Wireless operators wrestle for piece of revenue stream and network control

Editor’s Note:This article is an excerpt from RCR Wireless News’ March Special Edition, “The Perfect Storm – A Focus on Mobile Messaging, Marketing, Content and Apps.” The 80-page special edition is available here.

Few metaphors more aptly describe the wireless industry and at the same time generate more heated arguments than the “pipe” model, or more specifically the term “dumb pipe.” This model states that wireless networks are but a pipe through which information flows, whether that is basic voice traffic or more recently data traffic.

The “owners” of that pipe are the wireless carriers, which have spent untold billions of dollars acquiring the spectrum needed to support those networks – more spectrum equals a bigger pipe – and billions more in building out the pipe and recruiting customers to partake in the bounty flowing through that pipe. Few could begrudge those carriers for wanting to control the flow of information through that pipe and perhaps generate some revenues since it was their money that built the pipe and their money continues to supports it.

However, that is exactly what has happened during the past several years as the information flowing through those pipes has increasingly shifted to data and Internet-based services that have taken the traditional wired Web model and moved it to the mobile space. Carriers have embraced the progress, spending billions of dollars yet again to acquire additional spectrum to support those services, as well as upgrading their networks to handle the traffic.

The GSMA noted recently that wireless operators have pledged more than $72 billion in spending this year alone in network upgrades. Asia Pacific is expected to see the greatest investment in mobile broadband with predicted capital expenditures of up to $34 billion. North America follows with up to $19 billion, with Europe expected to invest up to $14 billion. According to the GSMA, mobile broadband is set to account for 52% of all operator investment in mobile infrastructure globally. Of all the regions, North America will spend the greatest percentage – 80% – of its total mobile capex investment on mobile broadband.

But, like the traditional wired Internet, the evolution of the mobile Web has reached a point where consumers want more from their wireless services. As such, companies with applications and content that those customers desire want unhindered access to the pipe.

Governments have tip-toed around the issue, claiming that while they would like to see carriers be more open with their networks, they realize that to do so will require carriers to have access to more spectrum, which is becoming increasingly rare. Sabers have been rattled, but a battle has yet to commence.

 

Value chain

Carriers generally have been left out of the revenues generated by a lot of the mobile traffic being sent across their network. Whether that traffic is in the form of third-party applications or mobile marketing and advertising, carriers typically are only seeing revenues from the recurring monthly rate plans a customer has selected that allows for the traffic to be transmitted.

At the recent Mobile World Congress event in Barcelona, Hugh Bradlow, CTO at Australian operator Telstra Corp. Ltd., provided some straight talk on how carriers view the current mobile application frenzy and the carrier’s place in the model. While there has been some debate as to whether great applications or robust networks are driving the current surge in wireless data uptake, Bradlow’s view is clearly in the network camp.
“Increased speed and lower latency has enabled the application market,” Bradlow said. “Without the network, the iPhone would not have taken off. 3G kicked off the world of apps, and 4G will continue that evolution.”
(This stance may be questioned in the U.S., where Apple Inc.’s first iPhone launched supporting AT&T Mobility’s EDGE network, forgoing its nascent 3G network until its second iteration a year later.)
Highlighting the current disconnect between the developer community and carriers, Bradlow presented a slide showing an inverted pyramid showing perceived value by consumers with application occupying the large base at the top and the small point occupied by network access. This was placed next to a traditional pyramid, showing investments. Here applications took up the small point at the top and network access represented the pyramid’s base.
“Application developers can’t expect to get all the return on a small percentage of the investment,” Bradlow said, before later admitting that even without a cut of the revenue stream from selling applications, carriers are garnering benefits. “Customers that run apps need a data package so it’s big business for us,” Bradlow said.

 

App store envy

While admitting that there were too many operating systems and corresponding application stores on the market, Bradlow noted Telstra was not necessarily concerned as it saw itself as a mall owner, where people would go to shop at specific stores within that mall.
“We want to be a facilitator like a shopping center in providing options for customers,” Bradlow explained. “We may have our own store, but will provide options. There is a place for shopping-center owners and most of them are rich.”

This appears to be a similar approach that will be undertaken by domestic carriers AT&T Mobility and Verizon Wireless. Both operators have announced their own plans to launch application stores that will run alongside OS-based app stores from Research In Motion Ltd., Palm Inc., Google Inc.’s Android and in AT&T Mobility’s case, Apple Inc.’s App Store.

Beyond just operating an application store, carriers are also looking to work closer with application developers. At the MWC event, 24 wireless operators from around the world announced the formation of the Wholesale Applications Community, which they described as “an alliance to build an open platform that delivers applications to all mobile phone users.”

Founding members of the oddly dubbed WAC, (new members and a new name are expected) include América Móvil, AT&T Inc., Bharti Airtel, China Mobile, China Unicom, Deutsche Telekom AG, KT, Mobilkom Austria Group, MTN Group, NTT DoCoMo Inc., Orange, Orascom Telecom, Softbank Mobile, Telecom Italia, Telefónica, Telenor Group, TeliaSonera, SingTel, SK Telecom, Sprint Nextel Corp., Verizon Wireless, VimpelCom, Vodafone Group plc. and Wind. In addition to the carriers, the group also named a few device manufacturers had joined, including LG Electronics Co. Ltd., Samsung Electronics Co. Ltd. and Sony Ericsson.

The group said it was “committed to create an ecosystem for the development and distribution of mobile and Internet applications irrespective of device or technology.”

“The alliance’s stated goal is to create a wholesale applications ecosystem that – from day one – will establish a simple route to market for developers to deliver the latest innovative applications and services to the widest possible base of customers around the world,” the group noted in its founding press release. “In the immediate future the alliance will seek to unite members’ developer communities and create a single, harmonised point of entry to make it easy for developers to join.”

The wholesome genesis of the group was applauded by many, though some questioned the need for a new group to try to cut down on the current clutter of too many organizations trying to develop their own initiatives designed to simplify the creation and distribution of mobile content.

“Many of the operators compete directly in a number of markets and it is difficult to see how they will agree to put in place and implement a strategy which will inevitably be more beneficial to some operators than to others,” noted Informa Telecoms & Media in a report. “And operators have a poor track record in seeing through such collaborative projects even though they may have entered into them with the best intentions.”

“The [WAC] initiative … attempts to address this challenge but operators will need to move rapidly to enable the ‘single point of entry’ for developers sought by the initiative if they are to stand any chance of regaining some of the ground they have lost on the mobile-content front to the likes of Apple and Google,” added Guillermo Escofot, senior analyst at Informa.

 

Network intelligence

In 2007, carriers had a better chance to capitalize on the mobile ad space because they had a deep knowledge of the mobile customer, noted Derek Kerton, principal analyst at The Kerton Group. Carriers have billing relationships, as well as demographic and location information. Today, companies like Google and Apple also have some of that information. “Carriers had a phenomenal range of personal data, but that list is now reduced greatly.” Indeed some consumer groups are asking the Federal Trade Commission to block Google’s acquisition of AdMob based on privacy concerns, among other things. Carriers that partner with Google may get a piece of the revenue share, but in the long term, they likely will not have the sole relationship with mobile users so they need to reinvent their relationship with the subscriber, Kerton said. “In the long term, they may be dumb pipes with some services thrown in.”

That level of detailed information, whether from a carrier or someone else, is a valuable commodity to advertisers looking to make a push into the wireless space. Such information typically includes a high level of detail about a customer, which can be linked to their online activity, providing advertisers with a more complete picture of potential customers.

“It’s important to get the measurements,” said Jakob Nielsen, managing director at U.K.-based advertising firm GroupM Interactive. “It becomes so important to the whole media plan. Money follows the eyeballs.”

Nielsen added that a goal for carriers looking to increase their attractiveness to the advertising world would be to simplify the package of information they bring to the table. One issue that Nielsen said many advertising agencies are particularly concerned about is tmaking sure the customer has decided to opt-in for mobile advertising.

This has been a tricky proposition for carriers, which have worked hard to gain the trust of their customers when it comes to keeping e-mail and text messaging spam from infiltrating a customer’s mobile device. However, the explosion of social media sites has shown that consumers may be more willing to share information about themselves in return for a reward than previously thought.

“We would love operators to bring one overall advertising package of opt in, but we know that Rome wasn’t built in a day,” Nielsen said.

One challenge for carriers looking to measure customer usage is the predominance of prepaid users in a number of markets around the world. Prepaid customers typically do not have to provide any personal information to carriers, thus any metrics collected from their usage is only associated with a phone number and not a person.

 

Beefing up the backhaul

In addition to their own software plans, carriers have to prepare the hardware on their networks to handle the increased traffic load being created by mobile data services. AT&T Mobility is perhaps the most well known operator that has faced such a capacity crunch as its exclusive offering of Apple’s iPhone in the U.S. led to a rush of customers downloading applications and surfing the Web.

Methods being discussed to handle the increased demand on backhauling mobile data traffic is moving some of that traffic away from a carrier’s main network and onto a smaller, broadband-backed network using femtocells, or for carriers to increase how they share network assets.

“Backhaul-on-demand, as we call it, can be a win-win situation for both the buyer and the seller,” explained Philip Bates, senior manager at telecom adviser Analysys Mason, in a recent report. “Mobile operators eliminate the risk of over- or under-dimensioning their backhaul networks as a result of errors in forecasting future levels of data traffic, avoid the capital expenditure associated with a move to packet-based backhaul, and safeguard their quality of service at shared sites by means of a service level agreement with the backhaul provider. Meanwhile, backhaul providers secure large, long-term revenue opportunities, and can mitigate the traffic forecasting risk to some extent through their ability to aggregate the traffic from multiple operators at low incremental cost.”

Tracy Ford contributed to this article.