Mobile Operators Respond to Global Trends
Déjà vu with data growth
We have been here before. Data traffic already exceeds voice on many mobile networks. And it is predicted to increase 1000-fold within a decade as wireless becomes the world’s primary method of Internet access. A massive surge in fixed network traffic started approximately 15 years ago. Data surpassed and then dwarfed voice as Internet access and IP services drove exponential growth.
Major fiber investments around the millennium provided copious amounts of cheap bandwidth for consumers. Unfortunately, overinvestment followed by bankruptcies and significant retrenchment proved to be a painful experience for many network service providers, their vendor-financed suppliers and other investors. The question is: Will these mistakes be repeated in the bonanza to turn 3 billion mobile voice and text users into mobile broadband consumers on Long Term Evolution (LTE) and 4G networks?
Mobile broadband economics
To help ensure profitable growth, mobile operators are revamping their business models. This will include charging on the basis of speeds, data volumes, service levels and advanced services which can be combined with the raw connectivity.
In the fixed telecoms boom of the 1990s, aggressive pricing on highly commoditized connectivity services and vendor financing exposed many operators and their suppliers to significant losses. Today, operators and technology vendors must be careful to ensure services are more differentiated and expenditures are better matched to their revenues.
Some players triumphed through the fixed Internet access revolution. These included incumbent local phone companies, leading DSL equipment suppliers, and many web companies including Amazon.com and Google. But there were also significant financial casualties such as some national backbone and international communications service providers, fiber optic transmission equipment manufacturers and many ISPs. The challenge will be to figure out which strategies will be required to capitalize upon the mobile broadband revolution while avoiding previous mistakes.
Old and new challenges
The old 3G problem was that nobody used it much. At first, flat-rate unlimited data pricing made great sense in developed nations where a sizable segment of price-insensitive users were encouraged to use it while providing them comfort that the monthly expenditure was fixed. The arrangement was also simple for operators with no need for metering or complex billing and no shortage of network capacity. That all changed a few years ago when users – of smartphones as well as data cards and dongles – started using 3G networks a lot.
The relatively new 3G problem and the upcoming 4G challenge is that escalating demand must be economically balanced with supply. This is a multi-faceted puzzle that must use pricing to temper demand and associated network costs. It’s closing time for the one-size-fits-all, all-you-can-eat pricing model because it:
- Fails to extract higher expenditures from those who are willing to pay more
- Excludes price-sensitive users who would be willing to pay lower prices for limited usage or reduced performance
- Subjects operators to extremely high usage and at great cost from a small proportion of customers
Figure 1 illustrates how a single flat rate limits revenues by restricting pricing opportunities with those people who are willing to pay more and restricts subscriber uptake with those who are only willing to pay less.
Figure 1: Flat-rate pricing limits revenues and restricts subscriber uptake
The desire to boost revenues while limiting total costs has made flat-rate pricing with unlimited usage unworkable in mobile except on new networks with excess capacity where the lure of this pricing model can accelerate subscriber acquisition. Unfortunately, speeds on parts of these networks soon plummet due to congestion. Operators carry a heavy burden increasing mobile broadband capacity because costs with spectrum, radio access, backhaul, and core network technologies are significantly higher per gigabyte transported than on fixed networks with fiber and copper access lines.
Furthermore, the vast majority of mobile subscribers worldwide have prepaid, pay-as-you-go pricing for voice and text. With so many of these users in cash-based economies and without operator billing relationships or credit ratings, they will also be best suited and most amenable to prepaid and usage-based arrangements for data.
New mobile business models from many operators worldwide include tiered service pricing on the basis of access speeds, volumes of data and session lengths with prepaid and postpaid charging. Operators are also seeking to enrich services with improved quality of service (QoS), quality of experience (QoE), location-based capabilities and more.
Footing the bill
Bringing broadband IP and Internet access to the world’s masses is a very costly undertaking no matter which technology is used. Wireless broadband upgrades from 2G to 3G or 4G are highly suited to places where there are no landlines including some remote regions in developed nations.
Europe’s millennial 3G licensing also caused an economic shock to the telecoms sector that should not be repeated. Taxing mobile operators with high spectrum costs in conventional auctions extracts excessive capital from the sector and impairs investment for the most expensive to reach places and those consumers who have the least to spend.
The legacy of the over investment and excessively competitive pricing in long-haul, fiber-based communications capacity a decade ago is that some assets were able to be purchased after the bust for a small percentage of original costs. In conjunction with copper landlines funded by preceding decades of monopoly profits, this has provided affordable broadband Internet access to those who happen to live in the right places, but what about everybody else?
Mobile broadband infrastructure is very costly, though not as expensive as pulling fiber to rural and remote communities everywhere. The danger is that mobile network expansion will be curtailed if spectrum is taxed too highly in auction fees. Licensing with more significant coverage and service level obligations in conjunction with less costly spectrum would extend coverage and capacity investment much further.
Bridging the digital divide
Existing fixed broadband Internet users who have mobile lifestyles are the most obvious early adopters for mobile broadband on phones, laptop PCs and other devices. However, their demands could ultimately be exceeded by the billions who today have limited or no Internet access and to whom fixed Internet access with fiber or copper connections are not economical. Mobile broadband is always on and always with you – a weekly commute to an Internet café or a library visit is a far cry from the pervasive Internet experience provided with personal mobile devices. For these people, mobile broadband will become the predominant or only means of Internet access.
Compared to wireline, wireless remains the most economical option for voice and Internet access outside of densely populated areas and for approximately half of the world’s population. Over the last 15 years the Internet was brought to many who already had landline phones, by first using dial-up and then through DSL over existing copper access lines connected to newly built fiber-optic backbones. Meanwhile, remote regions and developing nations were catching up on voice services with 2G cellular-based access.
Cellular devices are now also more accessible and most suitable for the mobile lifestyles and literacy levels of many who spend most of their time outside of a home or office. Looking ahead, LTE will bridge the digital divide. Wireless networks will migrate to 3G and 4G including next-generation IP technologies and will bring mobile broadband Internet to billions of people who have cellphones but no fixed access.
