Unwilling to become locked into a flat-rate billing structure that would not generate enough revenue to fund the provision of mobile broadband service, operators began to call time on their all-you-can-eat data offerings in 2010.

Mike Hibberd

January 5, 2011

7 Min Read
The price is wrong
There’s a lot of talk about the hunger for data of iPhone users, but analysis shows that the majority of users will be comfortably served by 500MB of data per month

Unwilling to become locked into a flat-rate billing structure that would not generate enough revenue to fund the provision of mobile broadband service, operators began to call time on their all-you-can-eat data offerings in 2010.

The cost of mobile telephony has always been difficult for end users to understand— and responsibility for this lies squarely with mobile operators. After all, most carriers have traditionally shied away from telling their users the truth about the costs involved in providing service.

Handset subsidies offer the perfect example. While a few, arguably more enlightened markets shunned subsidies from the beginning as damaging and addictive, most let users think handsets were low—or zero—cost items. The result was the kind of churn patterns that see users hop from one network to the next every time their contract runs out, in a bid to get their hands on the latest model. Without a low price of entry, ran the theory, mobile telephony would never enjoy widespread adoption. It was a pattern of strategic thought that resurfaced when operators began looking to stimulate the uptake of mobile data services. Tariffs offering effectively unlimited use of data for relatively low monthly rates were balanced out by extending the binding period of the contract.

These tariffs—complementing decent applications and handsets—certainly did the job; the resulting surge in mobile data usage has been well documented. The strain on networks has been considerable, with failings from leading operators getting uncomfortably high profiles within the industry and beyond. In 2010 the resulting operator backlash against their own marketing strategies began in earnest. And while it seems unlikely that they will ever be able to kick their handset subsidy habits, operators seem sent on ridding themselves of the flat rate curse.

Among the first carriers to join the purge were those that were hit hardest, and most publicly, by the data boom. AT&T and O2 UK, both launch partners for the iPhone, followed Vodafone in restricting the volume of data available to their users as part of their monthly packages. While these operators were careful to stress the fairness of their decisions, effectively pointing the finger at the small percentage of users that accounted for the vast majority of traffic, there were declamations of flat rate strategies from some other operators that had introduced them.

While giving a keynote presentation at the Nokia World developer event in London in September, Vodafone CEO Vittorio Colao spoke of the end of the culture of “free-ism”, suggesting that every class of service provision should carry its own price. His comments came on the heels of Vodafone’s decision to scrap its fair usage policy and introduce out of bundle charging for all postpay customers that exceeded a 500MB monthly limit. When Dutch carrier KPN announced its own decision to call time on flat rate tariffs, CEO Ad Scheepbouwer called the introduction of tiered pricing “a return to sanity”.

Scheepbouwer was more frank about his reasons for making the change, conceding that it was necessary in order for the carrier to make money from mobile data, rather than trying to couch the move as designed to offer a fairer service to the consumer. “Data pricing needs to be more closely linked to the cost of delivering the service in order for KPN to be able to monetize the data growth opportunity,” he said.

The problem is set to get worse. Informa forecasts a compound annual growth rate in global mobile data traffic of 76 per cent from 2008, when traffic totalled 238 petabytes, to 2013 when traffic is predicted to reach 4,105 petabytes. That represents an increase of more than 1,500 per cent over the five year period.

Revenue growth, on the other hand, will be nowhere near as extreme, meaning that the investment required to build capacity into the networks will not be covered by income from the service. Global mobile data revenues are set to grow from $175bn in 2008 to $322bn in 2013, according to Informa, an increase of only 84 per cent over the same five year period. But both the investment and the fairness justifications for a change in pricing strategy may well hold up, as Informa analyst

Thomas Wehmeier explains: “What’s been galling for these operators is that a small band of bandwidth hogs have been the cause of lots of the problems” he says. “These new tariffs are designed to profitably manage this small percentage of users, while also offering attractive pricing for the overwhelming majority of users whose usage is much lower.”

Addressing O2’s decision to restrict users to 500MB per month, Wehmeier says: “There’s a lot of talk about the hunger for data of iPhone users, but our analysis shows that the majority of users will be comfortably served by 500MB of data per month. Indeed, there will be many users who end up paying less with the new tariff structure since they aren’t forced to take the top end tariff plan.” The extent to which consumers will be sympathetic to these changes remains to be seen—especially bearing in mind the operators’ history of poor communication in this area. More importantly, though, consumers are used to paying for access on a flat rate basis; it’s how they pay for fixed line internet, and how they’ve paid for mobile broadband access so far.

Compounding the problem is the fact that most users do not understand how a megabyte relates to a piece of content.

If they are allowed 500MB of data each month, how many web pages, videos or downloads will this get them? After all, it is no longer the case that smartphones are the exclusive preserve of tech-savvy, high-spending early adopters who might either understand the correlation between data and cost or simply be impervious to fluctuations in their bills.

Smartphone penetration is on the increase, meaning that more and more consumers will have them; and the usage pattern of the mass market consumer could be very different to that of the high end user. This creates another issue, says Informa’s billing sector specialist, Peter Dykes. “It is highly unlikely that users will want to tie themselves to rigid price plans in which undershooting the volume cap leaves them feeling they haven’t received good value and overshooting incurs penalties,” Dykes says.

One alternative to charging by volume— which has already gained some traction among operators—is to charge by speed of service. Hong Kong carrier CSL is a pioneer of this model, which it introduced after doing a rip and replace on its old network, installing HSPA+ throughout. The firm’s CEO Tarek Robbiati told MCI earlier this year that he was “left with no choice but to provide speed-based pricing” in response to a 23- fold increase in mobile data traffic across his network.

It is expected that such strategies will become more prevalent with the widespread introduction of LTE. Vodafone Germany said this year that it will offer its LTE service on a price-per-speed model, charging €e40/month for 10GB of data at 7.2Mbps, e50 for 15GB at 21.6Mbps and e60 for 30GB at 50Mbps. Speed-based pricing certainly offers a greater degree of flexibility than the tiered pricing of the kind introduced by several operators this year. But sector specialists argue that carriers ought to look to more sophisticated, tailored offerings that take advantage of the capabilities of modern pricing, rating and policy management solutions and the range of information available to them. “While, in our opinion, there is no choice for operators but to end their flat rate offerings, we don’t believe that simple tiered pricing structures are enough,” says Pekka Valitalo, market analyst at Polish billing solutions outfit Comarch.

Valitalo argues that carriers should look to offer consumers pricing options based on what they observe about their usage, rather than expect users to understand which volume or speed most suits them.

Nothing comes for free, of course, and for most operators, a non-trivial investment would be required for their billing support systems. Nonetheless, says Valitalo, “this investment would be significantly cheaper than constantly spending to improve network capacity.”

Peter Dykes agrees: “What is needed is for operators to understand the full capabilities of technologies such as DPI and policy control when working in conjunction and begin to think in terms of what is possible, as opposed to what has worked in the past. They need a large dose of imagination and the willingness to try something new.”

The migration of the herd away from flat rate billing for mobile data may well have begun in 2010, but the destination remains unknown.

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About the Author(s)

Mike Hibberd

Mike Hibberd was previously editorial director at Telecoms.com, Mobile Communications International magazine and Banking Technology | Follow him @telecomshibberd

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