Toll-free data: The technical details, the business model and the skeptics
It was as much a staple of the 1990s as grunge music and the Slinky: toll-free numbers. The numbers, usually of the 1-800 variety, allowed callers to place no-charge telephone calls to businesses and other entities. And now, the concept of toll-free connections is being revived, albeit haltingly, for the 21st century: enter the "toll-free" data plan.
During the past six months especially, U.S. wireless carriers have increasingly batted around the concept. The most commonly discussed form of toll-free data would allow users to access a certain kind of content or content from a certain provider without dipping into their monthly bucket of data. In exchange, the content provider--most likely an over-the-top (OTT) player--would pay the carrier directly; strike a revenue-sharing deal with the operator; or form some other business arrangement.
Will this strategy work? And more importantly, will carriers embrace it?
At this point the carriers appear to be in a wait-and-see mode. Wireless data is still evolving from unlimited plans to usage-based plans. The latest twist: Verizon Wireless (NYSE:VZ) launched its shared data plans in late June and AT&T Mobility (NYSE:T) will soon launch its own shared data plans. Additionally, there are concerns that toll-free data plans might be too complicated from a technical and commercial perspective to launch.
Ultimately, such plans, if they ever make it to market in a widespread way, will have to provide mutual benefit to carriers and content providers. "This is a new area of interest from all operators around the world," noted Kelly Ahuja, senior vice president and general manager of the Mobile Internet Technology Group at Cisco. "How do you create new services and new ways of making money?"
Is toll-free data technically feasible?
Analysts and representatives from network and policy control vendors broadly agree that the network components exist to make toll-free data plans a reality. Essentially, the viability of such plans boils down to policy controls at the data channel level of the network.
"It's about how you vary policy based on the end application or service that's being used," said Richard McConnell, CTO of cloud and network services vendor Aepona. "It's how you operationalize that in terms of the relationship with that third party at a payment level and also a charging level."
The most critical element of the equation is the Policy Control and Charging Rules Function (PCRF) in the network, which carries all of the business and policy rules that are set by the carrier and applied to data on the network. Coupled with deep-packet inspection (DPI), the PCRF should be able to hone in on how specific content is being used down to the subscriber level. Then, once the type of content is determined, the policy and charging rules would kick into place to have that data not count toward a customer's data bucket, or to apply a certain level of quality of service to the data.
Carriers would still need to real time meter how much data for a specific application is being used "so you could do a revenue share and show the application provider that there was a subscriber using the service," said Ann Hatchell, director of data experience marketing at Amdocs. Hatchell was formerly with policy control vendor Bridgewater Systems, which Amdocs purchased in June 2011.
McConnell noted that for one instance or application, this is very easily accomplished. The challenge is whether the idea can be applied to different applications and a myriad of devices on the network. "I think the issue is how you operationalize it so it can be a scalable business model," he said. "Because you can't go in and manually set those rules for every case."
Another technical issue is whether such plans would generate too much signaling traffic if the network is constantly monitoring what a subscriber is doing at the application layer, noted Phil Marshall, an analyst at Tolaga Research. "The difficult bit is the policies at the application layer and the policies at the network layer and making sure those are coordinated in an efficient manner," he said.
Toll free business models
There is already some basic precedent for toll-free data plans. Google (NASDAQ:GOOG) in 2010 provided free Gogo-powered in-flight Internet service to flyers on AirTran, Delta and Virgin America planes in a promotion of its Chrome Internet browser. Additionally, Facebook in 2010 introduced a mobile site called 0.facebook.com that, on launch, was available to the subscribers of 50 different international mobile carriers for free. However, the most well-known example of toll-free data is one that is not often trumpeted as such: the Amazon Kindle.
In May, AT&T Mobility's Ralph de la Vega explained how AT&T is already playing in the toll-free data space via the Kindle. "When you download a book to your Amazon Kindle, we provide the connectivity. The cost for downloading the book is something we wholesale to Amazon. That makes business sense," de la Vega noted. (Users don't pay a monthly fee for downloading Kindle books; the network access costs are built into the price of the book.) "We have done this for several years and there will be other cases like that."
While there have been some examples of toll-free data business models, it is still not a widespread practice. Moreover, there is no established structure for such agreements. Indeed, many agree that the commercial challenges for toll-free plans are more significant than the technical ones. One challenge is finding content providers willing to test out the toll-free data waters. Another is clearly explaining to users how they will be able to access one type of content for free but not another type of content.
There are several flavors of toll-free data plans, Amdocs' Hatchell noted, none of which has yet been openly embraced by U.S. carriers. One might allow customers or certain tiers of customers to access data services unmetered for a period of time during the day, or for a certain day of the week. Another option is the one most commonly bandied about, which is that a specific application would be "zero-rated," or not count, toward a data allotment.
Mark Jacobstein, vice president of product management for Qualcomm (NASDAQ:QCOM) iSkoot, described one such zero-rated service the company is involved in provisioning. He said that the company's "Free Social" service is in place in several markets in Southeast Asia and South Asia. The service gives end users free access to Facebook and Twitter--as long as the OEM is using Qualcomm chipsets.
However, Hatchell said the most likely way toll-free plans will be launched will first be through carrier-branded applications or content hubs, such as music portals. "The next step beyond that is, how do I target other apps or services? What kind of an arrangement can I get into with those app partners to get them to sponsor [the content]?" She noted that the model could be a subscription system, a revenue-sharing one or based on usage of the app or service.
What AT&T, Verizon, T-Mobile and Sprint say about toll-free data
Wireless carriers have so far expressed varying degrees of enthusiasm for toll-free plans, all the while remaining deliberately vague about how such plans would be put in place. AT&T has been the most vocal proponent of the concept, with its CEO Randall Stephenson saying in early June that customers are beginning to understand tiered data pricing and how such pricing may cause them to avoid data-heavy types of over-the-top content services. And since content providers are trying to monetize their content over mobile, he said he could envision a model where content providers are willing to pay to bring customers to their content.
"I think you'd be stunned if we weren't getting those phone calls. We are getting those phone calls," he said. "The content guys are asking for it."
While making clear that Verizon has not decided to launch toll-free plans, Verizon Communications CFO Fran Shammo said in May that LTE allows such plans to be offered.
T-Mobile USA said in a statement that in the future it "will continue to explore new pricing models, including exploring options whereas the cost of data used would be paid for by content providers, advertisers and/or T-Mobile."
Sprint Nextel (NYSE:S) CEO Dan Hesse said it was difficult to say if Sprint would support such plans, noting that the carrier still has unlimited smartphone data plans and is focused on keeping things simple for customers. "I'm not saying that Sprint wouldn't participate and wouldn't work with content providers in some mutually beneficial way," he said. "It's good for the industry and good for us to figure out new business models since data usage is increasing so much."
For carriers and content providers alike, the challenge from a business perspective will be to strike an agreement that both parties get value from. "It's another meaningful way to provide value for your customers without actually charging them for it," Hatchell said, noting the benefit to carriers. For content providers, she said the benefit is driving more customers to the service and differentiating it from other OTT content, either through preferential pricing or quality of service.
Skeptics raise questions
Despite the optimistic signals from carriers, there are still plenty of hurdles to making toll-free plans a reality, both from a technical and commercial standpoint, according to skeptics. Dean Bubley, an industry analyst at Disruptive Wireless, recently wrote a report that is highly critical of the model.
Bubley noted that applications on different types of devices--different smartphones as well as tablets--use different amounts of data, which would be a concern for both application providers and carriers looking to monitor how a toll-free service was used. Similarly, many carriers are urging more customers to use Wi-Fi networks, which also complicates how much a content provider and carrier will be able to monetize on-network usage. He also notes that the definition of an application is changing with the advent of HTML5. The policy control aspects of monitoring for a specific app or service, he said, could be feasible only "if there is an extremely tight relationship between the app developer and operator."
He also said from a business perspective, such plans could push content providers and OTT players to game the system by encouraging users to use theirs apps over Wi-Fi if the price the carrier charged them was too high, thus negating the benefit to the carrier. "The premise sounds good, but the difficulties of measuring it and managing it from the IT side is likely to be a nightmare," he said.
Jacobstein is pushing a new Qualcomm platform, Yagatta, which the company hopes carriers will use to deliver more efficient OTT services such as messaging, video and voice over IP. In the meantime, he said, because developers are unlikely to make their apps as data-efficient as possible, toll-free data plans are more likely to catch on in developing countries where the cost of data services is relatively high.
"I don't actually think the idea we're going to zero-rate your data for x, y or z applications or service is nearly as interesting to a North American customer who isn't as price sensitive," he said. "I think it's much more compelling in the rest of the world where people are paying a la carte."
Net Neutrality concerns
Another hiccup for toll-free data plans is whether they would violate net neutrality rules. For example, if a commercial deal is struck between a carrier and Netflix,but does not include Hulu, and that deal gives Netflix a guaranteed quality of service or even excludes Netflix from counting toward a customer's data bucket, it might violate net neutrality rules lawyers and analysts said.
"A wireless data cap in itself does not violate network neutrality," said Mitchell Lazarus, a telecommunications lawyer at the Washington law firm Fletcher, Heald & Hildreth. "It becomes a problem when there are exceptions to the data cap, when certain content can be accessed by the data user that does not count toward the data cap and other content does."
For all these reasons and more, right now, as AT&T's Stephenson noted, toll-free data plans may be something content providers are asking for, but the carriers are not yet ready to deliver.