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Mobile broadband: When is it profitable?
|28 января 2010|
Mobile data plans have started to evolve. U.S. mobile operators, under pressure from exploding traffic volume in their networks and grappling with network congestion, have recently announced new service pricing for voice and data.Though it is still unclear what the net effect of the new pricing will be on subscribers, the new plans set an important departure in the approach to voice versus data service plans. Subscribers may be able to get cheaper voice, but data pricing shows no comparable decrease.
More importantly, operators have started to require that subscribers have a data plan with some device types--mostly smartphones. Mobile operators seem to acknowledge that they can offer a better deal to their subscribers for voice services, which are substantially more profitable (with the exception of SMS, which on a per-bit basis may give an even better return than voice), but they have chosen not to extend this change to mobile data plans.
Why didn't data prices go down? Two reasons may explain the new approach to data. Mobile operators want data to become an integral part of subscribers' service plans. They are willing to charge less for voice, as long as subscribers pay on average more for data. This reflects a more balanced approach in splitting revenues between voice and data--with operators less willing to have voice subsidize data services. As data services become more mature and widely adopted, this is an approach that is no longer sustainable.
The second reason is that mobile operators cannot afford to lower data plans, as they may lead to a downward spiral in ARPU, at a time when they need to deal with an unprecedented growth in individual user traffic.
Initially the bulk of the growth in data traffic was generated by iPhone users, who now use more than 500 MB per month. With the introduction of new devices including Android-based smartphones and the higher number of applications, mobile data is rapidly becoming a mainstream consumer service. In the U.S., smartphones now represent over 30 percent of shipments and the percentage is likely to go further up. Traffic generated by these devices is also quickly catching up with that from iPhones. In Russia, mobile WiMAX operator Yota sees over 1 GB per month data traffic from subscribers using their HTC smartphone. For laptops, this figure is a staggering 13 GB per month. A large--and rapidly growing--portion of this traffic is video. This is what worries operators worldwide: with email and Internet access, traffic growth is bound by the limited requirements of the application; with video or even audio content takes little effort for subscribers to enter in the realm of the GB/month.
Mobile operators are delighted to see that their subscribers love mobile data services--and that are willing to pay for them--but at which point does the growing popularity of data and video affect profitability of the mobile data? It does not take long, as a quick back-of-the-envelope calculation that compared delivery costs and revenues on a per-MB basis.
The revenues per MB can be computed as a function of the monthly fees, for different levels of traffic. Revenues can be compared to the delivery cost per MB, which we estimate at $0.015 for HSPA, $0.005 for LTE and $0.003 for WiMAX on the basis of our analysis of mobile operator and vendor data. The delivery cost per MB depends on many variables that are specific to different operators--and in particular on the network utilization level--and therefore are subject to variability. Our values are therefore only indicative and on the low end in comparison with other estimates we have come across. It has to be kept in mind that these estimates do not include costs such as customer acquisition and support, or network core operations, which are shared with voice.
At the current average traffic levels of 500 MB/month, revenues per MB outstrip delivery costs for HSPA, LTE and WiMAX, for ARPUs starting at $20 per month. As traffic grows, however, the costs per MB rapidly exceed the revenues, especially when charging subscribers low fees. At a 50 percent CAGR, the 500 MB per month will reach 2.5 GB per month in five years. At $20 per month, for instance, mobile operators operate at a loss for subscribers using more than 1 GB per month in an HSPA network, or for subscribers using more than 5 GB per month in an LTE network. At 10 GB per month, data subscribers do not generate any net benefit for mobile operators with HSPA. With LTE or WiMAX, revenues from 10 GB subscribers at best reach the delivery cost.
After being caught by surprise by the sudden growth in mobile data, mobile operators have started to realize that, to profit from it in the long term, they need to strike the right balance between pricing and traffic, and limit the scope of network expansion to increase capacity. If they raise the prices too much they risk losing subscribers. If traffic is too high, congestion and the need for expensive upgrades ensue--and profitability is threatened. If they spend too much on network expansion, they will hurt profit margins.
One solution that mobile operators have timidly started to mention is the introduction of traffic limitations. Subscribers have been grown accustomed to flat-rate unlimited services--for both data and voice--and it will be difficult to wean them off this type of plans. Unless strict--and likely to be highly unpopular--caps are introduced, they will only affect a small fraction of subscribers. For instance, on AT&T mobile network, 3 percent of subscribers use 40 percent of the bandwidth, according to the operator. Traffic caps may be useful in managing these 3 percent subscribers, but they miss large opportunities for improving traffic.
Increasing the efficiency of the network is crucial to manage traffic in ways that benefit both subscribers and mobile operators. Mobile operators no longer have to transport traffic through a passive, best-effort channel. They can use tools like quality-of-service and traffic prioritization, subscriber policies, compression, deep-packet inspection to give subscribers more control over their mobile online experience while increasing the perceived network capacity through to a more efficient use of resources. The rigidity of traffic cap can be avoided by using a more flexible approach in which traffic flows are actively managed depending on data and infrastructure requirements and operators data policies. And in the process, mobile operators can escape their dreaded fate as commodity providers, and leverage data management to differentiate their offering from competitors and extract more revenues from data services.
The tools to actively manage traffic are available today, yet heir implementation is taking a long time. Mobile operators are rightly concerned about the reception among subscribers who may see traffic management as a way to limit their freedom, while in fact it is more likely to result in a more fair use of network resources. Transparency and subscriber education of what managing traffic entails is going to be the next step for mobile operators to gain better control over data services and their profitability.
Monica Paolini, the founder and president of Senza Fili Consulting