Paolini: Don't supply and demand apply to wireless data monetization?

By Monica Paolini, Senza Fili Consulting
We spend a lot of time thinking about monetization--and it is becoming an increasingly frustrating, overused topic. Operators struggle to extract a fair financial benefit from the astounding growth in wireless data services, but--and this is where the frustration comes from--we see many proposals on how to go about monetization that point in the right direction, but concrete proposals, or clear success stories, are few and far between.

In truth, in the past couple of years there has been substantial progress on the monetization front, with operators first acknowledging the need for a more sophisticated (yet not more complex) approach to charging for their data (and increasingly voice) services, and with an increased willingness to test new approaches, especially in more competitive emerging markets.

The tools, the opportunity and the vision are there, but somehow we are stuck. Why? Shouldn't growth in demand and limited supply drive to higher prices (and hence provide opportunity for monetization of the service)?

Let's look at oil prices, currently a hot topic. As for most tradable goods, oil prices depend on demand and supply. As demand, especially from emerging countries grows, and worries about supply levels grow, prices are bound to increase, as they have done lately.

Growth in wireless data traffic is faster than that of oil consumption, and supply is capped by network deployment and spectrum allocation. While investing in new infrastructure, operators are clearly not in a position to increase capacity in the short term at will (or at least not without very deep pockets). This would suggest that the price for wireless data should go up--of course I would not expect that it would happen at a comparable rate or pace than for oil (oil after all is much more fundamental to economic activity that mobile broadband on smartphones), but the trend should be in the same direction. Why is it not?

I am sure there are multiple reasons for this that go beyond the scope of a comment piece, but I started to wonder whether the operators' efforts to protect their networks from overloading by clamping down on subscriber traffic are one of the reasons why monetization efforts are not as successful as the growth in adoption, usage, and overall dependence on mobile broadband would suggest. (I am making the simplifying and possibly controversial assumption here that the ability of mobile operators to monetize their services equates to a price increase for the service subscribers get, as it would increase the revenues from the network resources available).

Could it be that by trying to minimize to the impact of congestion on subscribers and by offering mostly volume-based plans operators reinforce the perception that dominates in voice services that whatever network resources are available they are equally spread among subscribers and that they are already getting the best they can? In other words, there is no equivalent of the upgrade to business class they can hope or pay for when flying?

The point I am trying to make is not the one frequently made about operators being or risking to become a dumb pipe. On the contrary, it is that they may need to be less protective of the pipe, to freely encourage usage growth even though this may mean increased congestion--and hence a risk that the perception of the quality of their network will suffer--even though it is more likely that operators with a good network and hence able to attract more subscribers face congestion. Basically, what would happen if operators let demand grow at a faster pace, while supply keeps growing at the current rate? I am not advocating that they slow down capacity increases or that they do not need more spectrum--they will need to meet the demand for more capacity to keep the market growing for sure.

In most industries this is the standard approach. Let demand for organic milk grow faster than farmers can switch to organic milk production, and prices will go up. In wireless this approach is problematic because of churn considerations (which does not affect the dairy industry in quite the same way). In theory at least, if subscribers notice that congestion is higher in their network, they may switch to a competing operator (in the U.S. market there is no overwhelming evidence that this is indeed the case). This is what we would expect if only one operator were to encourage higher consumption. If they all did the same, the impact on churn would likely disappear.

So what purpose would an even faster increase in traffic load achieve? Because of a tighter supply/demand relationship, subscribers may see more variability in their connections in the short terms, and get a better understanding that network resources are limited. This should give mobile operators the opportunity to differentiate services more successfully than they can do it now, which in turn would enable them not only to charge more demanding subscribers for premium service, but also to more effectively segment the market and to nudge more price-sensitive feature phone users to move to smartphones.

Could it be that by increasing the traffic-load pressure on the network, operators will have the chance to deploy tools like QoS, prioritization, policy, or traffic optimization to a better effect--as they would give subscribers the motivation they need to open their wallets?  And, perhaps even more importantly, wouldn't this give them the edge they need to either compete or to negotiate from a stronger position with OTT players? Higher network utilization means more competition for resources, and operators can successfully prove that the superiority of their offering--e.g., operator-managed VoIP or video, versus its OTT equivalent. This will make OTT players feel the pinch.

Could it be that things have to get worse before they get better?

Monica Paolini, PhD, is the founder and president of Senza Fili Consulting and can be contacted at [email protected]. Senza Fili Consulting is an analyst and consulting firm that provides advisory services on wireless data technologies and services.