Operators experiment with new data tariffs as 'unlimited' comes to an end

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Smartphones are becoming an increasingly significant driver of mobile data traffic, which is rapidly overtaking voice as the primary growth strategy for mobile operators globally. But this increase in traffic is challenging for operators, which must balance those demands with the available network bandwidth and spectrum.

According to a recent report from Ericsson, total smartphone traffic is expected to triple during 2011, while traffic generated by advanced smartphones is forecast to increase 12-fold to roughly equal mobile PC-generated traffic by 2016.

The message that smartphones are becoming a force to be reckoned with is reinforced by a recent study by comScore, which said smartphones and tablets drive nearly 5 percent of total digital traffic in the five top European markets (France, Germany, Italy, Spain and the United Kingdom).

Unlimited is unsustainable

The challenge for mobile operators is to find a way of pricing smartphone data bundles that makes them attractive to users but at the same time does not exhaust spectrum resources or make mobile data networks impossible to manage. This means that although "unlimited" data tariffs represent an attractive marketing message, they are increasingly seen as unsustainable.

According to a spokesperson for O2 UK, "ultimately, across the industry, 'unlimited data' is an unsustainable model. Mobile spectrum is a limited resource and, in order to ensure the best experience for the majority of customers, we need to invest heavily in scaling the mobile network. That is why we ask customers to pay proportionally for the data they use."

In Europe, mobile operators are becoming increasingly inventive with data bundles for smartphones.

In Europe, mobile operators are becoming increasingly inventive with data bundles, and they are also finding innovative ways that allow them to move beyond "unlimited" data tariffs. Although the classic bundles of data, voice and text still exist, operators are increasingly uncoupling data from the mix and offering flexible, tiered data plans that can be bolted on to voice plans.

"MNOs realise it's all about the data," said Emma Mohr-McClune, research director  of consumer services for Europe at Current Analysis. "Voice was being used as a market driver, but this is now being turned on its head."

Separating data plans from devices

O2 UK introduced separate data allowances in March, allowing users to choose their data plans independently of minutes, texts, contract length and handset. "Regardless of how many minutes they have, or which handset they've got, customers can choose the amount of data they need to fit their mobile habits. We reduced the cost of our core tariffs in this change," said the spokesperson.

The increased emphasis on data is also clearly illustrated by Telenor and 3 in Sweden, for example, which offer a range of tiered data plans for smartphones but charge separately for voice minutes.

Unlimited smartphone data tariffs, meanwhile, are becoming a rare beast in Europe's mobile markets today. Hutchison's 3 is the main example of an operator that offers "all you can eat" data, such as with 3UK's The One Plan. Other operators may use the term "unlimited" but actually throttle data speeds down to GPRS levels once certain data caps have been reached to enable them to better manage their networks.

This approach is common among German operators, for example. As explained by Vodafone Germany, once a certain data allowance is used up within a month, the bandwidth is reduced to 64 Kbps for the rest of the month. The maximum speed is then available again the following month.

In general, approaches to "unlimited" data tariffs have been mixed and sometimes misleading, and the term itself is now becoming less popular among operators. For example, the Advertising Standards Authority banned T-Mobile UK from continuing to use its "truly unlimited" claim on a limited promotion because the operator banned the use of the phone as a modem (i.e. tethering), for peer-to-peer file sharing or for making Internet phone calls. The ASA said it considered that the information in the small print contradicted the headline claim: "Truly Unlimited."

"We didn't want to call [The One Plan] 'unlimited'," said Guy Middleton, head of corporate communications at 3UK, in confirmation of the weakening appeal of the term.

"All you can eat" is an important message for 3, which tends to be a challenger in its markets with significantly fewer subscribers than other operators. In the UK for example, 3UK has 5.6 million active users compared to around 20 million users at rival operators. "We have everything to gain," added Middleton. "We are on a very aggressive customer acquisition strategy."

Operators are shying away from even using the term "unlimited" for data plans anymore.

In general, though, are we seeing the beginning of the end of data plans marketed as "unlimited" in Europe? According to Current Analysis' Mohr-McClune, it's unlikely that "unlimited" will ever be completely stamped out.

"'Unlimited' is a very strong message, and it's very appealing and very disruptive. If mobile operators could get away with it, they would market their data as unlimited," she said. "The key attraction of unlimited data is that users equate it to cost certainty."

Is unlimited necessary?

Whether or not users actually need "unlimited" or extremely high volumes of data for smartphone use is also a valid question. In general, unless smartphones are used for tethering--when mobile phones are used as modems for Internet access via laptops--data usage needs are in fact relatively low and currently unlikely to exceed 2 GB a month apart from excessively high users.

For example, O2 UK said it found that fewer than 0.1 percent of its customers (around 22,000 people) were using 30 percent of the total network data traffic, "which was adversely impacting on the experience for the greater majority." In contrast, 97 percent of its customers use less than 500 MB a month.

Mohr-McClune suggests that operators should take the message of cost certainty and apply it in different ways rather than simply tagging plans as "unlimited."

"The UK, Ireland and Austria are very aggressive with unlimited data," she said. "But the view now is that they will have to shift the message to ‘never pay more.'" In other words, operators need to reassure users that they will never spend more than a certain amount on data. This is certainly the message of Nordic operators with their promise of "free mobile surfing" as part of smartphone plans.

Mohr-McClune added that latest versions of iOS and Android include tools that enable users to better track their data usage and derive a greater understanding of what they do actually use.