Mallinson: Mobile broadband prices will hold firm as they tumble

Whereas some price points for mobile broadband services will continue to be offered in the coming years, higher price points for premium services and lower price points for light and occasional use are also being introduced to increase uptake, usage, revenues and profits. For example, typical "sticker" prices for data plans at attractive levels, such as $19.95 or equivalent, will persist. However, "bucket" sizes and monthly data volumes actually used will grow enormously. Operator revenue yields and prices, when expressed in dollars per gigabyte, will, therefore, fall dramatically.

What is price?

Price can be defined in a variety ways that dramatically affect price comparisons, including the directions of trends. For example, a Financial Times Lex column railing against the proposed acquisition of T-Mobile USA by AT&T uses Merrill Lynch, GSMA Association and OECD sources to assert that "the US and Canada are the first and third most expensive markets for typical wireless services." Lex reaches this misleading conclusion by comparing total annual expenditures for typical wireless services.  Alternatively, by comparing the effective price paid per voice minute, the US is among the cheapest worldwide, at around 4 cents, versus at least three times more in most European nations. America even fares well against rock-bottom prices of one or two cents in India and China, if one also considers the handset subsidies that most Americans enjoy that are not available with such low prices elsewhere.

Differences between interconnection payment systems and termination charges with "receiving party pays" in North America and "calling party pays" pretty much everywhere else partially account for disparities, as do the averaging effects with different proportions of contract versus prepaid users. US subscriber penetration is relatively low for a developed nation, due to prevalence of postpaid service, but minutes of use per month in excess of 800 per subscriber are several times higher than in Europe. On the other hand, if you make virtually no calls, even if you receive many, you can maintain prepaid mobile service in many nations­­­­--other than the US--for virtually nothing. Whereas ARPUs in many nations have held firm or decreased slightly in recent years, the prices per minute, per text and per gigabyte of data actually used have tended to fall substantially in most nations worldwide.

In matters such as merger investigations, total expenditures should only be considered in pricing comparisons along with more conventional definitions of price, including the amount paid per item purchased and quantity consumed. One of the reasons people increase their consumption and spend more is because bargains and lower prices stimulate demand. Americans also drive more miles than in most nations; that may account for relatively high fuel expenditures, but it does not correspond to elevated prices. American gasoline prices are generally considered, on a per litre or per gallon basis, to be around half those in Europe.

I also take issue with the FT journalist's assessment that "American consumers suffer from a failure to enforce a single technical standard, such as GSM, or sharing of increasingly expensive infrastructure." However, I will save further comment on those matters for another column.

Same prices buy bigger and bigger buckets

As price points and ARPUs have held steady or fallen only moderately, the voice buckets have expanded substantially, with more anytime minutes included, free family calling, free evenings and weekends and some unlimited offerings on voice and text (depending on operator and nation). You get a lot more for your money than you did 10 years ago.

Flat-rate unlimited data plans appeared to offer very low prices per gigabyte, but these were introduced when actual usage was very low, networks provided much slower throughput than today and the operator objective was to stimulate adoption and usage. Demand grew in a lopsided manner, with around 10 percent of users generating 90 percent of the network traffic in recent years. Mobile operators soon discovered this pricing model was unsustainable. They reacted by introducing caps and throttling to crimp heavy users before average usage reached more than a few hundreds of megabytes per month among the minority with data plans. Unlimited data plans are now a premium-priced rarity in mobile, but data growth continues unabated.

WiseHarbor predicts usage will increase dramatically with half the world using gigabytes per month by 2020. The name of the game for mobile operators is to harness volume growth profitably in the face of plunging prices per gigabyte. That means generating incremental revenues on increasing data volumes per subscriber and reducing marginal costs. I will examine the latter crucial issue in an upcoming column. As mobile broadband moves from a minority pursuit to mainstream and eventually the major revenue source for mobile operators, as is already the case with Softbank Mobile in Japan, developments in pricing will mirror much of what we have already seen with voice pricing. New high-level and low-level price points and innovative charging methods including prepaid and content-related options can help expand penetration, increase usage and maximize revenue growth. As with voice and text, data buckets will expand as average usage levels increase, with subscribers getting a lot more for their money. Data ARPUs--blended across all users including the declining proportion without data plans--will continue to grow substantially for many years. 

Prices per gigbyte will plunge

Whereas WiseHarbor predicts a dramatic reduction in the worldwide average revenue yield for operators from $0.10 per GB in 2010 to $0.001 in 2025, this is consistent with average price points remaining at today's levels, because 1,000-fold data traffic growth is also expected. In fact, substantial operator revenue growth worldwide will result from the mathematical product of these two trends. The "$19.95 plan," its equivalents and other popular price points will stick around as demand continues to increase.

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 is publishing an annual update to its Extended Mobile Broadband Forecast in May 2011. The new forecast will include network equipment, devices and carrier services to 2025. Further details are available at: http://www.wiseharbor.com/forecast.html

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