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The planned introduction of tiered mobile data services by operators such as AT&T Mobility, KPN, O2 and Verizon Wireless is a win not only for operators, but more importantly, for subscribers. While knee-jerk responses have expressed fears that pricing tiers will discourage subscriber adoption, this necessary and beneficial pricing change will in fact lead to wider adoption of mobile broadband services.
The data divide: Traffic vs. revenue
The growing number of mobile broadband users, coupled with increasing bandwidth per user, is creating a dilemma for operators. Industry analyst firm Heavy Reading estimates that bandwidth on 3G networks is growing at a rate of approximately 400% annually, while the associated revenue from data services is only growing by approximately 40% per year. Simply put, operators will be carrying more data per user for less revenue. As the traffic levels swell, neither economics nor delivery architectures are keeping pace with the escalating demand for mobile broadband access.
Unlike voice and messaging traffic, where bandwidth cost per subscriber is well understood and relatively constant, the amount of bandwidth consumed by different applications and devices can vary dramatically. A text e-mail sent from a smart phone may use only one or two kilobytes of data, but downloading a web page can consume 500 KB or more. Other high bandwidth services such as video or dedicated applications that can easily devour megabytes, if not gigabytes of data, do not actually generate any revenue for the operators.
Another compelling fact is that a tiny fraction of subscribers generate the majority of Internet traffic and cause congestion choke points during different times of the day, and the bulk of the expenses incurred by the operators are a direct result of having to provision enough capacity to meet the demands of the small set of high users.
Benefits of tiered pricing: Operators, subscribers and device manufacturers
Tiered pricing helps to solve these problems in a variety of different ways by linking usage with cost, while also ensuring that subscriber relationships are not damaged. This approach enables operators to open up mobile data plans to a wider range of customers and get more revenue from the heaviest users, while offering more reasonable plans to others who may not be as demanding of users. A wider net to cover more subscribers may not necessarily yield immediate benefits to the operators’ bottom line, but provides more growth opportunities.
Consumers benefit by the receiving more plan options, less chance of incurring “surprise” surcharges at the end of the month, a marked improvement in the quality of service and the introduction of innovative new services.
Instead of a one-size-fits-all model, tiered pricing lets subscribers pick plans that best suit their needs. As a result, mobile data will become affordable for a whole new group of consumers, and the existing subscriber segment that typically use less than 500 MB of data per month will save money. This new set of users will upgrade from basic or feature phones to advanced smart phones, or will choose from a myriad of devices such as a tablet or netbook, driving new device sales.
At the same time, operators can offer higher bandwidth and usage tiers for those subscribers who demand more from their mobile Internet service. The need to enhance the mobile broadband experience and make it more personal for the end-user is inevitable due to the growth of a more sophisticated subscriber base, with varied needs and demands for customization of services and applications on their smart phones, tablets and netbooks.
Operators also know that one of the greatest sources of churn is to surprise them with huge surcharges at the end of the month. By providing different tiers of service, operators can actively “manage” the subscribers and move them between tiers by engaging with them and providing them with choices, in real time. For example, if a subscriber is close to using the allotted monthly quota for the tier, the operator can notify the subscriber via SMS and provide them with the opportunity to upgrade for a nominal fee – instead of letting the subscriber incur steep over usage charges when exceeding the quota.
One of operators’ key concerns with flat-rate unlimited mobile broadband plans is that the smallest fraction of users can negatively impact the quality of experience of the vast majority. From the consumer point of view, this can mean that lower usage subscribers effectively subsidize the heavy users’ bills. Tiered services instead provide the operators with the flexibility to segregate traffic if necessary in order to ensure the best possible experience for the vast majority of subscribers.
Finally, tiered pricing opens the door to some innovative new types of on-demand services such as a “turbo boost” service, a capability that would enable a subscriber to accelerate downloads or uploads of
content, or a premium video service, which would enable the subscriber to experience a higher quality video in high definition. These types of sophisticated offerings could potentially be offered as a part of a tier, or as an on-demand purchase.
Certainly challenges remain. Subscribers will need to understand their service choices and the impact on their bills. Operators will need to properly message the changes, as otherwise changes can often be misunderstood. It is encouraging to see that operators are taking the first important step toward more choice-driven mobile data services. As the market responds with more adoption, operators will naturally evolve and provide more innovative service offerings.
Susie Kim Riley is chief marketing officer of Tekelec. She joined the company from Tekelec’s May 2010 acquisition of Camiant, where she was founder and CTO.
