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Following on the heels of increasingly common, albeit still fairly new “freemium” service offerings, AT&T’s recently announced sponsored data service launch has been unusually controversial. Not that that’s likely to deter other telco providers from offering a competitive alternative. Whereas the debate about any business model innovation in telecoms is usually confined to its potential impact on revenues (why else launch if not to increase subscriber numbers or reduce churn?), with toll-free data a Pandora’s box of broader issues appears to have been opened.
The Federal Communications Commission is already set to weigh in, clearly suggesting the agency feels that a toll-free service may be game for regulatory intervention. Why? Because with sponsored data, questions of net neutrality come into play, a topic already being fiercely and publicly debated by the CEOs of Netflix and various telco pipe providers, among others. They’re the ones on opposite sides of the sponsored data coin.
Then, there’s the moral argument. Is sponsored data “double dipping,” where the service provider accrues income from both a sponsor and a subscriber simultaneously for provision of access to what amounts to the same pipe? And is that acceptable? Dilemmas like this abound.
Whatever the answers, it looks like both sponsored and freemium models are here to stay. In the case of the latter, that’s likely because freemium allows relationships with customers to be enhanced by putting them in position to instantly “click and buy” over the network, thus opening a new revenue channel for service providers that’s distinct from traditional usage. New sources of income like this are something they badly need.
In this use case, the cost of providing the free bucket of data is offset by the reduction in marketing costs required to acquire subscribers to the free service in the first place. There is evidence, particularly with Internet services – Dropbox and Gmail provide examples – that the model can be effective for all participants.
The key difference between freemium and the traditional telco business model is that in the case of the former the variable costs are known in advance. For instance, 200 megabytes of data costs what it costs, while two minutes of voice call in the traditional world could be charged at significantly different rates (depending on distance, roaming agreements and other factors). But with this in mind, for freemium to deliver results it’s critical to keep overheads as low as possible.
With sponsored data, things are slightly more complex. Here, the mismatch between over-the-top content providers who are driving up the delivery quality (as high as 4K speeds recently, an example of which you can read about here) of their services and mobile access networks that are not evolved enough to handle these speeds is the central issue. In light of that, it can (and no doubt will) be argued that sponsored data is actually an innovative way to bring this content to devices that could or would otherwise not be able to consume it.
If that’s true, we could actually ask whether sponsoring some types of data is more necessity than innovative idea, not least because some OTT providers put such extreme pressures on delivery networks. Netflix, mentioned earlier, is an example. According to one study, Netflix serves a subscriber base that on average watches five TV shows and three movies per week, numbers which by our calculations could translate to roughly 42 gigabytes of data per user per quarter. If only 5% of my time was spent consuming at this level while I was on the road (e.g. on available 3G and 4G networks) my $20 data cap would be gone entirely and then some. With the cost of Netflix priced at $10 per month you can reasonably argue whether delivery should cost twice the price of the content being delivered.
All of this is, of course, to look simply at business model innovation in a relatively abstract sense. There’s also the question – for telcos – of how to enable and deliver services like freemium and sponsored data and, indeed, whether legacy BSS infrastructures have put telcos in position to do so successfully. “Yes and no” is probably the most accurate answer to that.
Legacy IT stacks are reasonably efficient at managing (rating, billing, servicing, etc.) the legacy services they were designed for but their functionality far outstrips what’s required, let alone effective, in the new service world where fast-times-to-market, rapid and easy enablement and cost-efficiency are the key. This means that modern service innovation plus legacy BSS looks like being a broken equation that won’t deliver the right results. This means that the pressure is on vendors as much as telcos, who need to create a new “service control” paradigm which can support innovation while bypassing the limitations of the legacy IT stack.
Service Innovation – controversial or not – may point the way to future success for telcos but service control will be needed to deliver it.
