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Tiered Pricing Just the Beginning of Making Data Profitable

Mon, 11/22/2010 - 7:27am
Andrew Berg

Since AT&T Mobility made the move to tiered data pricing, the other big players have followed suit. The days of unlimited data plans appear to have passed, at least for the moment. Given current tiered data plans, for various devices, being offered by T-Mobile USA, Sprint, Verizon Wireless and AT&T, the going price for a gigabyte of data is hovering right around the $8 to $12 range, depending on how much you actually purchase.

Data is an interesting proposition for carriers. While demand for bits and bytes is through the roof, data still only manages to account for about 20 percent to 30 percent of a U.S. carrier's revenue stream, with the lion's share attributable to voice. That equation signals an industry on its head right now. Sure, data is a valuable commodity for carriers, but it's still an incredibly costly one to produce. Investments in network maintenance, upgrades, as well as the rollout of 4G technologies like LTE and WiMAX, keep data profit margins down. 

That's changing, if a bit slowly. While the concept of doling out data in increments anywhere from 250 megabytes to 5GB per month sets the stage for more granular pricing, additional options are inevitable if carriers are to maximize data ARPU going forward.

Verizon First to Jump

AT&T may have been the first of the major U.S. carriers to the realm of tiered pricing, but Verizon Wireless remains the king of data in the United States and globally.

According to Chetan Sharma Consulting, Verizon Wireless narrowly maintained its No. 1 ranking for the first half of 2010 in terms of the operator with the most mobile data revenues. The first quarter of 2010 was the first time Verizon Wireless had edged out Japan's NTT DoCoMo for the top spot in data revenues.

In an effort to maintain its lead, Verizon recently confirmed to The Wall Street Journal that it's mulling speed-based data plans, pointing to current fixed broadband plans as a model for this kind of wireless data pricing.

"If you want to pay for less speed, you'll pay for less speed and consume more, or you can pay for high speed and consume less," Verizon CFO Fran Shammo said in an interview with the Journal.

The comments made Verizon Wireless the first U.S. carrier to publically discuss selling data on anything more than a purely volume-based model, and it undoubtedly will not be the last. While Verizon hasn't announced anything concrete, most believe that this is just the tip of the iceberg as carriers try to figure out ways to make it profitable.

Customer First

While the carriers are rambling on about how many terabytes are being pumped through their pipes, as well as boasting about just how fast all those bits are flying around the country, it's a fact that the end-user on the whole really doesn't understand or care to understand the difference between 250 megabytes or 5 gigabytes.

Susan Welsh de Grimaldo, director of mobile broadband opportunities for Strategy Analytics, says that increasingly nuanced pricing is the wave of the future, but customer understanding cannot be overlooked.

"Even inside of voice pricing, we're starting to see some segments of users who want just a handset plan, but they want a data-centric plan and voice becomes the add-on," Welsh de Grimaldo says.

Taken one step further, she says that operators could bring data down to prepaid hourly units. "If they have excess capacity on the network, they could push out some sort of notification for those people that have opted in and say, would you like a certain amount of video content over the next few hours, if so just click here to sign up."

As users acquire multiple devices, the carriers are increasingly incentivized to keep that customer. Welsh de Grimaldo says that simplicity may be one driving factor for consumers to stay with one carrier for all their devices. 

"I think we'll continue to see a range of business models, where carriers say, 'If I can keep this person with multiple devices on a single-bill format, there's great value in that,'" she says.

But the real problem for carriers right now is educating the consumer on what all the bits and gigabytes mean. "After talking with AT&T, I think their perspective right now, particularly with doing these no-contract plans, is that people don't really understand their usage levels. So these no-contract plans and caps are really a process of educating the consumer on how much data they are using so they can start to think about how much they need on each device with a little more accuracy," Welsh de Grimaldo says. 

While network intelligence is an incredible tool for carriers, Welsh de Grimaldo says that in the immediate future, carriers need to focus on the basics. "I think network data and optimization are tools that can be used, but I think the catalyst will really be how the operators position their services to the consumers," she says.

Smart Pipes a Catalyst for Smart Plans

Randy Fuller, director of business planning for Tekelec, a company that specializes in the kinds of network intelligence systems that make things like tiered pricing possible, agrees that carriers globally are on the move to shake up the way consumers think about and pay for data.

"We see a lot of variability in terms of what 'tiers' mean," Fuller says. "The AT&T method is strictly a billing thing... but in Europe, Russia, certain parts of Latin America, we're seeing a lot carriers bumping customers' bandwidth down if they go over their data cap."

Fuller notes that T-Mobile in the United States has just implemented a similar strategy, which reduces a customer's bandwidth if they go over 5GB of data for a month.

"The other thing that we're seeing in emerging markets is service-specific plans. For instance, some carriers are saying, 'Well, you can use all the email you want, but only a certain amount of Web browsing,'" he says.

Fuller says that there's no doubt that operators want to give users as much usage as possible, but he says that has to be in line with their network budgets. In the end, he says, carriers are trying to serve up data portions for all different kinds of appetites, capturing not just the techno-geek but also the person who may want to do nothing more than check their email.

"A lot of what's happening is trying to use the terms and conditions of these price plans to place incentives for different classes of users." 

Data Is the Future

In the paper, "Managing Growth and Profits in the YottaByte Era," Chetan Sharma Consulting stressed that carriers need to sufficiently plan for the "data tsunami." The paper states that 4G will not be enough to accommodate demand going forward, suggesting that an amalgam of new business models, technology solutions such as femtocells, congestion management, optimization and new types of devices will be a necessity if carriers are to manage data growth without a negative impact on their profits.

The report goes so far as to recommend that smartphones be further segmented. The report offers that more app-centric phones targeted towards specific consumer sets are in order. By building a phone around apps, carriers can do away with the browser and still provide users with a tailored experience that is optimized to conserve bandwidth but still deliver a satisfying experience.

Chetan Sharma predicts that the wireless industry is about to change in such a fundamental way that the very measurements by which Wall Street gauges growth will be ratified. Instead of focusing exclusively on ARPU, Wall Street will start watching average margin per subscription (AMPS), average connections per user (ACPU), as well as customer and family lifetime value that maximizes profits across all connections that a family or the user has. Instead of promoting family minutes, carriers will promote family terabyte plans where one can bundle usage across multiple devices used by a family.

There's no doubt that data will continue to be king for the foreseeable future. In the second quarter of 2010, the U.S. wireless data market grew at an estimated 22 percent over last year to exceed $13.2 billion in mobile data service revenues. That's on track to meet initial estimates of $54 billion for the year. Voice revenues are expected to top out at right around $100 billion for the year. Chetan Sharma estimates that data revenues won't eclipse voice revenues until 2015.

While that may sound like it's a ways out, carriers have to be feeling the heat and these latest moves to tiered pricing strategies are just one facet of how they hope to level the disparity between data demand and profits.

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