Flat rate is dead: What’s next for operator business models?

Operators are scrambling to solidify a position in the value chain of mobile broadband. One important driver for this, as every presentation in the industry shows, is increased demand and, in particular, flat revenue relative to that demand.

 

Operators are scrambling to solidify a position in the value chain of mobile broadband. One important driver for this, as every presentation in the industry shows, is increased demand and, in particular, flat revenue relative to that demand, writes Christopher Hoover.

 
We’ve all seen the graphs where demand increases up and beyond revenue and the cost curve hovers ominously above that. In spite of that over-familiarity, this is indeed an important issue in the industry and much conversation has rightly been had regarding what to do about it.
 
Typical solutions revolve around resource control, such as throttling or usage caps. A basic assumption with these solutions is that users are interacting with the internet just as they always have, but more so. However, this isn’t true. How people use the mobile internet is changing.
 
Consider that in 2008, browsing commanded 80% of facetime – the amount of time users spend interacting with a particular service. In just two years, that shrunk to only 50%. Most conservative estimates show that mobile application store revenue will grow to $15 billion over five years. This trend is accelerating, with 3.8 billion applications downloaded in the first half of 2010 – making it on track to double the metric from 2009 of only 3.1 billion for the whole year.
 
In short, applications are moving rapidly to replace the browser as the dominant driver of mobile internet access. People don’t use the browser to read the New York Times, engage via Twitter or socialise on Facebook, they use the respective apps. Indeed, the concept of general internet access is less and less meaningful. This is important because applications enable context sensitive business models and these models provide a flexibility that’s key to addressing the cost/revenue gap.
 
Implications for operators
 
Applications enable convergence—they enable easier management so that cross platform consistency can be more easily achieved. A good example of this is how cable operators in the US are using applications to enable delivery of media between platforms. The application can query profile and entitlement information maintained within the operator and ensure a well understood and consistent technical environment between devices, such as codecs, for media delivery.
 
Another important implication is that applications make flexibility – in terms of charging and policy – much easier. Instead of indirect analyses of packet flow to enable application-aware policies and charging, this awareness is available from applications by definition. The application simply tells charging and policy systems about itself directly, through an interface such as Rx.
 
Moving beyond service awareness, applications can enable policies and charging rules to be applied based on how that application is being used. For example, charging methods can change if a user selects premium content in a movie streaming application. QoS variables may be changed based on promotions defined by the content provider and delivered through the app. Policy and charging can both change if a VoIP application adds another participant, a video component or exchanges a file.
 
In addition, enterprise-specific value can be provided via application context. Corporate users don’t want to have to carry around two phones and segmenting personal and business use of one device is much more easily accomplished with an application aware network. Operators have the ability to offer enterprise users the option to use their personal smartphone as a business device, without any party worrying about potential fraud. Usage of applications like SalesForce.com or Google Documents can be recognised and billed to the corporate account, while designated consumer-facing apps like Pandora and Moviefone would be addressed on the personal bill.
 
A final, obvious implication is that to capitalise on any of these opportunities, there needs to be a robust interface defined between the application layer and the operator’s policy and charging infrastructure along with a deep integration between those infrastructures.
 
Contextual pricing
 
Currently, operators have three data charging model frameworks from which to choose: unlimited plans, usage-based pricing or context-based pricing. While unlimited plans are well known to the public at large and usage-based charging is easily understood as a pay-for-what-you-get model, application- aware networks could enable context pricing for network usage that benefits customers beyond what we have seen in the market to date.
 
For example, if a customer is primarily interested in Facebook and Twitter, a plan could provide inexpensive all-you-can-eat usage of those applications. Applications can be priced based on usage context as well. For example, a movie streaming application may be sold free, with unlimited data consumption, with the caveat that usage be restricted to off- peak hours. Alternatively, the same application may also be available in a premium version that supports peak hour usage.
 
The point is that flat-rate or consumption- based pricing provides insufficient flexibility for both the customer and the operator, to the detriment of both parties. Similar flat-rate and consumption-based plans across operators stifle competition and peak period congestion remains an issue, affecting customers and operators alike. Congestion management options are constrained and are less effective than is otherwise possible. However, if customers stand to realise significant savings by choosing to use an application off peak, traffic periods would shift and subscribers would pay less for better performance. Everybody wins.
 
What comes next?
 
If comprehensively and understandably deployed and disclosed, pricing models with a contextual basis for charging present the best way to improve the experience for the large percentage of users, while fairly and appropriately monetising content, it’s a tremendous opportunity for operators to give their subscribers clear, common-sense pictures of how traffic moves over the network. They can then enable customers to tailor their own usage however they desire.
 
In addition, devices like the 3G iPad have changed the game in terms of how content is being accessed and by whom. For devices with a selling point of being inherently multimedia rich, users here will be even less tolerant of poor service quality. Devices like these demand built-in prioritisation if carriers want to deliver on these expectations consistently and with the applications users care about.
 
From a consumer’s perspective, the beautiful thing is that operators don’t have to violate net neutrality rules when prioritising – operators can look at their data and know that YouTube, for example, is the most frequently accessed application over a tablet device and flag it for high-priority access.
 
 
Evaluating and prioritising based upon the context of usage is just a first step in creating a new breed of mobile data billing. By maintaining the status quo, operators simply aren’t making the most of their network investments and both operators and subscribers suffer. Contextualising usage enables flexibility, increases competition and benefits all stakeholders. While these methods could be employed in a variety of degrees, operators that take context into account are undoubtedly much better positioned to give their subscribers the experience they want.
 
 
Chris Hoover, vice president of product management, Openet.
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