Mallinson: Mobile broadband - thrice as much at half the price


Keith Mallinson

I said it two years ago, and I'm sure I'll say again: mobile data traffic will grow one thousand-fold over 15 years to 2025; but that can only occur if per-gigabyte prices plummet. Charging a premium for LTE, as EE is currently doing, is unsustainable. Instead; stoking mobile broadband demand with lower and lower-priced LTE is most essential.

Demand is not extremely elastic

Growth is a combination of increasing usage by existing subscribers and new subscriber usage. The former may multiply their usage if price reductions facilitate this without major increases in per-subscriber spending. The latter tend to be more price sensitive than the former, so the prices required to lure them drive down average prices for all.

While what is occurring today with rapid growth in mobile data is somewhat reminiscent of the fixed network data growth frenzy 15 years ago, we should be more optimistic and yet realistic about the likely outcome. Fixed network data traffic growth was exponential in the late 1990s, but only because prices fell so fast and so far. Ensuing bankruptcies and restructurings including WorldCom, Level 3, Global Crossing and TyCom occurred in the post-millennial telecoms crash because the market misjudged the demand relationship between price and volume, with excess supply in fiercely competitive markets with fraudulent financial reporting.

Data demand is highly sensitive to price, and by "price" I do not mean average "bucket" prices (with average bucket sizes, in gigabytes of data, increasing over the months or years), or total monthly expenditures represented in data ARPU figures. I mean the average paid per gigabyte transported. That is the applicable economic definition. For operators, this is the all-important price yield that is comparable to the per-minute, rather than average bucket price or ARPU figures, for voice calling.

With volume demand growth overwhelmingly driven by reducing prices, elasticity of demand is not massively higher than one. (Please comment below or email me with figures if you have measured mobile data elasticities)  And, if profit margins are to be maintained or improved, that means costs (per unit volume of traffic carried) must also fall at a rather similar rate.

The other significant constraint on mobile broadband growth is spectrum scarcity; but this also affects prices. If spectrum supply is constrained or allocated at excessive prices, this will in turn also preclude the consumer price reductions required for predicted mobile broadband growth.

LTE to the rescue

Thankfully, new technologies including HSPA+, LTE and LTE Advanced provide the technical and economic benefits required for sustained commercial success with substantial traffic growth. Whereas these technologies provide higher and higher headline speeds--that look great in advertising messages--it is their ability to provide much greater network capacity and dramatically-lower unit costs that is most important.

The current situation with mobile broadband has similarities with the introduction of 3G in the first half of the 2000s. Operators in many nations found it difficult or impossible to charge a price premium for 3G. In fact, many operators had to eat much higher than average handset subsidies in order to boost 3G adoption so they could exploit the favourable operating cost advantages of WCDMA over GSM for voice and data.

Premium pricing for LTE by EE and some others worldwide will only be possible for a limited period. This will be no longer than until all operators nationwide are up and running with significant coverage for the new technology. Thereafter, if not before, the name of the game for operators will be stoking up demand, maximising it and capturing as large a share as possible. Competition is driving LTE prices down to 3G levels and below. The great thing about LTE--with higher peak speeds and less-loaded networks--is that average speeds and overall consumption will also be much higher. Data ARPUs for many subscribers will increase despite lower prices, and new customers will boost total revenues. That's what really matters, but premium pricing seems nice while it lasts.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor publishes an Extended Mobile Broadband Forecast. This includes network equipment, devices and carrier services to 2025. Further details are available at: Find WiseHarbor on Twitter @WiseHarbor.