Cutting out the 'scissor-effect'

The issue of mobile broadband profitability in developed markets today has arisen frequently in discussions with operators and vendors during the last year. Although ensuring profitability is a challenge, there will be ample opportunities over the coming five years for operators to avoid a cataclysm. Nevertheless, the industry as a whole needs to work together to stop the "scissor-effect" from becoming a self-fulfilling prophecy.

Economic theory stipulates that if costs rise faster than revenues then profits will eventually turn into a loss. When charted this creates a "scissor-effect" whereby the line drawn for costs overtakes that for revenues, creating a loss-making situation.

We do not disagree with this theory at all. However, our contention is with how this logic is being presented by vendors to sell their products and services. Instead they should be helping their customers (operators) to focus their attentions on maximizing profitability, which is undoubtedly of more mutual benefit.

First, in many diagrammatical versions of the scissor-effect theory shown to us in relation to mobile broadband, real costs and revenues rarely underpin the diagram, so they are not representative of today's situation. Second, where "real" costs are used, they rarely tell today's full picture, either being generous towards vendors making a pitch, or reflecting onerous cost allocation by operator finance departments founded on voice-centric assumptions. Finally, diagrams we have seen tend to represent a massive generalization and oversimplification of today's mobile broadband situation. They do not take into account the structure of an operator, its legacy infrastructure or the simple fact that the entire network is rarely congested.

Indeed, a more realistic generalization today is that a minority of users use bandwidth-hungry applications, such as peer-to-peer (P2P), on a few sites in the network. Backhaul is the more common network concern to operators rather than the radio access network.

Moving forward, absolute data traffic will undoubtedly increase. However, even if average usage per user increased rapidly, through the uptake of video for example, the outlook for operators over the next five years can still be profitable.

Network and tariff innovation

The standard scissor-effect diagram frequently used today ignores mitigating factors that operators can employ over the next five years. Network efficiency is undoubtedly key and operators must define a clear network strategy. In this way, capex can be used most efficiently to alleviate opex increases and establish the most efficient network possible.

Once a strategy is defined, radio network upgrades become just a piece of a much larger puzzle - along with traffic management tools, offload via Wi-Fi or femtocells and backhaul upgrades, for example.

Operators also have the opportunity to innovate their mobile broadband tariffs. Some operators, with the newest, most efficient networks, have found that flat-rate "unlimited" tariffs are profitable. However, many operators are attempting different models to support the revenue part of the profitability equation.

Of the options available today, tariffs segmented by average speed and supported by an enforced fair usage policy are likely to prove most popular. "Unlimited" may be easy to market and sell, but the mobile network is a shared resource with finite capacity, so cannot be left open to abuse.

Build trust, not just networks

For infrastructure vendors, the key is to rebuild operator trust after damaging it with early 3G deployments and renewed efforts to push LTE. Vendors are still perceived as box sellers despite the millions spent on marketing and their desire to offer managed services. They must approach the next five years more holistically.

Mobile broadband profitability will require a blend of solutions, so vendors must highlight interoperability. They must also be clear on exactly what 'LTE ready' means to their customers. There is no standard definition, but differences could mean millions of dollars of extra spending by operators when the time does come to upgrade.
 

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