The theme of my 2013 "predictions" piece was that this is going to be a year of "disruption" across many elements of the value chain. I'd like to delve a little deeper into a discussion of business models and pricing, where I think we will see both disruption to prevailing structures, and experimentation around new forms of monetization. I see this happening in many sectors of the mobile space: operator pricing, video over mobile, "content everywhere," and applications.
Operator pricing models. If 2011 was the year of tiered data pricing and 2012 was the year of shared data plans, 2013 might go down as the year where operators start to chip away at handset subsidies. Smartphones now represent some 70 percent of new sales, but are negatively affecting operator margins (example: Verizon's latest earnings report), which is causing a re-think of the viability of the subsidy model. Bring-your-own-device, equipment financing, more aggressive pre-owned programs, a greater emphasis on prepaid, and promotion of additional smartphone platforms beyond Android and iOS are all tools the operators are using to reduce the reliance on subsidies.
We are also entering a newly competitive phase of the U.S. wireless industry, driven by a rejuvenated and recapitalized Sprint Nextel and T-Mobile USA, resolution of Clearwire's status, Dish Network becoming a factor and the continued rollout of LTE networks. More competition and capacity will lead to an assault on the prevailing ~$10/GB pricing model of the postpaid leaders Verizon and AT&T. Witness the aggressive new unlimited pricing plans being offered, such as T-Mobile's $70 prepaid unlimited plan and Straight Talk's rather staggering $45 unlimited offer for the iPhone.
Additional spectrum and greater competition are also providing a more welcome environment for MVNOs and flank brands with experimental business models, such as FreedomPOP (freemium model), Solavei (referral fees), and "Wi-Fi first" type plans of Republic Wireless.
Video over cellular. We are going to approach a clash point in 2013. LTE delivers the first true "mobile broadband" service, which means that video and rich media look great over cellular where coverage is good and network capacity is ample (a big qualifier!). But most wireless data plans don't encourage significant use of rich media over cellular (an hour of streamed video is about 2 GB), because of the cost to deliver that data and fears of a capacity crunch.
It will take some innovative pricing models to allow subscribers to regularly stream Homeland over 4G. Examples include paying a "premium" ($1-2) for mobile streaming, either on a per-session or per-content basis, not unlike the surcharge paid in iTunes for the "HD" version of content. We might also see content providers or advertisers subsidize or support "mobile"
viewing. Operators have been putting in place the type of billing, network management, and service delivery capabilities to enable a more dynamic and flexible relationship with respect to video content. Amazon could be a pioneer here, in that it offers loads of free TV and movie content to Prime customers, has experience bundling in the network service as part of the content cost, and already offers 500 MB of free data (a mere "taste!") on some Kindle models.
Content everywhere. I wrote an extensive Lens piece a week ago, essentially rebutting the conventional wisdom that TV is the next industry that is going to be "disrupted." Yes, customers express frustration with the high cost and bundled structure of the cable model, but OTT services such as Netflix, Amazon, Hulu, Apple, always involve some form of compromise or tradeoff in programming options. Cable companies are also preventing subscribers from going OTT by charging artificially high prices for broadband on an unbundled basis. Expect data caps to become more prevalent in cable, as well.
Much of the escalating cable bill is attributed to the downstream effect of skyrocketing rights fees being charged for live sports and other premium content, which is passed on to the network providers in the form of higher per-subscriber fees. Additionally, it is the media conglomerates such as News Corp. and Viacom that insist on the "bundling" that again, ends up being passed down to subscribers. For those expecting Apple to be the "Disruptor," I think it is less likely that Tim Cook will march into the offices of the NFL or Viacom in the way Steve Jobs dictated the new terms for music to Universal, Warner and Sony.
Rather, the TV and video distribution model is likely to be complemented, rather than disrupted, for the foreseeable future. Cable companies, rather than jigging with the price model, are offering subscribers more for their money, as a retention tool: vastly expanded suite of free on-demand programming; complimentary and complementary mobile apps that allow viewing on any device; and, soon, cloud DVR.
Similarly, media companies and content providers are focused on expanding DRM so that once content is purchased once, in physical or digital form, the rights are owned permanently and the content can be viewed on any device. The Ultraviolet initiative is a good example of how this vision is playing out.
Applications. The app economy is going to mature in 2013, with monetization being a major focus. Simply put, there are too many apps--really good apps--that are not making money, especially outside the gaming category. Witness the struggles of Pandora and Yelp.
As a result, we are likely to see consolidation in crowded categories and continued evolution of app business models. Already, we have seen a trend away from purely ad-supported models and toward "freemium" and in-app purchases. But I think we're going to see the emergence of more aggressive and innovative pricing for apps. Specifically:
Good apps will get more expensive. Yes, there will be free and cheap apps at the end of the "tail," but I think "elite" apps that are rich in content and require a lot of money to support and continually update will cease to be free or will simply cost more. Subscription fees, rather than one-of purchases, will become more prevalent.
There will be creative approaches. The Wall Street Journal and the New York Times have been at least modestly successful with their pay wall approaches. But consumers only have an appetite for a handful of these in their content repertoire. As a result, other brands are going to have to get more creative. A good example is Next Issue, which is a joint venture formed by five leading U.S.-based publishers--Condé Nast, Hearst, Meredith, News Corp., and Time Inc.--which provides access to up to 75 magazines on a tablet for one monthly subscription price.
- Enterprise apps. With smartphones and especially tablets growing like gangbusters in the enterprise, we are seeing rapid development of native and cloud-based enterprise applications. The consumer app pricing model is certainly not going to work here, given the historic pricing (and profitability) of enterprise software. The issue is made more complex because it is intertwined with the overall migration to SAAS. This will be a fertile area for business model experimentation and innovation over the next couple of years.
Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.