The launch of LTE in many markets is driving operators to look for new monetization strategies for mobile data.
Analysys Mason's recent work has focused on pricing of 4G mid-screen and large-screen mobile broadband offerings, and on growth in take-up of these services. We forecast that global 4G mobile broadband connections will grow from 22 million at the end of 2012 to over 290 million by the end of 2018.
A review of global mobile broadband in LTE markets reveals a number of trends in the way service providers are pricing and bundling LTE mobile broadband. Advertising specific headline speed levels, for example, is a phenomenon that is mostly found in western Europe. Most operators in developed Asia Pacific and the US do not advertise specific headline speeds, but highlight the faster speed that LTE enables in a more general way.
Operators commonly use three different strategies in pricing their data:
- Volume-based pricing: differentiating tariff tiers with monthly data allowance, which is implemented either through an advertised cap (monthly data allowance as part of the marketing proposition) or with a cap or throttling as part of operators' fair use policy. Around 40% of operators in western Europe apply pure volume-based pricing. More than 70% of operators in Central & Eastern Europe, developing APAC and the US used pure volume-based pricing, making it the most common pricing model in those regions in the second quarter of 2013. For example, NTT DoCoMo applies a pure volume-based tariff differentiation with maximum theoretical download speeds of 112.5-Mbps across its Xi data plan tariff tiers.
- Speed-based pricing: tariffs differentiated only by speed while offering unlimited data are rare. No operator in our study outside of western Europe and only 4% of operators in western Europe use them. For example, Elisa Finland, which offers a truly unlimited data allowance across all tiers, differentiates these tiers with download speeds from 21 to 100 Mbps.
- Hybrid volume-speed-based pricing combines volume-based and speed-based pricing. This is the most popular pricing model in western Europe, but less relevant in other regions.
Operators in the US focus their marketing efforts largely on coverage rather than emphasizing headline speeds. Consumers in most countries in western Europe are used to speed levels being advertised and are familiar with different speed levels from fixed broadband tariffs. We do not therefore expect a shift away from this marketing strategy there. Some operators in western Europe have, however, revised LTE headline speeds down for their mobile broadband offers. This is likely to give more realistic speed levels and leave further room for monetization by re-introducing higher speed tiers later.
Entry prices for LTE MBB subscriptions in more mature LTE countries are declining. For example, half of the LTE operators in western European countries reduced the prices for their entry-level LTE subscriptions between November 2012 and May 2013. Similarly, some operators in APAC offered less expensive LTE entry-level subscriptions at the beginning of May 2013, compared to September 2012. Telstra and Optus in Australia, for example, revised their entry-level tiers down by about 40%.
As shown in the chart below, there is significant variation in entry-level costs for LTE mobile broadband services. Making LTE available on lower-level tiers, or reducing the monthly data allowance for entry-level tiers are two ways to reduce the entry-level price for LTE. Making LTE less expensive will increase take-up, making the services attractive to a wider segment of the population. Less-expensive tariffs will also appeal to the increasing share of mid-screen (tablet, e-reader) mobile broadband users, who consume less monthly data than large-screen users.
Operators have also chosen different strategies on how to differentiate 3G from 4G tariffs, and indeed whether they differentiate at all. As LTE markets mature, operators are typically making 4G available across all tariff tiers. The number of LTE operators in western Europe, for example, that no longer differentiate between 3G and 4G technology on MBB tariffs increased to almost 40% in the second quarter, compared to one-third in the fourth quarter of 2012.
Little differentiating between 3G and 4G
Operators in more mature LTE markets in western Europe reduced the monthly data allowance on entry-level LTE subscriptions (excluding offers with unlimited data allowances) from an average of 11GB at the end of November 2012 to 8GB at the beginning of May 2013. Operators that have stopped differentiating between 3G and 4G tariffs and are aiming to make LTE services more affordable are driving this trend. We expect entry-level prices for LTE to decline further as more operators make LTE available across all tariff tiers.
The premium charged for 4G over 3G varies widely between countries and operators. We observed a clear speed-based differentiation between 3G and 4G tariff tiers among operators in Singapore (see figure 2
). Operators offer lower-priced 3G tariff tiers that give the same monthly data allowance as the more-expensive 4G tariff tiers.
StarHub charges the highest 4G premium, with a mark-up of 51% on the monthly access charge for its 4G 6GB tariff tier.
SingTel's 4G premium is 33% on its 10GB tariff.
M1's 10GB 4G tariff charges the lowest 4G premium of only 14% premium compared to 3G.
We recommend service providers take three steps to position their mobile broadband services effectively and drive LTE take-up:
- Make LTE available across all tariff tiers to monetize LTE. Higher LTE speeds will increase data consumption and encourage consumers to spend more for higher data allowance packages than they did on 3G. LTE makes mobile broadband a more viable fixed broadband substitution than 3G and subscribers will be willing to purchase higher data allowance packages at higher monthly fees.
- Consider multi-tier variable volume-based pricing. Multi-tier pricing, as applied by NTT DoCoMo, gives a low initial data allowance at a low monthly access charge and includes higher data allowance at a fixed rate if needed. This method of pricing addresses various consumer segments and gives customers flexibility to automatically switch to a higher tier during periods of higher usage.
- Align MBB tariffs with the needs of mid-screen users. The number of large-screen MBB connections is expected to decline over the next five years (particularly in Europe). Operators should target this growing customer segment with tariffs that are tailored to the lower data consumption needs of mid-screen users and priced at rates that give subscribers incentives to connect mid-screen devices to a cellular data service rather than using them as Wi-Fi only devices.
Sidebar: Simple data plans vital for emerging markets
Operators need to nurture fledgling smartphone users in emerging markets to ensure mobile internet services are a success, Ovum analysts believe.
Emerging markets are tipped to be primed for a data boom, but a lack of fixed infrastructure makes mobile networks the most likely bet for providing access. Ovum analysts say operators must carefully guide subscribers from current SMS and voice services to mobile web browsing on smart devices to help the boom happen.
"Operators and content providers now have an important role to play in helping the next billion transition from basic voice and SMS functionality, to their initial steps with mobile browsers, and ultimately to smart experiences on the mobile internet," says Shiv Putcha, principal analyst for consumer telecoms.
Rising smartphone penetration in emerging markets will also push consumers toward mobile internet, Putcha says, noting smartphones are "giving some consumers access to the Internet for the first time."
The key to operators' success lies in offering pre-pay subscribers simple data tariffs. "The next billion consumers are typically highly value conscious; tariff complexity combined with potential bill shock will deter prospective mobile Internet users," Putcha notes.
For content providers, offering localized services is the path to success, along with operator billing partnerships.
- Michael Carroll