Should QoS be part of mobile broadband pricing‾

Mobile operators are considering whether flat rate pricing is still the best way to meet customer expectations and stimulate the take-up of mobile broadband services.


There is no question that mobile customers appreciate the freedom to talk or be online as much as they like, but as competitive stiffens and mobile phone market penetration is already above 100% in most European countries, operators are facing a very serious issue: how to meet growing capacity requirements in the network while average revenues per user (ARPU) are constantly decreasing.


The answer may be putting network access back into the pricing equation by establishing and offering distinct network-based service classes for different customer groups.


Operators argue that the DSL model, with different pricing for different connection speeds, should apply in the mobile space - but speed alone is unlikely to be an effective differentiator. So the worst-case scenario confronting mobile operators involves a flat voice-and-data fee structure that slightly exceeds the cost of providing the services. Not a bright future for operators.


The first problem with flat rates is that they do not leave much room to differentiate on anything other than price. The second problem is that as IP traffic takes off in the mobile environment, operators will need to invest heavily in additional capacity with little or no prospect of generating additional revenues (under flat rate pricing regimes, traffic per customer will increase, but revenues barely at all).


But there might be a way out of this dilemma. Instead of guaranteeing every user the right to fight for access to the mobile network in areas of heavy demand, regardless of the price paid, we believe that the time is right to apply the principle of demand and supply.


Recent Arthur D. Little analysis shows a strong correlation between customers' price sensitivity and the available network quality. Customers of incumbent mobile network operators (MNOs) rank network quality and coverage as one of the most important features.


Having said this, high-end business customers probably would not necessarily switch their operator right away if the connection drops in the lounge at Heathrow Airport, but they eventually might be willing to pay to make sure that the drop is avoided in the future.


So how can operators overcome the commercial death spiral of increasing capital costs for the build-out of radio networks without decreasing quality of service that generates stagnant or even declining revenues‾



They first need to manage customer access to their existing capacity more effectively. Several operators are currently thinking about quality of service differentiation in the context of mobile broadband applications, borrowing the much-discussed net neutrality logic from the fixed-line environment. We believe, however, that it is more efficient that the decision about the "˜right' level of service quality should lie in the hands of customers.


Operators can manage this relationship more easily since they will not need to negotiate the terms of service provisioning with countless third-party service providers. In the future, customers will be able to decide if they want priority access to the radio network and authorisation to use extensive mobile broadband features and/or several types of network access.


In its simplest terms, we see the same logic applied to the mobile world that is already well known in the credit card or airline industry.


For high-end business customers, this model could also be extended towards the promise to be always connected, regardless of the availability of the network. This service could be achieved by entering roaming agreements with other national operators to make sure that the customer is always able to use their mobile phone. However, each level of service would be subject to conditions necessary to ensure the functioning of emergency services.


If operators do not want actively to sell different grades of service, they could conceivably define them based on existing tariff structures.  For example, flat rate offers guarantee best effort service, while higher consumption tariffs have a prioritised service class by default.


Currently most operators fear that bringing quality of service back into the pricing equation would make them vulnerable to competitors who do not follow the same route, and that they would lose customers who are not willing to pay for services as a result. However, the service differentiation story can be told differently.


Operators can target high-end customers who are willing to pay for the guarantee of a higher service level. Although not a high percentage of the customer base, these customers are the ones operators are desperate to keep. On the other side, customers with low revenues will not experience a diminished service quality since they use their handset infrequently, therefore the risk of churn is relatively low.


By increasing revenues through service-based pricing, the operator will be able to make additional network investments and improve capacity. As a result, the performance of mobile broadband offers will improve and high-quality voice and seamless access to multiple networks will enhance the image of the operator.



But even for operators who are not willing to market different service classes, the introduction of differentiated QoS will enable them to pre-define service classes for their customers and support the management of their networks.


Finally, operators must develop innovation go-to-market strategies to keep vulnerability to competition low: something that is especially important for the first companies to introduce differentiated service plans.


While the standard flat-rate pricing model may encourage customers to make more use of mobile broadband services, it is increasingly clear that they will not deliver increased revenues. By contrast, flat rate tariffs that incorporate a QoS element could be how to increase usage among medium and high-end customers while delivering new revenues streams for operators.


Klaus von den Hoff, global head, Arthur D. Little's TIME Practice