The drying up of SMS and voice revenues is hastening the need for carriers to radically reinvent their businesses. As the industry plunges headlong towards an all-IP network environment, data and the way it's priced and packaged is arguably all that's left if major entities like Verizon and AT&T are to meet Wall Street’s expectations of continued growth.
While Verizon's Lowell McAdam touts video as the cornerstone of his company's wireless business, AT&T's chief executive Randall Stephenson told investors at a conference recently that we should expect to see new business models emerging around data in the very near future.
"At the end of the day, if you don't allow those kinds of models to flourish, you're going to inhibit the use of these networks," Stephenson said, noting that he expects to see content providers subsidizing data for their users within the next 12 months.
Shared data plans represent the first sparks of revolution that will change how the entire wireless ecosystem thinks about data. Already McAdam and Stephenson are changing the metrics by which they measure success, heralding the age of Average Revenue per Account (ARPA), as opposed to the almighty Average Revenue per User (ARPU) number.
This shifting paradigm renders visible the delicate, if at times conflicted, relationship between carriers, content providers and consumers.
While carriers push high-bandwidth applications to drive data usage, they're also trying to figure out how to manage all that traffic on their spectrum-strapped networks. Meanwhile, consumers want to watch that Netflix video on their LTE-capable tablet, but their unlimited plan just got yanked out from under them, so they're watching their usage the way some people watch the thermostat in January.
If you don’t believe that an exponential increase in data in the coming years will require radical innovation on both the business and technical sides, consider that T-Mobile reports video traffic represents nearly half of the traffic on its HSPA+ network, and adoption of the carrier’s T-Mobile TV service increased by more than 700 percent just last year!
Getting Smarter Behind the Scenes
If new business models are needed, then rollout of intelligent IP-based LTE networks are a huge boon for carriers. The next-generation networks being deployed today will allow consumers to carve out their own, personalized plans that will accommodate optimal delivery of those services and content that they use the most.
Michael Crossey, vice president of marketing for Aepona, a company that specializes in monetizing cloud and network services, says content providers are on the verge of myriad new options for their businesses.
“What we’re seeing is a situation where rather than have the operators control the ecosystem, and having the operators deliver the video services to their own subscribers, instead the operators can actually play more of a brokerage role between the content provider and the end user,” Crossey says.
It’s all made possible by exposing network APIs that allow content providers to programmatically request things like additional bandwidth or gradations of quality of service from the operators.
These new options can also create a better user experience. Carriers can use contextual information available to them, such as what device or type of connection a user is on, to create parameters around delivery of certain content.
“So for instance, you might not let a video download if the network recognizes that the customer is roaming,” Crossey said. “There’s a whole lot of information the carrier can mine to improve the user experience.”
Crossey says that while the death of unlimited plans could mean that some users will pay more for data, more sophisticated networks will increasingly ensure that users only pay for what they want or need. He says it’s imperative that operators have new tools and revenue streams for everyone’s sake. Without those things, Crossey says operators have no incentive to maintain and improve the networks.
“The over-the-top video is one area where they can start to recoup some of that investment,” Crossey says. “They can make an argument to the content providers that, 'We can give you best-effort delivery, or for your premium customers we can give you a guaranteed quality of service, and you can offer different tiers.’”
From there, the content provider has the option to pass that cost on to its users or it may decide to offer advertisers a spot for high-quality video sessions.
“Operators want to see a lot more options in terms of the business models they can apply, and they have to work with content partners in a collaborative way to determine those business models and give them the flexibility to deliver video services that are targeted towards their own customers according to how their customers pay for them,” Crossey says.
Can You See Me Now
While the carriers are finally realizing a path forward around data pricing, it's an interesting fix that consumers find themselves in these days. At the same time that operators are phasing out unlimited data plans, end users need more bandwidth to fuel their quad-core phones, which in turn run increasingly media-rich applications. From streaming content to video calling, bits and bytes are turning into $10 gigabytes faster than ever.
Eric Setton, founder and chief technology officer for video calling service Tango, says that the move to an IP-based world has been a positive one for his company. Setton says Tango is exactly the kind of application that carriers want to promote. In fact, Verizon Wireless has been preinstalling the app on its phones, and promoting the service in its stores and campaigns.
"Indirectly, if we generate more revenue for the carriers then that's great for us, because that means we can attach ourselves indirectly to a new revenue stream for the carrier," Setton says.
But Setton says that far from subsidizing its subscribers’ bandwidth, he sees the inverse happening.
"Some of the discussions with carriers that we've had have to do with revenue sharing on the data side. If we can show that we're pushing consumers to adopt higher end plans, if we can actually be compensated by the carriers because we're actually helping grow the pie, that's pretty interesting," Setton says.
Setton says that high-bandwidth over-the-top (OTT) offerings like Tango are already offering carriers ways to create new revenue streams, referencing efforts in Europe to define particular plans for people that want to use certain services. For instance, a carrier might require a user to pay extra for a VoIP plan if they want to use VoIP services.
But does consumer awareness of data usage mean they'll start searching for a Wi-Fi network before making that call over 4G? Setton says Tango is seeing the exact opposite.
"On the 4G side, the connection might actually be better than what you have at home...I think it's a testament to the quality of the networks right now. The consumer wins in that case, because if they don't even have to be thinking of that and that the phone just works wherever they are, I think that's better. People tend to be willing to pay for peace of mind," he says.
Tango has never grown faster than it is right now, Setton says, and he attributes at least part of that to better networks which offer better quality of service. In just 18 months, Tango has managed to bring 55 million users into the fold.
"Yeah, I'd say people are picking up on video calling," he says.
What’s a Gigabyte? What’s a Megabyte?
Perhaps key to the operators managing to make the switch to an all-IP world is educating customers on the value of bits and bytes. How many consumers know what portion of their data plan is gobbled up by a 10-minute YouTube clip? An hour of Pandora? A feature-length movie on Netflix?
Most carriers have data usage calculators on their websites so that their customers can figure what plan is right for them. Still, it’s a guessing game for many new smartphone customers.
When consumers don’t understand what they’re paying for, user experience tends to suffer.
“The big problem is what I call, ‘What is a megabyte?’” says Guy Rosen, CTO of Onavo, a company that makes a data compression app for iOS.
Rosen says that big changes in how carriers sell data have brought the issue of data usage to the forefront.
“Consumers understand 1000 voice minutes, as well as 1000 text messages, but when it comes to a megabyte, there is still a lot of confusion,” Rosen says.
Onavo is pretty simple app that can be downloaded on iOS devices. There’s also an Android app but it doesn’t compress data, although Rosen said there’s one in the works. The app basically identifies other apps on the phone and condenses the amount of data they use in a cloud that sits between the user and the network. It also educates users on which apps are using the most data, as well as how much data Onavo is actually saving the user.
Rosen says operators, as well as consumers, are in a fix. While he admits that there’s still a long way to go before voice moves entirely to IP, there are plenty of OTT messaging providers that are cannibalizing SMS revenues.
"I mean as an iMessage user, you don't even notice that anything has changed. Do the same for voice and that's what's going to happen there as well," Rosen said.
When asked whether Onavo gets any flack for cutting into carrier revenue by reducing the amount of data a user consumes, Rosen says his company is a good example of the kind of conundrum in which the operators find themselves. More data usage means more revenue, but it also means a more congested network.
"The carriers actually have several different agendas. The reason all of this is happening is that the operators are really straining under the load of all this data congestion. And so, in reality, anything that helps reduce the amount of data is actually very welcome,” he says. “They are eagerly searching for anything that can help lighten the load and free up their networks."
Rosen agrees with McAdam that video is going to be huge, but he says it’s a lot bigger deal for the carrier who has to manage a network than it is for the end users.
“When you're an operator and you look at your network and you see a lot of video, you don't care whether it’s a small number of users or a whole bunch of users,” he says. “As a consumer-oriented company, we look at the individual user. Yeah, sure, there are a small number of users who watch more video, but the vast majority are a lot more moderate in their usage than you would think."
Roger Entner, founder of Recon Analytics, acknowledges the pressure on carriers to increase revenue and describes the challenge of finding a balance between simplicity and innovation. He says that in an ideal world, data prices would change by the second depending on how much demand is on the cell site, but that in the end, consumers hate complexity.
“Wireless carriers would love to sell unlimited price plans,” Entner says, “because consumers love to have unlimited and are paying a premium for unlimited over what they actually need, simply to take that worry away.”
Unfortunately, pricing data has never been a simple task for carriers. Price plans are pretty sticky, Enter says, noting that most major carriers have “thousands of price plans active in their system” because customers pick a plan and don’t change.
“Selling data by the gigabyte is currently the best compromise. It’s not as simple as unlimited, but it’s the best we’re going to do right now,” Entner says.
On the innovation side, Enter argues that content providers subsidizing data really isn’t quite as radical an idea as it’s made out to be. Kindle owners are already seeing this model in action every day, they just don’t think about it. Every time they download a book, the carrier gets a few cents from the download, the data for which has been subsidized by Amazon.
Entner says that things do get a little interesting when you take a look a subscription services.
“So let’s say you have an NFL subscription, and you have the choice between paying $7.99 a month and everything you stream comes out of the data package, or you pay $9.99 a month and it doesn’t. If you’re watching a lot of games, the $9.99 is probably the better choice. If you’re watching only a few games, the $7.99 is probably the better choice,” Enter says.
In end, Entner emphasizes the learning curve inherent in an all-IP world.
“Progress is not always free. People have to get used this idea that what they have in their hand is an extremely powerful device,” he says. “I used to say that the smartphones of today are more powerful than the computers we used to send people to the moon. Today it’s probably more accurate to say that just that little app that runs in the background and gauges your battery life is probably as powerful as those computers.”