100X Data Growth vs. 2X Revenue Growth

February 26, 2009 at 3:59 am | Posted in Uncategorized | Leave a comment
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Having established that data traffic is expanding rapidly (see the previous post, Data Traffic Growing Faster Than Revenues) for fundamental, long-term reasons, let’s explore the central business problem: high growth in costs vs. modest revenue growth.

MNOs have turned to data services for revenue growth, recognizing that End Users have largely satisfied their demand for voice communication. As prices fell for a voice minute of use (just as with Long Distance before that), subscribers could afford to purchase more minutes for their dollar, but at a point their demand was sated and they had no desire to consume more.  SMS has certainly provided an unexpectedly large increase in data use, but that is, like voice, largely played out. What next? Since 2001, with the introduction of the Mobile Internet, MNOs have focused on increasing revenue (APRU) by creating attractive data services: browsing, information, entertainment, and new communication services. Now, almost 10 years later, it appears that they have succeeded … and their problem has become, ironically, too much demand.

Data traffic is growing out of pace with revenues. Data is growing at a torrid pace since the introduction of high-speed and high-capacity, 3G networks a few years ago. Many operators have reported aggregate increases in data traffic far exceeding the 100% growth rate that is anticipated for the next 5 years. Revenue has certainly increased significantly, but only incrementally. No consumer is willing to pay 10X their current monthly bill, so the revenue increase is measured in a fractional increase of the current revenue, not multiples, and certainly not tens or hundreds of multiples.

The Danger of Flat-Rate (Unlimited) Service Plans

The main culprit in unrestrained usage is unrestrained service plans: flat rate pricing. Although (like prepaid) these plans are simple for subscribers to understand, and very attractive in avoiding unpleasant surprises, they invite unrestrained use with no marginal revenues. Although consumers are attracted to unlimited plans, the operator is then stuck with a subscriber that is not generating any additional revenue. Eventually, flat rate plans will have to go, or at least be modified and restricted to manage costs and maintain profitability. We can already see caps emerging in mature, fixed, broadband networks, where the access cost is quite low (relative to mobile Internet): Comcast (in the U.S.) has imposed usage caps on high-speed Cable Internet service customers to limit excessive use and eliminate abuse, and ensure that costs do not balloon, so that service and pricing is maintained for normal customers. Flat-rate pricing is unsustainable, leading to unrestrained usage with no incremental compensation.

Flat-rate plans have been very popular with subscribers; Operators have successfully employed flat-rate plans to sign up a wave of new users to 3G data plans.

  • Significant adoption:
    “Vodafone says it signed up 2 million consumer customers to its flat-rate mobile Internet plans in 2007.” [“Mobile traffic boom to revive base station market, Mike Roberts, Informa, 7 July 2008]
  • Mobile Internet is included:
    Vodafone UK includes access to the internet and email on their mobile as an integral part of the monthly price plan. “Every plan will automatically include internet access”(Note: for post-paid customers, not pre-paid) [“Unlimited Internet on New Voda Plans,” Mobile Business Magazine, 7 May 2008]
  • Many operators employing Flat-rate Data Plans:
    “The best examples for flat, mobile broadband offerings can be found in the Austrian market. T-Mobile has launched Fairclick for €25 which includes 10GB data volume on HSDPA. When it comes to content flat fee, again H3G sets currently the top benchmarks. The X-Series which has been launched in the European H3G countries as well as in Australia and Hong Kong, comprises of a wide range of value added services, such as unlimited instant messaging, Skype calls, web surfing and mobile TV via Slingbox streaming.” [Arthur D Little “The World is Becoming Flat,” Technology & Media INSIGHT, 2008]

Whither Flat-Rate Plans?
Flat-rate plans have proven very popular with subscribers, and so they will be difficult for Operators to give up. I suspect that they will be slowly morphed and restricted to allow Operators to charge for some services, especially content and bandwidth-intensive services such as Mobile TV, or person-person video.

Data Revenue Doubling (over 5 years)

Now that the data services are becoming more popular, operators are striving for significant increases in ARPU-perhaps a doubling of average revenue per customer-as demonstrated by the excellent revenue/user of iPhone subscribers. Forecasts suggest that MNOs may see roughly a doubling in mobile data revenues over the next 5 years:

  • “Global mobile data revenues will increase 77% from 2007 to 2012” [Informa, 2008]
    “The traffic boom will be driven by a dramatic increase in the use of advanced applications such as mobile browsing and video-for example mobile video traffic will grow more than thirty-fold by 2012, according to Mobile Networks Forecasts.” [“Mobile traffic boom to revive base station market, Mike Roberts, Informa, 7 July 2008] Annual data services will more than double from $148 billion dollars in 2007 to $347 billion dollars in 2013 [Informa Telecoms & Media, 2008].
  • “Mobile data revenue will double by 2012” [Pyramid, 2008]
    “By our estimates, mobile data will account for 29% of the global mobile service revenue in 2012, up from 19% in 2007. Clearly, the mobile data opportunity is soaring: the 2007 mobile data revenue was more than double what it was in 2004, and we expect it to double again to US$300bn by 2012.” … and 20% of this is SMS in developed markets, 45% in Emerging markets. [“Mobile data revenue will double by 2012,” Dan Locke, Analyst Insight, Pyramid, 4/2008]

Note that this increase in revenue is largely due to IP-based services, not SMS (see figure). “In 2012, in emerging markets, SMS will still comprise 45% of data ARPS in contrast to less than a quarter in developed markets.”

ip-services-vs-sms-pyramid-2008

Operator Solution: Cut Costs

Rampant data use without commensurate compensation? Better cut the cost of the data use, right? That’s exactly what is happening. Operators are looking to reduce the cost of delivering each bit. This problem will not be solved with a single, silver bullet, but will require cost efficiencies in many areas, which is the topic of our next analysis: “Solutions for Expanding Data Usage.”

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