Carriers struggling to profit from rising data revenue
Could this be a sign that data is actually starting to pay for itself? Sprint Nextel, the third largest mobile operator in the USA, reports its customers are spending more on data plans than they did a year ago. In fact, the average monthly customer bill was up 6.6% to $59.98 (€45.19). The rise, it seems, came from smartphone data plans.
Of course, it is probably too early to start shouting from the rooftops, but the trend is positive and it seems customers are willing to pay a fair price for data services if they perceive they are getting good quality access and value for money, even if the plans are capped or tiered.
The question now is whether the increased revenues can be converted to increased profits. Sprint’s 4G offering will continue to be based on Clearwire’s Wimax network until its own 4G LTE network launches in six markets mid-year. Encouraging people to move to either 4G platform from the 3G network is paramount in reducing the heavy traffic loads caused mainly by the 3G only iPhone.
As a result of Sprint’s unlimited wholesale agreement with Clearwire, the company has more flexibility and willingness to offload its traffic to Wimax and continue to offer unlimited data plans to its customers, but how long that will last is anybody’s guess.
AT&T and Verizon are also reporting higher data earnings but over at AT&T, 41.2 million smartphones are wreaking the expectable havoc. Reports state that AT&T is seeing a massive increase in data traffic without a corresponding jump in data revenue. AT&T had added a net total of 10 million new smartphones in the past year alone, and the devices now account for nearly 60% of its postpaid subscriber base. Wireless data revenue is tracking about $24 billion per year, growing at a steady rate of more than 20% per year.
But AT&T also pointed out previously that data traffic on its mobile networks is actually doubling each year. That means a 100% annual increase in data traffic is being driven by a mere 32% increase in smartphones. This is a frightening mismatch, at least in percentage terms. Let me recap, a 32% increase in smartphone customers increases traffic by 100% but revenues are only growing by 20%.
Of course, we do not know the cost structure AT&T works to, and they may not have a clear indication themselves, at least until annual profit or loss figures come out. This raises the issue that must be plaguing all CEOs of mobile networks. What is the exact cost structure for data and can it be extrapolated accurately into a cost per megabyte or gigabyte being delivered? Surely this is essential in determining wholesale and retail prices, and critical in determining how to structure any capped or tiered data plans.
Of course, there are myriad other factors that affect market price, not the least being competitive forces. However, any business projections that require continuous capital investment to soup up the data network, plus the cost of extra spectrum, backhaul, internet peering and interconnect should have a base cost to work to. Without this we could simply be sinking good money after bad in the faint hope that data revenues will be optimized at some stage to cover costs and return a reasonable profit.
Maybe ‘The Insider’ could be way off the mark here. Just because his sources could not quote ‘cost per megabyte/gigabyte’ figures or even confirm their existence, does not mean they don’t exist. Different businesses may be using different metrics to reach the same result. Hopefully this is the case but the ‘data tsunami’ has hit with such speed and vengeance, one wonders if anyone has had any time to think about anything else but providing more and more capacity, whatever the cost.
It’s a worry when journalists such as Kevin Fitchard from GigaOM write, “The per-megabyte cost we pay for mobile data has actually fallen considerably in the past few years, but we wouldn’t know that by looking at our bills. If carriers from the beginning had set reasonable tiers that actually reflected how customers consumed data, operators could have gradually lowered prices as their networks became more efficient. It’s probably a stretch to say they would have come off as heroes, but their mobile data policies probably wouldn’t be vilified the way they are today.”
Kevin may be way off the mark, but if that’s what the public thinks then we, as an industry, may have to become a lot more transparent in future.