NTT DoCoMo president Nakamura recently stated that the existing business model involving flat-rate data and ever-more competitive voice prices will not be enough to deliver a return to shareholders. Similarly SKT and KTF in Korea have also been trying to back-track from their early implementation of flat-rate mobile data plans. Yet KDDI reports a tenfold increase in data usage as a consequence of its flat-rate initiatives, increased net additions and a healthy reduction in churn.
So is the shift to flat-rate tariffs an inevitable part of growing 3G services‾ Or have these industry leaders capped their growth in implementing flat-rate‾
Typically operators have been extremely reluctant to embrace the principle of flat rates. Spectrum investment has been expensive, and a central part of operator's 3G proposition is that growth in data will offset pressure on voice ARPU. The market leaders in flat rate - Japan and Korea - have invested in alternative areas of business: credit card companies (NTT DoCoMo and FeliCa); music companies (SK Telecom) and mobile commerce initiatives. But most small national operators will not be able to match those initiatives.
Tiered flat rates
Nevertheless, Ovum believes some form of data bundle is an imperative - a metered approach to data, with charges per kilobit, will not work. It does not have to be all-you-can-eat: but customers must feel some budget control in data usage. A common approach is a phased plan, with 4 Mb a common divider between moderate and heavy users.
This creates a challenge for the i-mode model which is built around the concept of a variety of off-portal, 3rd party content, and metered charging for data usage on top of content fees. Initially this concept was designed around sites with a very low data payload. However, as richer streaming and download-based applications become more common, this approach inhibits experimentation as it risks bill shock for customers.
The alternative model is zero-rated browsing, which we seeing as increasingly popular in Asia Pacific and Europe. Subscribers can browse for 'free' within the operator's portal, then have a flat-rate model for browsing outside the portal with a fair-usage limit.
Flat-rate tariffs facilitate advanced service delivery and can allow operators to differentiate their services. Those operators that have driven an aggressive data strategy have made market share gains against their peers. These gains have originated from strategic decisions: from technology choice through network design through to marketing and pricing.
The best example of this is KDDI, which launched its flat-rate service in December 2004. Initially EZ-flat service was pitched to high-volume users at 42,000 yen ($36) to attract subscribers from other networks. KDDI then refined its plan by segmentation. This effectively offers a low entry-level plan up to 4.9 Mb, then charges per bit until 10.3 Mb are consumed. At this point a second-tier flat-rate offer kicks in with users paying no more than 42,000 yen. It allows occasional users to experiment and gives access to the most popular WIN services.
As a consequence, KDDI says spending on content from flat-rate users on EV-DO is four times higher than on CDMA 1x, where usage is billed per packet. It has lowered churn levels, built brand and generated growth in net additions.
But there is a strong proviso here: flat rate is more than just an innovative tariff. The most successful offerings are those that are carefully planned as flat rates impact all areas of the business, from technology choice, network architecture and optimization through to tariff construction and marketing.
Perhaps the biggest challenge with flat-rate tariffs is the shift required in operator thinking, which has always been based on traffic as the driver for revenues. With 3G and broadband content, new business models are emerging, requiring new forms of partnership and collaboration. Operators must adapt or risk being bypassed by innovative competitors.