Mobile operators are moving towards usage-based pricing models to relieve network congestion and contain the cost of funding next-generation networks, reports Freshfield's mobile group.
Almost half of international mobile executives (48%) predict mobile operators will focus on developing new pricing models over the next three years, with 55% agreeing that tiered pricing is the way forward in mature markets and 47% arguing flat-rate "all-you-can-eat" data tariff plans are damaging their ability to increase revenue, according to a survey commissioned by international law firm Freshfields Bruckhaus Deringer*.
The cost of funding next-generation networks (44%) and ensuring adequate backbone capacity for future traffic loads (37%) are also identified as critical challenges whilst more than 60% believe pricing mechanisms will solve or mitigate the strain on the networks caused by data-hungry devices such as internet-connected smart phones. The move towards usage-based pricing models is predicated on an aggregate increase in data traffic. In mature markets, 37% anticipate application downloads will be a main revenue source in three years’ time, exceeding voice (36%) and video downloads (32%).
Natasha Good, co-head of Freshfields’ mobile group, says, 'Mobile providers are remodelling their pricing strategies to sweat their assets whilst tentatively looking at new product offerings. The telecoms community is tackling a twin challenge: maximising revenue from existing services to protect profit margins and managing the increasing strain on the networks. Usage-based pricing is a logical solution. It will ease current capacity issues by capping demand, contain capital expenditure requirements and potentially increase revenue.
'Pricing models tied to data consumption may be welcomed by regulators, who are increasingly scrutinising how internet traffic is managed. By squeezing demand for bandwidth through pricing, mobile operators are less likely to opt for traffic management tools such as choking the pipeline for users, perceived by some regulators to violate so-called net neutrality objectives.’
The picture on pricing differs in developing markets however, where 78% of mobile operators agree basic voice and data pricing plans are more commercially viable.
With half of all international mobile executives highlighting slow economic growth as one of the greatest risks facing their businesses, combined with higher than expected capital outlays on new networks (28%), the industry continues to pursue cost-cutting measures.
Almost a third (31%) agree network sharing with other operators is the single-most effective way for mobile operators to achieve cost efficiencies. Accelerated deployment of next-generation networks to realise their efficiencies (19%) is also high on the agenda.
'Sharing masts and even the radio access network spreads some of the biggest cost centres across two or more operators. However, sharing mobile operators must be careful not to limit the competitive independence of one another. Regulators will take a dim view of network sharing that goes so far as to impinge on real freedom to compete, especially at a service level.’
The need to maintain competitive advantage is driving innovation, with more than a third of mobile executives (35%) agreeing that expanding the variety of content and services available to users is a critical challenge facing mobile operators over the next three years. Almost 80% of mobile operators agree they will be better positioned to compete by opening their platforms to independent application developers and nearly half (45%) believe they should open their own 'app stores’.
Natasha adds, 'There are clear signs of a shift in industry practice towards greater collaboration. To maintain profitability, avoid being categorised as just a “dumb pipe” and make customers “sticky”, network operators will look to join forces with content providers and application developers.’
The obstacles to driving new revenue streams
Regulatory uncertainty and fears over data privacy are stalling mobile operators’ efforts to expand their service offering. Almost half (47%) say data privacy concerns are hindering their ability to offer third-party applications to customers. Loss of customer data through hacking (43%), absence of security software on handsets (34%) and downloading viruses (34%) are cited as the other main security risks.
'Recent concerns regarding the encryption of Blackberry services show an inherent conflict between the public interest in law enforcement authorities’ intercept measures and the legitimate end-user interest in the security and protection of content. Competent authorities have a tricky balancing act to perform, especially when services are offered from jurisdictions in other parts of the world and will need to seek practical solutions, such as co-operation models’, she says.
'With pricing positioned firmly at the heart of the solution to the mobile industry’s challenges, questions remain over whether consumers will be easily weaned off flat-rate data tariffs and how long mobile operators can stave off the need for investment in new technologies and infrastructure to maintain quality levels for a new breed of data-hungry consumer.’
*The Freshfields 'mobile challenges survey’, completed in June 2010, was conducted among 391 representatives from the mobile industry from 55 countries. The participants included software providers, mobile services providers, mobile network equipment providers, integrated fixed-wireless telecommunications operators, mobile network operators, value-added services providers and content providers.