Tiered pricing--instead of flat rates for unlimited data use--will stimulate low-end adoption and increase expenditures at the high end. However, some mid-range users will get away with paying less than they do today and changes could also constrain desirable usage demand growth unless consumers are clearly and continuously informed about their data consumption. The threatened network neutrality conditions on mobile services will be much less onerous for mobile operators with this usage-based pricing.
Unlimited data offerings for smartphone subscribers are being withdrawn both sides of the Atlantic, as has already occurred for most dongle and data card subscribers. Instead, tiered pricing or throttling usage from a flood to a trickle when plan ceilings are reached is becoming the norm on all types of mobile devices. AT&T and O2 UK have recently announced that new smartphone contracts, including those for the soon-to-be-launched iPhone 4, will include usage caps and overage charges. Vodafone is making similar changes and other operators will surely follow suit, particularly as they increasingly carry heavy-usage devices such as the iPhone.
O2 expects only 3 percent of its 21.4 million customers to pay additional charges as it switches from flat rate to tiered pricing. Data for smartphones will be bundled with voice and text and also sold in "Bolt Ons" with 500Mb for £5 ($7.30) and 1Gb for £10. O2 defends its move with published statistics indicating that 97 per cent of its smartphone owners use less than 500 Mb per month, and that only a tiny number use more than 1Gb. The real problem, according to inside sources, as reported by FierceWireless: Europe, stems from users that have been "abusing the unlimited clause in their contracts and using the handset as a 3G dongle to almost ceaselessly download peer-to-peer data." According to O2, nearly one-third of its data traffic is accounted for by just 0.1 percent of its customer base.
Contracts for dongles and data cards are already typically at data plan volumes such as 1 Gb for £7.50, 5Gb for £15 and 15Gb for £30 per month on Vodafone UK, with overage charges for exceeding these figures. Prepaid options are also common in Europe with top ups that last 30 days at prices of £10 per 1 Gb, £15 for 3 Gb and £25 for £7Gb with 3 UK. T-Mobile USA is throttling data rates for customers that exceed the limit on its 5Gb plan.
Flat-rates and unlimited usage made great sense in the early years of 3G because the data services were hardly being used. Flat rate pricing encouraged use, was simple to administer with no metering or variable charging and was low risk for customers with its predictable cost. This old 3G problem of too little use has been replaced in the last year or two with preferable problems such as growing pains that come from significant adoption and escalating usage. It is only a very small proportion of ultra-heavy users that spoil the party, but pricing changes will help operators in a variety of ways.
Leaving money on the dining table
The one-size-fits-all approach that comes with flat-rate pricing has three significant shortcomings in revenue generation and profitability. It fails to maximize revenues from heavy users that would be willing to pay more. It prices out light users who are price sensitive. It allows usage levels among some users that are so high as to be very costly and unprofitable.
Recent announcements aside, smartphone data is pretty cheap in Europe. For example, the going rate in the UK is £5 per month including value-added tax for unlimited usage on a SIM-only postpaid subscription. My daughter's iPhone--personally imported from the U.S.--like many other smartphones benefits from this price. Incidentally, her iPhone is used "jail broken" because neither Apple nor O2 would provide her with a legitimate way of continuing to use her device, even though it was fully paid up on AT&T's network when she relocated to the U.K. from America last year.
The graphic shows how a flat-rate limits pricing opportunities with those people who are willing to pay more and limits subscriber uptake with those who are only willing to pay less. Source: WiseHarbor
Bring it on Bit Torrent
With usage-based pricing, operators will have no qualms about carrying bandwidth-hogging services such as peer-to-peer file sharing, so long as customers pay their bills. Customers were uncaring and oblivious about how much scarce network capacity they use with a flat rate for unlimited use. With overage charges or throttling, customer behavior will change. As customers learn which applications use the most bandwidth, their behavior will adapt accordingly on the basis of their willingness to pay. Meanwhile, operators will become indifferent to what types of traffic they carry on their networks because data buckets are being sized to be profitable regardless of payload and incremental traffic will generate incremental revenue.
This does not mean that the market for policy and traffic shaping will collapse. Network neutrality police permitting, there will still be an opportunity to offer a variety of classes of services with more subtle and sophisticated pricing methods. Operators could, nevertheless, price on the basis of peak or average speeds, latency for individual packets and whole file delivery completion times.
However, usage-based pricing introduces issues that did not exist with unlimited plans. Data volumes, usage rates and total volumes are far from clear to subscribers. This could discourage use for fear of bill shock with overage charges or simply because expenditure savings are possible by reducing consumption where it was not possible before. Guidelines provided by operators including number of web pages, YouTube videos or email messages sent or received are pretty useless despite the reassuring tones from operators' sales and customer service agents. Usage monitoring and display on the phone in real time with a dashboard widget would help enormously, just as the fuel gauge in my car provides me with reassurance about my reserves, particularly when I am close to running out. I am not convinced that the promised, occasional or frequent, text message alerts are a satisfactory alternative.
Innovation and sanity in pricing
Competition in mobile services has always been as much about innovation and differentiation in pricing as about technologies and features. Following its launch in 1994, Orange promoted the benefits of its unique per second billing. AT&T eliminated the high and uncertain pricing in U.S. national roaming for voice calling with the introduction of its Digital One rate "bucket plans" in 1998. With increasing maximum numbers of minutes in a succession of price points and overage charges for exceeding limits, this structure has set the standard for voice pricing in the U.S. ever since. Similarly, as data takes centre stage in mobile phone pricing, data pricing is taking similar forms in the U.S. and in Europe.
International roaming charges for data can be extortionate with pricing of $2,000 per Gb quite typical. On calls with Vodafone and 3 sales representatives recently, I was advised against using UK mobile broadband services abroad. These individuals did not even bother asking me if I cared how much money I spend while roaming. No doubt data roaming generates high percentage profit margins, but the total revenues are relatively small in comparison to a market that will only expand to its full potential when there are sufficiently low price points to stimulate much higher adoption and usage. Wholesale prices among operators and retail pricing for roaming must surely fall, eventually.
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 has recently published its Extended Mobile Broadband Device Forecast to 2020. Further details are available at: http://www.wiseharbor.com/forecast.html