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Research report

Strategies for mobile broadband pricing and packaging


Matt Hatton October 2008

Research from Analysys Mason


Fixed Networks and Services
Analysys Mason Fixed Networks and Services online market intelligence service Business data services in Europe: market drivers and forecasts 20082013 Multi-play services in Western Europe: market sizings and forecasts 20082013 Central and Eastern European fixed telecoms: market sizings and forecasts 20082014 Pay TV in Western Europe: market sizings and forecasts 20052013 Legacy matters: ensuring a soft landing for TDM services Regulatory headaches in the transition to nextgeneration networks Next-generation network architecture: what and when? Success factors for hosted and managed VoIP in Europe Western European fixed telecoms: market sizings and forecasts 200413 How to succeed with fixedmobile convergence Quadruple-play bundling strategies The acceleration of fixedmobile substitution in Western Europe: facts and figures Mobile broadband: another substitution threat for fixed operators? The Western European mobile market: trends and forecasts 20082013 Wireless broadband forecasts for 20082015: HSPA, HSPA+, EV-DO, LTE and WiMAX Mobile proximity payments: scenarios for market development iPhone shows the way for mobile TV Critical ingredients of mobile TV: femtocells and sideloading Mobile media and entertainment in Western Europe: value chains and business models The business case for picocells and femtocells in the enterprise market Mobile media and entertainment in the US: value chains and pricing models Femtocells in the consumer market: business case and marketing plan The mobile advertising and marketing revolution

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Contents
0 1
1.1 1.2 1.3 1.4

Summary Mobile broadband is not one product, but many


Devices: USB modems will continue to dominate MNOs will find it difficult to differentiate their offers in terms of network coverage and capacity Customer usage requirements will vary considerably MNOs should sell mobile broadband as part of a wider service portfolio

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2.1 2.2 2.3 2.4

Effective pricing depends on segmentation


A range of tariffs is best Pricing to suit for the market conditions Pricing for DSL replacement guarantees adoption Affordability is key, rather than value for money

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20 21 22 23

List of figures and tables Table 1.1: Figure 1.1: Table 1.2: Table 1.3: Table 2.1: Table 2.2: Table 2.3: Figure 2.1: Figure 2.2: Mobile broadband devices as customer acquisition tools Evolution path of UMTS Broadband application usage (per user, per month) Benefits of femtocells for voice and data services Sample mobile broadband offers in Italy, August 2008 High-level mobile broadband user segmentation Suitability of mobile broadband tariffs to address user segments Impact of mobile broadband premium on market share Monthly spend on broadband 3 4 6 8 12 13 13 16 17

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Contents

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Strategies for mobile broadband pricing and packaging

Author Matt Hatton (Principal Analyst) joined Analysys Mason in July 2008. Matt has over ten years experience at the cutting edge of telecoms strategy research and consulting. His career in the industry has included five years as a Senior Analyst and Program Manager with Yankee Group and, most recently, work with Hutchison 3G UK (3 UK) in a market intelligence and strategy role. His focus areas include mobile broadband, subscriber acquisition and retention, retail strategies and value-added services. Matt has an MSc in Telecommunications from University College London and a degree in Geography from Queen Marys College London.

Acknowledgements The author would like to thank all those who assisted in the preparation of this report, particularly Mark Chambers and Sarah Peake for editorial support.

Disclaimer Figures and projections contained in this report are based on publicly available information only and are produced by the Research Division of Analysys Mason Limited independently of any client-specific work within Analysys Mason Limited. The opinions expressed are those of the stated author only. Analysys Mason Limited recognises that many terms appearing in this report are proprietary; all such trademarks are acknowledged and every effort has been made to indicate them by the normal UK publishing practice of capitalisation. However, the presence of a term, in whatever form, does not affect its legal status as a trademark. Analysys Mason Limited maintains that all reasonable care and skill have been used in the compilation of this publication. However, Analysys Mason Limited shall not be under any liability for loss or damage (including consequential loss) whatsoever or howsoever arising as a result of the use of this publication by the customer, his servants, agents or any third party.

Contents

Analysys Mason Limited 2008

Strategies for mobile broadband pricing and packaging

Key to acronyms
3G DSL GB GHz HSDPA HSPA+ HSUPA KB kbit/s LLUB LTE MB Mbit/s MHz MNO PAYG PC PCMCIA Third generation Digital subscriber line Gigabyte Gigahertz High-speed downlink packet access Evolved high-speed packet access High-speed uplink packet access Kilobyte Kilobits per second Local loop unbundling Long-term evolution Megabyte Megabits per second Megahertz Mobile network operator Pay-as-you-go Personal computer Personal Computer Memory Card International Association USB W-CDMA Universal Serial Bus Wideband code division multiple access Wi-Fi Wireless Fidelity

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Contents

0 Summary
MNOs should take a highly segmented approach to pricing and packaging mobile broadband offers, in order to meet the needs of consumers
The number of mobile broadband subscribers has increased spectacularly in Europe during 2007 and 2008.1 In some countries, mobile broadband accounts for over 20% of broadband connections and this proportion is growing. Because mobile broadband is a relatively commoditised service, pricing is vital to the success of MNOs customer acquisition strategies. This report considers the wide range of products and services that MNOs treat as one unit: mobile broadband. It then examines pricing strategies and provides recommendations to MNOs on how to shape their pricing to suit such a diverse range of products and customers during this critical subscriber acquisition phase. As a result of our research, we have identified ten key pricing actions that MNOs should consider when creating a pricing structure.

Recognise that there is not just one mobile broadband product. Mobile broadband users are a diverse group with different requirements. Use a granular pricing segmentation to reflect the different ways in which people use the service.

For the purposes of this report, a mobile broadband subscriber is one who pays to access the Internet on a PC or laptop using a USB modem or a datacard. It excludes mobile subscribers who access the Internet on their handsets, and those who use the mobile handset itself as a modem for access on PCs or laptops. This definition is used increasingly in the industry, and serves to distinguish the sort of service that competes directly against fixed broadband. The definition does not stipulate minimum access speeds, although typically these services provide at least W-CDMA Release 99 (3G) access where available.

0: Summary

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Strategies for mobile broadband pricing and packaging

Apply fair-usage limits and penalties in order to discourage people from overusing unlimited packages. In fact, unlimited plans should be discontinued. They do not allow for a very segmented approach, particularly if fair-usage limits of 35GB per month are applied, as we have seen in many countries. Make larger data bundles available for higher spending users. Users who are intending to replace their DSL connection may demand a data download allowance of more than 10GB per month. MNOs should assemble high-cost packages to accommodate these users, rather than forcing them to change their usage habits or charging them. MNOs should set prices that suit them and the market conditions, regardless of what their competitors might do. Give users the opportunity to try services before they buy them. Network coverage and capacity should be differentiation factors, but subscribers do not necessarily trust the figures that they are quoted. They must be allowed to test the user experience. MNOs should be cautious about including laptops with mobile broadband subscriptions, because there is a risk that they will be tempted to subsidise the devices, which would increase acquisition costs and churn. Be sure to provide customer support. Because laptops are more complex than mobile handsets, MNOs will receive more customer-care enquiries. Look at ways to differentiate the offering, whether through bundling, cross-selling, value-added services or access to Wi-Fi hotspots. Increasingly, MNOs will include DSL with mobile-broadband offers where possible. All MNOs should be prepared for that.

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0: Summary

1 Mobile broadband is not one product, but many


The first step in determining a pricing strategy for mobile broadband is to define mobile broadband. Commentators and most critically MNOs tend to consider it as a single product, but wide-area broadband connectivity can be applied to many diverse use cases, from a heavy home broadband user to someone who only uses mobile broadband occasionally. It is critical to consider the diversity of the addressable market when packaging mobile broadband. MNOs seek to address their voice and text users with a diverse range of plans, and should do the same for their mobile broadband customers. A one-size-fits-all approach to pricing will be unsuccessful. The need to diversify the pricing models can partly be explained by the complexity of the offer. There are multiple elements in the value proposition, which need to be combined and priced correctly in order to optimally address user demand. This chapter examines the elements of the value proposition.

1.1 Devices: USB modems will continue to dominate


Users who want mobile broadband are presented with three device options. A fourth option will be introduced imminently. The four options are as follows.

USB modem. A dedicated device, frequently referred to as a dongle, which plugs into the standard USB port of any desktop or laptop PC. The device can be shared between multiple PCs simply by unplugging it from one and plugging into another. The availability of USB modems has stimulated the increase in the number of mobile broadband subscribers, because these devices are more user-friendly than the PCMCIA cards that dominated the market before 2007. Their user-friendliness has significantly improved the user experience of mobile broadband services and reduced the customersupport costs for MNOs. Mobile phone as a modem. This takes advantage of the increasing number of HSDPAcapable phones. If phone users buy mobile broadband from their MNOs as a supplement to their existing voice contracts, they can then connect their laptop to their phone (via Bluetooth or a USB cable) and use their phones high-speed data connection to the radio access network. This should not to be confused with subscriptions for mobile Internet connectivity on the handset itself. To date, few MNOs have taken advantage of the

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1: Mobile broadband is not one product, but many

Strategies for mobile broadband pricing and packaging

opportunities presented by this option. This product has significant weaknesses compared with the USB modem. The phone is not powered by the laptop and must, therefore, rely on its limited battery life. Furthermore, it is difficult to share a mobile phone modem between multiple users and multiple devices and the need to synchronise devices detracts from the user experience. It does have the advantage that subscribers do not need to pay for, or carry around, a separate modem.

Laptop bundled with subscription. Increasingly, MNOs are including laptops with USB-modem subscriptions, allowing customers to spread the cost of their device over the duration usually two years of the contract. This offers some benefits to MNOs in terms of extending the addressable market. However, there are two risks associated with this. First, that MNOs will gradually move from bundling the laptops to subsidising them, with all its financial implications. Second, MNOs are likely to be faced with additional customer service obligations.2 Laptop with embedded mobile broadband. The next step on from laptop bundling is to embed mobile broadband in the laptop, removing the need for a separate USB modem. This model has substantial weaknesses. It makes it difficult for users to combine their laptops with the contracts that they want. It makes upgrades (for example to HSPA+ or LTE) difficult, because the radio is embedded in the device. In contrast, USB modem users can simply replace an older version with the next generation of modem without the need to buy a new laptop. It is unlikely that users will accept the limitations of these devices unless they are substantially subsidised.

The USB modem is a highly effective means of addressing most market segments, as shown in Table 1.1. Its disadvantages are modest when compared with some of the weaknesses of the other products.

For more information about the implications of including laptops with mobile broadband subscriptions, see the market trends paper Hatton, M., MNOs must be wary of bundling laptops with mobile broadband, Analysys Mason (Cambridge, 2008).

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Table 1.1: Mobile broadband devices as customer acquisition tools [Source: Analysys Mason, 2008]
Benefits for end users USB modem Easy to share between different users/devices Easy to upgrade (for example, to HSPA+ or LTE) Compatible with PCs Mobile phone as modem No up-front dongle charge Suitable for cross-selling discounts Most users always have their mobile phones with them Laptop bundled with subscription Payment for laptop is spread over the duration of the contract Modem is easy to share between different users/devices Modem is easy to upgrade (to HSPA+ or LTE) Embedded laptop Payment for laptop is spread over the duration of the contract Lower additional cost than a bundled laptop (probably) Difficult to share with multiple users Difficult to switch operators Extra cost per month Upgrade path to HSPA+ and LTE is unclear Must own/buy laptop Difficult to share with multiple users/laptops Battery life is limited Extra (EUR1530) cost per month An additional device to plug into laptop Drawbacks for end users Must own/buy laptop An additional device to plug into laptop

1.2 MNOs will find it difficult to differentiate their offers in terms of network coverage and capacity
Network coverage and capacity are fundamental to the appeal of the mobile broadband value proposition. Patchy coverage and low speeds will limit the appeal of the service. Much of the recent success of mobile broadband can be credited to improvements in the access network. Most MNOs in countries with developed economies have expanded their 3G networks to cover 70% or more of the population. In some cases, more than 90% of the population is covered. Because mobile broadband is predominantly a nomadic service, adoption will be closely linked to network coverage in specific locations. Many users will not buy a service that does not cover the key locations, for example the home or the office. At 90% or more, coverage is reaching a point where it is no longer a barrier to adoption. During the past two years, MNOs have also been upgrading their 3G networks to increase capacity. Capacity depends on two factors: available spectrum and technology.

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Strategies for mobile broadband pricing and packaging

In many countries, opportunities are arising for MNOs to acquire more spectrum for data services, for instance auctions of spectrum in the 2.6GHz band and so-called digital dividend spectrum released by the switch-off of analogue TV. Furthermore, MNOs and regulators in many countries are looking at the issue of refarming 900MHz spectrum so that it can be used for UMTS. Buying more spectrum will allow MNOs to improve capacity in terms of the number of subscribers they can support, but it will do little to alter the headline speeds that services can achieve. Most MNOs in Europe have deployed HSDPA and are starting to roll out HSUPA. HSDPA offers maximum speeds of 14.4Mbit/s, although most MNOs have deployed a 3.6Mbit/s variant with some upgrading to 7.2Mbit/s. Furthermore, MNOs will want to upgrade their networks to HSPA+ and LTE in the near future. Some MNOs deployed HSPA+ in the second half of 2008, although we do not anticipate substantial roll-outs until 2009 at the earliest, as shown in Figure 1.1. The first LTE-compatible dongles will be available in late 2009, but it is unlikely that MNOs will upgrade the core and radio networks to be compatible with LTE until 2010.3

Figure 1.1: Evolution path of UMTS [Source: Analysys Mason, 2008]


2003 WCDMA Release 99/4 DL: 384kbit/s UL: 384kbit/s 2004 2005 2006 HSDPA Release 5 DL: 14.4Mbit/s UL: 384kbit/s 2007 2008 HSUPA Release 6 DL: 14.4Mbit/s UL: 5.76Mbit/s 2009 HSPA+ Release 7 DL: 42Mbit/s UL: 11.5Mbit/s 2010 LTE Release 8 DL: 45Mbit/s UL: 13Mbit/s 2011

Data rates are an important factor for subscribers when deciding which MNO to select for mobile broadband. However, there is a disparity between what MNOs claim about theoretical network speeds and end users experiences. Media comparisons and blog comments indicate that different users have radically diverse experiences with the same products. Much of this is attributable to local environmental conditions that may improve or degrade services. It is questionable how much credibility subscribers give to MNO claims. Most MNOs have broadly the same capabilities and coverage, while the user experience will vary substantially depending on local factors. As a result, MNOs will not gain much if they try to differentiate their services on coverage and quality. MNO claims can guarantee that people will consider subscribing, but will do little more than that. In recognition of the varying quality of service and the lack of trust in MNO claims, MNOs must let subscribers

For further discussion of the technical evolution of radio access networks, see Brydon, A. and Heath, M., 3G Network Evolution from 2007 to 2012: HSPA+, LTE, WiMAX and femtocells, Analysys Research (Cambridge, 2008).

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try the service before they buy it. MNOs cannot communicate accurately what the user experience will be like for a given service, so users must be allowed to experience it for themselves. Although coverage and capacity are not significant differentiating factors, it is obviously important that MNOs continue to increase the data rates on their networks. At the moment, all HSDPA offers are similar in terms of data rates. However, when an MNO starts to gain a reputation for having better network speeds or capacity, MNOs that have fallen behind will find it difficult to compete.

1.3 Customer usage requirements will vary considerably


The final area that is fundamental to the mobile broadband products value proposition is the size of the data allowance that is included with the subscription. The amount of network traffic generated by mobile broadband service users will vary significantly depending on the applications used. Applications include the following.

Web browsing. Mainly text and static pictures. Typically estimated to generate 4MB per hour per user. Email. Emails that consist almost exclusively of text generate approximately 510KB of data traffic per email. Therefore, few users would expect to generate more than a few MB of traffic per month in this way. However, if we include the marketing emails that most people receive (typically 2050KB per message) and the use of email as a bearer for richer content, such as pictures, then the requirement increases. Photo uploading. Many Internet users are using their broadband connections to share photos, particularly uploading them to social-networking sites such as Facebook, and picture sharing sites like Flickr. Assuming that a picture of 1024768 pixels generates 400KB of data traffic, heavy photo uploading can quickly mount up. Video downloads. A typical high-quality video download generates approximately 10MB of data traffic per minute. Video streaming. Typically, a video-streaming Web site such as YouTube will stream video at 200kbit/s, and a three-minute video generates approximately 45MB of data traffic. Music downloads. Full-track music downloads generate approximately 45MB per track. Audio streaming also represents a fairly bandwidth-intensive application.

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Total immersion applications. Online games such as World of Warcraft and applications like Second Life are very bandwidth-intensive.

Some subscribers requirements will be light, while others will demand large data allowances. The issue of data allowances is intricately linked with the issue of price, which will be dealt with in Chapter 2. However, it is worth exploring what the volume requirements would be for a variety of different subscribers, as shown in Table 1.2.

Table 1.2: Broadband application usage (per user, per month) [Source: Analysys Mason, 2008]
Application Web browsing Email Picture uploading Video downloads Video streaming Music downloads Total immersion applications Approximate total usage Low usage 10 hours 200 emails 5 pictures None 5 video streams None None Less than 100MB Medium usage 40 hours 600 emails 25 pictures 2 video downloads 20 video streams 10 tracks None 1GB High usage 70 hours 1000 emails 50 pictures 10 video downloads 50 video streams 30 tracks 20 hours More than 5GB

Clearly there are weaknesses to the general segmentation used in the table above. Not all patterns of use will fit into these three categories. For instance, some business users will mostly use email and Web browsing and will generate very little traffic from video streaming or music/video downloading. Another method of determining mobile broadband data allowances is to examine how much traffic is generated by the average fixed broadband user. In a recent report, we established that median usage of fixed broadband was around 1GB per month per user, very similar to the mean usage of mobile broadband.4 Therefore, mobile broadband has a role as a DSL or cable replacement. As such, we estimate that as many as 3040% of fixed-broadband subscribers are addressable with a mobile-broadband replacement.

See Wood, R., Mobile broadband: another substitution threat for fixed operators?, Analysys Mason (Cambridge, 2008).

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Strategies for mobile broadband pricing and packaging

Mobile broadband can address the usage patterns of todays DSL customers. However, there is a danger that average usage will accelerate away from mobiles ability to address it in the next 23 years. The most obvious drivers for this are the Web-based video-ondemand services, characterised by the BBCs iPlayer. If users increase their demand for these services, mobile-broadband bundles with 3GB data capacity limit will be insufficient. For users who are trying to select a mobile-broadband package, the decision is further complicated by two factors.

Lack of awareness. Users are unaware of how much data they consume. Few people are familiar with what constitutes a GB of data, so charging by the GB is unintuitive for the average user. Caution. Users pay for more data than they actually use, in order to minimise the risk of exceeding their limit and being penalised with high out-of-bundle charges. These overestimates can be considerable. We examine out-of-bundle charges further in Chapter 2.

As a result of these factors, users will find the choice of tariff difficult. When they choose a plan, most will opt for 35GB per month even though average data consumption is 1GB per month. This confusion on the part of customers is one of the reasons for the popularity of unlimited data plans, even though most have fair-usage limits comparable to the standard limited offers. We consider unlimited offers further in Chapter 2.

1.4 MNOs should sell mobile broadband as part of a wider service portfolio
None of the large MNOs offer only mobile broadband. All sell other telecoms services. These may be limited to mobile services, or may also include a fixed-line offering, over either PSTN or cable. MNOs cannot, and should not seek to, sell mobile broadband in isolation from the other products in their portfolio. They should explore the substantial opportunities offered by cross-selling and bundling. Many MNOs are starting to offer discounts to subscribers who take multiple products. For example, 3 UK offers a 50% discount on mobile broadband to its voice contract subscribers. This represents a means of building a stronger relationship with the customer and, of course, to increase ARPU. However, MNOs will struggle to differentiate their services based on this form of bundling because all of their competitors, as well as distributors, are able to replicate this approach. Indeed, in many cases, the third-party retailers have been early movers in this market. In September 2008, UK retailer Phones4U launched an offer combining a mobile phone contract and a mobile broadband offer, including a laptop, for GBP45 per month.

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Strategies for mobile broadband pricing and packaging

Several operators, including O2 UK, have started bundling fixed and mobile broadband offers together, offering connectivity inside and outside the home. O2 gives free fixed broadband access to customers that subscribe to a GBP20 per month 3GB mobile broadband plan. This represents a discount of GBP7.50 per month compared with O2s standard price for the two products, although O2s mobile broadband is GBP5 per month more expensive than the standard 3GB products on the market. O2 also includes access to The Clouds 7500 Wi-Fi hotspots as part of the deal. This is a sensible strategy for any MNO concerned that mobile broadband will make unsustainable demands on the capacity of its wide-area network. The combination of DSL and Wi-Fi should allow a large volume of mobile broadband data traffic to be offloaded from the macro network. For O2, this approach compensates for the deficiencies of its mobile broadband product it has the lowest level of 3G coverage in the UK and building its LLUB business, which until now has been only modestly popular. In its attempts to make up for its deficiencies, O2 has found the right strategy for an MNO with LLUB operations: use DSL as a differentiator for a mobile broadband offer. Similarly, MNOs seek to improve in-building coverage and offload traffic from the macro network with femtocells. This need is even more pressing with mobile broadband. As illustrated in Table 1.3, the benefits of femtocells are greater for data services than voice: improvements to in-building coverage are more pronounced, while the requirement to offload traffic from the macro network is much greater. A femtocell strategy for mobile broadband uses Wi-Fi, rather than an in-building version of the wide-area technology. Laptops can comfortably support both 3G and Wi-Fi and there are none of the tariff complications implicit in using femtocells for voice, such as how to handle incoming calls, what termination rates to charge and how to handle bundling.

Table 1.3: Benefits of femtocells for voice and data services [Source: Analysys Mason, 2008]
Provide better in-building coverage Voice Modest to significant improvement depending on distance from nearest base station Significant improvement in almost all cases DSL speeds will be substantially better than mobile Offload traffic from macro network Little pressure on macro network capacity from voice, particularly as MNOs are increasingly provisioning for mobile broadband Offloading data traffic is a priority in order to maintain quality of service on the macro network

Data

Cross-selling tends to be particularly successful when the two products have a direct impact on each other. MNOs with LLUB-based services can increase the adoption of their fixed broadband services and offload network traffic. Cross-selling mobile broadband with voice offers no benefits other than lower prices, although cross-selling fixed and mobile

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Strategies for mobile broadband pricing and packaging

broadband offers demonstrable advantages to the MNO. DSL and Wi-Fi can be used as competitive differentiators and help protect the integrity of the radio access network. It will not be long before MNOs start to offer quintuple-play packages (fixed broadband, fixed voice, multi-channel TV, mobile voice and mobile broadband). Virgin Mobile, an MVNO in the UK, has signed a deal with T-Mobile, allowing it to launch mobile broadband services in the fourth quarter of 2008. Virgin Mobile has not announced whether it intends to launch a quintuple-play package, but it is a strong possibility because the MVNO has been an avid proponent of quadruple-play package.

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1: Mobile broadband is not one product, but many

2 Effective pricing depends on segmentation


The different elements in the mobile broadband proposition mean that MNOs can offer many variations to consumers. MNOs can alter network speeds, data allowances and devices to suit the needs of particular user groups. Nevertheless, mobile broadband remains a relatively commoditised service. MNOs are selling access and there is little to differentiate it. As a result, price is the most important element in the value proposition, and MNOs must recognise this. MNOs have focused on price as a way to differentiate their offers. However, they are rightly wary of the risk of excessive price competition in such a commoditised market. A period of intense price competition would diminish the profitability of mobile broadband. It could also threaten core voice revenue if mobile broadband subscriber numbers increase substantially, and data traffic floods the network and reduces the reliability of voice services. Investments in further network capacity would also be compromised if subscriber profitability evaporates. This chapter examines the pricing options that have been implemented, the emerging best practices and the opportunity for further development.

2.1 A range of tariffs is best


Mobile broadband users patterns of use vary. In the same way that these are best addressed with different variations on the product, they must also be addressed with different pricing models. Seven methods are in common use.

Monthly contract. Users sign up to a contract (usually with a 12-, 18- or 24-month duration) and are allocated a monthly allowance, either traffic volume (GBs of data) or minutes. Typically, subscribers receive a modem as a reward for committing to a monthly fee. Increasingly, MNOs are also offering contracts that include a laptop. Unlimited monthly contract. This version of the monthly contract promises unlimited use for a monthly fee. We consider unlimited contracts in more detail below. Monthly rolling contract. This contract offer has a one-month break clause at any time, so subscribers are not committed to ongoing spending. This is appealing to users who are interested in controlling costs or who may want the service for a short period. This

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option is also useful as a means of conducting for extended trials. Typically, prices are comparable to contract fees, but do not include a subsidised modem.

Monthly prepaid contract. Users top up a prepaid account, which buys an allowance of either minutes or GB. The credit expires after one month if it is not used. This is an ideal option for subscribers who would like to control their spending. It also works well for people with poor credit ratings. Extended prepaid contract. Rather than paying in advance for just one months service, users pay for a larger allowance (either traffic or volume) that must be used within a longer period, for example 6, 12 or 24 months. For customers whose use is relatively sporadic, this option is better than a monthly prepaid contract. Daily/weekly prepaid contract. Users pay into an account, which is debited every day or week that the service is used. Fair-use limits apply to these offers. T-Mobile UK introduced such a tariff in September 2008, charging GBP2 per day or GBP10 per week. This option would appeal as a supplement to fixed broadband for sporadic users, such as second-home owners. Pay-as-you-go contract. Users pay per MB of data or per minute, with no up-front charges. This obviously offers the greatest price control of all the options, but is generally charged at a substantial premium, making it uneconomic for anyone but very sporadic users.

MNOs tend to offer a variety of options to suit different users. Table 2.1 presents a selection of Italian tariffs, demonstrating the availability of monthly (time- and volumebased), monthly unlimited, monthly prepaid and pay-as-you-go contracts.

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Strategies for mobile broadband pricing and packaging

Table 2.1: Sample mobile broadband offers in Italy, August 2008 [Source: Analysys Mason, 2008]
MNO/tariff Pricing model Monthly charge EUR19 EUR19 EUR20 per month Inclusive bundle Charges when data allowance is exceeded EUR1.20 per hour EUR6 per GB EUR0.9 per hour EUR2 per hour

3 Tre Dati Time 3 Tre Dati 3 SuperWeb Time TIM Maxi Alice 150 Abbonati

Monthly contract (timebased) Monthly contract (volume-based) Pay-as-you-go contract (time-based) Monthly contract (timebased)

100 hours per month 5GB 150 hours per month (evening/weekend only) 500MB (30-day limit) 10 hours per day Unlimited

TIM Maxi Alice Facile

Monthly rolling contract (volumebased) Monthly contract (timebased) Unlimited monthly contract

EUR20

Vodafone Internet Facile Vodafone Internet Facile Senza Limiti

EUR30 EUR45

EUR2 per hour

Offering a diverse range of tariffs presents the best opportunity for growth. A one-size-fitsall pricing model will severely limit MNOs opportunities to acquire subscribers, for the simple reason that a single tariff cannot address all the segments of the subscriber base. We can identify three main types of subscriber, categorised according to their reason for adopting a mobile broadband service.

Replacement. For this type of subscriber, mobile broadband replaces a DSL or cable connection and is used as the principal, or sole, method of connecting to the Internet. Users demand large bundles and prices that are competitive with those for fixed broadband. In some countries, prices have declined sufficiently to allow for this. For example, mobile broadband is now cheaper than DSL in Austria, making it a potential replacement. Complement. For this type of subscriber, mobile broadband is a complement to a fixedline DSL or cable option. Usage will be lower and more occasional than for DSL replacement users. Packages aimed at complementary users should be cheaper, and should include smaller data allowances than packages for replacement subscribers. A greater degree of flexibility in pricing will also generally be required as usage will be less predictable than for replacement subscribers. No alternative. For some users, mobile broadband will be the only option. Certain groups do not have access to DSL or cable services, either because of lack of credit

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worthiness or because fixed services are unavailable or inappropriate, for example people in temporary rented accommodation. Pricing for these subscribers can be slightly higher than for the replacement market. No alternative subscribers do not demand prepaid options, their levels of use will be reasonably high and price differentials with DSL will be irrelevant. Each of these segments will have radically different requirements in terms of data allowances and price sensitivity, as shown in Table 2.2. Furthermore, levels of demand will vary within each segment. As illustrated in Section 1.3, the volume of traffic can vary significantly depending on the use of different applications. MNOs must offer multiple options to suit varying levels of usage as well as the three types of subscriber identified above.

Table 2.2: High-level mobile broadband user segmentation [Source: Analysys Mason, 2008]
Type Complement Complement Replacement Replacement No alternative No alternative Use Light Heavy Light Heavy Light Heavy GB requirement 00.5GB 12GB 0.51.5GB 510GB 0.51.5GB 35GB Price sensitivity Medium Medium High High Low Low

As outlined in Table 2.3, the applicability of each type of tariff will vary considerably depending on the broad subscriber group being addressed.

Table 2.3: Suitability of mobile broadband tariffs to address user segments [Source: Analysys Mason, 2008]
Type/use Complement/Light Complement/Heavy Replacement/Light Replacement/Heavy No alternative/Light No alternative/Heavy
= Low suitability = Moderate suitability = High suitability

Monthly contract

Unlimited contract

Monthly rolling

Monthly prepaid

Extended prepaid

Day/week prepaid

PAYG

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It must be noted that this segmentation needs to be even more detailed than that outlined in Table 2.3 to effectively address all segments. However, it does give a flavour of the variety of ways that MNOs should address different groups.

Unlimited plans have their limitations Unlimited tariffs are questionable, because they are rarely actually unlimited. MNOs must always limit excessive use. This will typically take the form of a download limit. The penalty for exceeding a fair-use limit varies. In some cases, MNOs disconnect the subscribers service if limits are repeatedly exceeded. In other cases, MNOs such as T-Mobile UK reduce the speed of the connection. Some MNOs offer a single contract plan, often describing it as being unlimited. These offers are unlimited for low-use subscribers or for subscribers who use mobile broadband as a complement to cable or DSL. However, they may not be suitable for a DSL or cable replacement service for many subscribers. As such, the MNO is losing out on potential customers. By only offering a single plan, sometimes with a limit as low as 3GB, MNOs are not addressing the customers who consume higher levels of data.

Larger bundles are required for heavy users Even where MNOs offer a variety of data allowances, they often fail to offer a big enough plan at the top end of the scale. Why limit the maximum offer to 7GB or even 10GB? This will discourage users who could generate large amounts of revenue. By limiting data allowances, MNOs may actually be pushing people to adopt prepaid services, where spend is directly linked to data consumption, with the consequent disadvantage that customers are less loyal. If MNOs want to retain customers, they need to offer more appropriate contracts. The other alternative would be to introduce less punitive charges for those subscribers who exceed their data limits. There is further discussion of out-of-bundle costs below.

2.2 Pricing to suit for the market conditions


Discussions above have dealt predominantly with tariff shaping rather than the exact price point. No right price point will be appropriate in all the diverse territories where MNOs are launching mobile broadband. The key is to price appropriately according to local and operator-specific conditions.

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Low prices encourage take-up to some degree (see Section 2.3). However, MNOs must be aware that there is a cost associated with the service. Many operators are selling mobile broadband below (fully loaded) cost.5 It is acceptable to do this in the short term and to fill unused network capacity. However, MNOs need to be careful when considering further investment in networks. The countries where take-up of mobile broadband has been the fastest have been those with a new entrant 3G-only operator (usually Hutchison 3G). These MNOs typically have small subscriber bases and a lot of unused 3G capacity. As a result, they can justify selling mobile broadband at a lower price than other operators. Any revenue they can generate from that unused network capacity is incremental additional revenue. For example, in Italy in March 2008, TIM and Vodafone Italy each had substantially more 3G subscribers than 3 Italy. As a result, 3 Italy had a large amount of spare network capacity that it wanted to fill. Other operators typically do not have that luxury. In those circumstances, 3 Italy is able to pursue a more aggressive pricing strategy than is sensible for the incumbent MNOs to follow. The conclusion is simple: MNOs should set prices according to their available capacity and should not just blindly follow their competitors.

2.3 Pricing for DSL replacement guarantees adoption


There is a correlation between mobile broadband pricing that is competitive with fixed broadband and high rates of mobile broadband adoption. In Denmark, MNOs charge EUR40 per month for mobile broadband. This is unappealing when compared with the average DSL price of about EUR26 per month (for 23Mbit/s access speeds). As a result, users have been slow to adopt mobile broadband. Compare this with Ireland, where the price of mobile broadband is cheaper than fixed broadband and mobile broadband adoption has been significantly higher. The standard cost of Eircoms 2Mbit/s service with a download limit of 20GB is EUR30 per month. This is undercut by 3 Irelands 3.6Mbit/s service, which includes 10GB and costs EUR20 per month. Figure 2.1 shows that there is a clear direct relationship between the premium paid for mobile broadband and the percentage of broadband connections accounted for by mobile services. Some countries, including Austria, Ireland and Poland, have a negative premium: mobile broadband is cheaper than fixed broadband. In others, such as Bulgaria, France and Switzerland, mobile broadband continues to command a significant premium over fixed broadband and as a result adoption has been modest.

See Wood, R., Mobile broadband: another substitution threat for fixed operators?, Analysys Mason, (Cambridge, 2008).

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Strategies for mobile broadband pricing and packaging

Figure 2.1: Impact of mobile broadband premium on market share [Source: Analysys Mason, 2008] Austria Belgium Bulgaria Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Netherlands Norway Poland

250% 200% Mobile broadband premium 150% 100% 50% 0% 0% -50% -100% Mobile broadband as a proportion of total broadband connections 5% 10% 15% 20% 25% 30%

There is a danger with DSL replacement that users are being lured in by seemingly comparable offers to fixed broadband only to find that it cannot match the quality of service that they are accustomed to with DSL. Examples are emerging of subscribers being disgruntled with the service that they receive. For instance, a YouGov survey in August 2008 revealed that one quarter of mobile broadband subscribers in the UK do not plan to renew their contracts, predominantly because of slow connection speeds. The good news for MNOs is that they have 18 months to two years to correct matters. The bad news is that for many customers mobile broadband does not offer a true replacement for DSL.

2.4 Affordability is key, rather than value for money


There is little doubt that DSL and cable offer better value for money than mobile broadband in terms of cost per MB. However, both have high monthly fixed charges. Mobile broadband offers lower barriers to entry for consumers, particularly through prepaid or rolling monthly contracts. As such, mobile broadband is more affordable. For fixed-line broadband customers who are relatively light users of the service, the lower entry price points offered by MNOs will be much more appealing than the lowest per-GB cost of DSL. With this in mind, MNOs should approach the DSL replacement market in two ways.

Apply prices that are competitive with DSL and include large allowances of data in order to encourage take-up among heavy users.

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Offer flexible payment options to appeal to the lighter users who need a broadband service but do not want to pay the high monthly fees implicit with DSL or cable.

Figure 2.2 presents some hypothetical prices for DSL and mobile broadband options. An unlimited DSL or cable offer represents good value if a subscriber uses more than 5GB of data per month. For lighter users, mobile broadband makes more economic sense.

Figure 2.2: Monthly spend on broadband [Source: Analysys Mason, 2008]

200 180 160 Monthly cost (EUR) 140 120 100 80 60 40 20 0 0.5 1 1.5 2 2.5 3 4 5 6 8 10 12 Monthly usage (GB) Prepaid mobile (EUR15 per GB) 1GB mobile (EUR15 per month) 3GB mobile (EUR20 per month) 5GB mobile (EUR25 per month) 10GB mobile (EUR35 per month) Unlimited DSL/cable (EUR30 per month)

However, this presumes that subscribers understand their own usage patterns and will purchase accordingly. This is almost certainly not the case, currently. MNOs must allow for users lack of familiarity with their own requirements in terms of GBs of data. They can do this in three ways.

Publish clear guides to how much usage a subscriber can expect from their allowance, in terms of applications such as Web browsing, email, music downloads and video streaming. Make users aware of their ongoing usage. This can be achieved in a number of ways, for example: a desktop counter; alerts when reaching key thresholds (such as each GB); and information at the start, and end, of each session. Reduce charges for exceeding download limits. In Figure 2.2 we have assumed that users are charged EUR10 for each extra GB. In many countries, MNOs charge even

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more. In the UK, for instance, 3 UK charges GBP0.10 (EUR0.125) per MB approximately EUR125 per GB and Vodafone UK charges a flat rate of GBP15 (EUR19) per GB for any user who exceeds a usage allowance by even one MB. In contrast, 3 Italia charges just EUR6 per GB.

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Actions
MNOs should understand the requirements of different types of mobile broadband subscriber and set prices accordingly Mobile broadband subscribers use the service in different ways. MNOs need to understand how subscribers use the service and must introduce price options that are appropriate for all segments. MNOs should offer as many payment methods and price points as possible, in order to meet the needs of all these groups.

MNOs should avoid one-size-fits-all tariffs These will not be appropriate to large groups of users. MNOs will be able to compete more effectively if they have a range of offers addressing all the potential segments. Mobile broadband is not such a complicated service that it requires extreme simplification.

MNOs should price according to their own capabilities and needs, rather than following the competition The appropriate price point for mobile broadband will depend on the MNO, its network loading and upgrade plans. Competitors may have different dynamics that allow them to reduce costs considerably.

MNOs should reduce out-of-bundle charges In many countries these are disproportionately high and threaten to discourage subscribers, particularly users who subscribe to contracts that include a high volume of data.

MNOs should use DSL as a differentiator Fixed DSL will become a differentiator for mobile broadband offers, and a critical one. Users will demand the higher at-home speeds and MNOs will benefit from offloading all domestic traffic onto the PSTN.

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Actions

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