With the wide implementation of HSPA (+) and the first LTE deployments, together with availability of new attractive smartphones, tablets and ultra book, it has become clear that today’s networks and price structure are ill-prepared to meet these new challenges.
From value chain to value circles: the operators’ broken business model
One of the main reasons why the current models are inadequate to monetize video is the unresolved changes in the value chain. Handset and device vendors have gained much power in the balance lately and many consumers chose first a device or a brand before a network operator. In many cases, subscribers will churn from their current operator if they cannot get access to the latest device. Additionally, device vendors, with the advent of app stores have become content aggregators and content providers, replacing the operators’ traditional value added services.
In parallel, the suppliers of content and services are boldly pushing their consumer relationship to bypass traditional delivery media. These Over-The-Top (OTT) players extract more value from consumers than the access and network providers. This trend accelerates and threatens the fabric itself of the business model for delivery of mobile services.
Mobile video is already being monetized by premium content vendors and aggregators, through subscription, bundling and advertisement. Mobile network operators find themselves excluded from these new value circles overnight while forced to support the burden of the investment. In many cases, this situation is a self-inflicted wound.
Operators have competed fiercely to acquire more subscribers when markets were growing. As mature markets approach saturation, price differentiation became a strong driver to capture and retain subscribers. As 3G was being rolled out in the mid 2000’s, the mobile markets were not yet saturated and mobile network operators business model still revolved around customer acquisition. A favourite tool was the introduction of all-you-can-eat unlimited data plans to accelerate customer acquisition and capture through long term captive contracts. As a result, the customer penetration grew and accelerated with the introduction of smartphones and tablets by 2007. By 2009. Traffic started to grow exponentially.
Data traffic was growing faster than expected: AT&T data traffic grew 80x between 2007 and 2010 and is projected to grow another 10x between 2010 and 2015. Korea Telecom traffic grew 2x in 2010, Softbank (Japan) traffic doubled in 2011, Orange France traffic doubled in 2010 and doubled again in 2011. In 2012, mature operators are trying to acquire smartphone users as it is widely believed that the ARPU (Average Revenue Per User) is much higher (nearly twice) than the one of traditional feature phone subscribers.
The cost to acquire these subscribers is important, as many operators end up subsidizing the devices, and having to significantly increase their network capacity.
At the same time, it appeared that increasingly, consumer data consumptions was changing and that the “bandwidth hogs”, the top 1% that were consuming 30 to 40% of the traffic were now consuming about 20%. They were not consuming less, the average user was consuming a lot more and everyone was becoming a voracious data user.
The price plans devised to make sure the network is fully utilized are backfiring and many operators are now discontinuing all-you-can-eat data plans and subsidizing adoption of limited, capped, metered models.
While 4G is seen as a means to increase capacity, it is also a way for many operators to introduce new charging models and to depart from bundled, unlimited data plans. It is also a chance to redraw the mobile network, to accommodate what is becoming increasingly a video delivery network rather than a voice or data network.