unlimited smart phone and iPhone offers. They will be the first of many operators to do so. The ‘all you can eat’ mobile broadband business model has finally collapsed under the burden of unsustainable cost levels and crippling quality of service issues. By introducing these usage thresholds operators are hoping to leave behind the bad press and welcome a new era of mobile broadband profitability and consumer satisfaction.

If only. Evidently operators have valid concerns regarding broadband service quality and profitability, which require positive action from their side. But the usage cap is too blunt an instrument to effectively create a sustainable business model for mobile broadband. Are operators moving from the frying pan into the fire?

First of all, usage caps raise all kinds of difficult questions for the consumer; So what exactly does a Megabyte give me? What happens when I overspend? Will I get notified in time or can I expect a huge bill if I am not careful? Will I suddenly not be spending a lot more?

Although operators are at pains to assure that only a small percentage of their consumers will be affected, the impact is very likely to be very high on consumers in terms of perception, spend, confidence and satisfaction.

Steven van Zanen, Acision head of mobile broadband
Steven van Zanen, Acision head of mobile broadband
 

Perhaps more importantly, the usage cap is only addressing the symptoms of the problem, not the fundamental cause. Today, video easily accounts for 60% of smart phone traffic and is generating the majority of problems on operator networks. With the iPhone 4’s video calling capabilities, a new ‘network killer’ service is likely to appear. The consumer, in the mean time, is largely unaware of the effects of such services on the network and is in no way incentivised to alter behaviour.

This is where Acision believes the crux of the matter lies: consumer awareness. Consumers have no idea what the impact of a video service is; let alone what ‘a Megabyte’ relates to.

Operators in our view therefore should consider the following approach: Offer a low price all you can eat package for the most elementary services. Most services, such as browsing and email, don’t cause any major network problems. They could therefore be offered as part of an unlimited bundle, freeing the consumer from any hassle in these service areas;

Treat resource intensive services differently, in such a way that the consumer can relate to. This is where a cap could apply. Not a cap in Megabytes, but in a measure that the consumer understands, which for video could be number of minutes. Video calling would of course fit such a model easily as voice calling is no different; Differentiate the offer. Operators could start differentiating their offers based on these specific resource intensive services, as long as they are able to explain it clearly to their customers. So for example offer two hours of video for $10, as a bolt on package to the standard all you can eat service.

This is where we believe operators should focus. Creating a blended model of all you can eat basic services combined with transaction based premium services which consumers understand and relate to. Such an approach will enable long term sustainability in mobile broadband which balances consumer confidence and satisfaction with a viable operator business model.

 

Keith Horsted, GTeq channel development director:

The automatic iPhone update feature has caused a number of users to appreciate just how expensive mobile data really can be, especially if they are not on a data bundle.

It has perhaps also highlighted the fact that most people do not understand just how much data is associated with mobile applications and data use in general. The situation is even more evident when roaming abroad.

Consequently, it would seem a natural progression for companies to insist that their users make better use of existing company data networks for data and even voice calls from their mobiles. How the mobile networks incentivise and encourage users to stick with them, rather than migrate the traffic onto fixed networks is open for debate, but I would suggest that most mobile networks will rely on consumer ignorance and the removal, sorry, the selective exclusion, of functions such as SIP or even WiFi from certain branded handsets to retain their traffic.

Current data tariffs were devised when average data usage was around 300KB and therefore the amount of unused data in the bundle was pure profit; however, some of these bundles are now being fully utilised and in some cases exceeded, which again has highlighted the out of bundled data costs.

Keith
Keith Horsted, GTeq channel development director:
 

The solution is as simple, or as complex, as the mobile networks want it to be and will depend on how much money they want to spend or how much they want to make.

 

Dr. Ekkehard Stadie, Simon-Kucher & Partners’ partner:

Developments in revenue and data flow in mobile networks show that the mobile operators’ current tariff models will not remain sustainable for long. In growing markets, flat rates are the optimal tariff model not only for subscribers, but also for operators. Subscribers benefit from the ‘always on, always connected’ feeling and operators can exploit under-usage effects. However, with increasing mobile data usage, operators are in danger of falling into the profit trap.

In terms of revenue, operators’ income is largely fixed due to flat rates and market saturation. And from a network perspective, they are forced to invest in frequencies and capacities if they want to remain in control of data volume and continue to deliver an attractive user experience. If things continue as they are, the providers’ EBIT margins, which are still excellent compared to other industries, are guaranteed to plummet.

The first operators have already turned away from ‘all you can eat’ data structures (AT&T in the US, and O2 in the UK) or are thinking of doing so (Nordic and Baltic-based TeliaSonera, US-based Verizon Wireless, and Orange in the UK). One main reason is that they were challenged in offering constant network quality to their customers. Other market players (Telefónica, Deutsche Telekom) openly discuss the introduction of a two-sided market, where service providing companies like Google start to pay a part instead of the customers.

Dr. Ekkehard Stadie, Simon-Kucher & Partners’ partner
Dr. Ekkehard Stadie, Simon-Kucher & Partners’ partner
 

Operators have to evaluate different strategic routes to cope with upcoming challenges. There are multiple ways to optimise the current offer structure; however it’s also necessary to assess the new business models that are now available to strengthen market position

Today, most operators offer undifferentiated, unlimited flat rates which prevent the monetisation of usage. This is subscriber-optimal, if there is no speed restriction from a certain data usage onwards, but not operator-optimal. But returning to pay per use tariff models and discontinuing flat rates is not an option, as it is a major customer satisfaction factor and important for large numbers of always-on applications. Instead, operators could offer fair flat rates (e.g., 5GB). If 5GB are consumed during the billing period operators can proactively provide the option of purchasing addon volume.

Another value driver that should be used for price differentiation is speed. Up to now, operators used to launch new technologies and replace former technologies at the same time. In the future launch of LTE technology, the monetisation of different speeds should be implemented in the offer structure.

To maintain the quality of data networks and a positive customer experience, peak and off-peak pricing can be used to steer customers’ behaviour. Furthermore new pricing dimensions (such as maximum speed or priority) can boost revenue.

Telecommunications providers continue to offer the popular flat-rate model, but introduce fees for content providers that want to use their networks. As Telefonica Spain’s Chairman, César Alierta, explained: “Internet search engines use our network without paying anything at all, which is good for them but bad for us. It’s obvious that this situation must change. If the markets think we won’t make a single cent from that, they can think again.”

Telecommunications providers are aware that the major user innovations are developed by service and hardware suppliers such as Google, Facebook, Twitter (whether they are commercially successful or not) and Apple. The providers do not attempt to charge manufacturers for IP data streams; the money is still paid by the users.

If this were not true, it would be like a power supplier such as E.ON demanding money from Siemens because consumers use E.ON’s electricity to wash their clothes with Siemens machines. But the energy sector does show how important it is to follow a strategy of regular price increases. Energy suppliers were well advised not to make flat fees their dominant price model. What the power companies actually did was to differentiate their prices. This is a simple example of peak-load pricing; customers pay higher prices for consuming energy at the same time as everybody else.

Another possible alternative is to secure public funding to finance infrastructure usage and expansion. After all, telecommunication providers’ investments in comprehensive networks represent a key supply mandate and help to make information accessible to everyone. Some governments have passed strict regulations on the expansion and accessibility of telecommunications networks, monitored by committees and roundtable groups. It is therefore by no means unreasonable for telecommunication providers to request money in return for their services.

To avoid tackling challenges in core business areas head-on, telecommunication providers may be able to tap additional sources of revenue. This poses two challenges: past experience; and margin expectations. In the past, providers’ attempts to diversify content have all failed; newly developed service and application platforms have been overrun by the internet. Even ubiquitous applications such as email have been perfected by Google and its counterparts.

Cross-selling of non-telco related services usually comes at the price of a smaller profit margin. This could have a negative impact on market ratings. But this should not blind us to the fact that telecommunications providers are ideal candidates for cross-selling. They have the largest customer bases, issue regular invoices, have a direct customer contact channel, and can (if the customer gives consent) create customized offers based on internet and telephone usage data.