Right Pricing Mobile Broadband ... Examining the Business Case for Mobile Broadband

Right pricing mobile broadband.Examining the business case for mobile broadband.Informa’s Pricing Mobile Data Conference.27th June 2012, London, UK..

Dr. Kim Kyllesbech Larsen,

Technology, Deutsche Telekom AG.

Some key questions to be very passionate about.

Do we understand data profitability vis-à-vis demand, supply & cost?Do we understand data profitability vis-à-vis demand, supply & cost?

Do operators capture enough value of mobile broadband?Do operators capture enough value of mobile broadband?

How to change the pricing game from quantity to quality ... Is it possible?How to change the pricing game from quantity to quality ... Is it possible?

Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 2

Value of internet1…Worth massive lifestyle changes!What would you give up for a year for internet access.

80 80

75 74

68

48

3027

22

1 Source: The Boston Consulting Group Report on “The Internet Economy in the G-20”, March 2012.


Value of internet1 …the customer perspective.Need, Love and (then) taken for granted?

Perceived Value of Internet

(relative to GDP per Capita)

1 Source: Analysis based on The Boston Consulting Group Report on “The Internet Economy in the G-20”, March 2012.

4

0%

10%

20%

30%

40%

0% 25% 50% 75% 100%

Perceived Value of Internet(relative to GDP per Capita)

Price of Internet(relative to GDP per Capita)

0%

10%

20%

30%

40%

0% 2% 4% 6%

Internet penetration < 50%

Internet penetration > 50%

Japen & South-KoreaTaken for granted

Internet Penetration

The perceived value of internet drops as internet becomes a commodityThe perceived value of internet drops as internet becomes a commodity

!

Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK.

Price setting in mobile.Today’s data price philosophies are volume centric.

1 Most price levels are NOT designed in isolation from competition, In fact often competition is the main “inspiration” for pricing. 2 Quality could be speed but is not exclusively so.

Price ( Volume ( Quality, Product, Time ) , Cost, Competition1, Regulation)

Volume Time

FUP basedfeedback

COST

mainly driven by Quality & Product

Quality2 Product

5

Illustration

e.g., MTR, roaming tariffs, …


6Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK.

Price & profitability … Pricing the ByteVolume is easy and gives a (false) sense of being almost a voice minute

Minimum Cost per Byte

Volumetric networkcapacity

Maximum Cost per Byte

Volumetric customerdemand

Profitability can be “safely assumed” if the “Price per

Byte” is chosen somewhere in-between

REMINDER! Vastly different data-traffic profiles and Costcan result @ the same volumetric demand.

Conceptual

view

Marketing & Sales

Technology

Finance together with M&S


Why data profitability is a *****Every data service, mobile app, smartphone, contributes to the Busy Hour differently and thus COST and Profitability.

Mobile TV high BW impact but relative little volume in this illustration.

60%50%

40%

20%

8% 7%3% 2% 2% 1% 1% 0.5% 0.5% 0.5% 0.4% 0.2% 0.2%

100%

Mobile

TV P

rem

ium

Ser

vice

Mobile

TV B

asic

Ser

vice

Bus. F

ull Connec

tivity

Full Connec

tivity

Bus. A

t Hom

e Surfi

ng

Musi

c downlo

ad

Bus. E

mai

l Pull

Peer 2

Pee

rM

IM

Confined

Connec

tivity

Bus. C

onfined

Connec

tivity

Bus. E

mai

l Push

Mac

hine

2 M

achin

e

Real R

ing-to

nes

Emai

l Pull

MM

S outg

oing

MM

S inco

min

g

BH Throughput in Mbps

Volume in MB Home surfing (wireless DSL)

Conceptual

view

Home

Surfing (w

irele

ss D

SL)

Relative contribution to

BH bandwidth demand as

Function of service type

Note: the above example from the pre-smartphone pre-mobile-apps (2006) but nevertheless it illustrates the challenges we have when trying to define data profitability in a meaningful way.

400 600 800 1000 1200 1400 1600

Every new generation of smartphone increases data load above & beyond the old ... and thus Cost!

Source: Network data.

Data volumeper Smartphone

Smartphone CPU clock frequency

×5

×2.7

0 10 20 30

@ UL=5.8Mbps

@ UL=384kbps

iPhone

Max. DL Speed in Mbps

Data volumeper Smartphone

×4

GPRS ×6

Improvements in intrinsic smartphone speed

dramatically increases the data usageAND COST!

Improved air-interface speedincreases data usage

AND COST!


Right pricing mobile broadband…Changing the game!New philosophies … new dimensions.

Volume

Time

Quality1

Product

Reduce

Cost of Providing data

Differentiate on Quality.Speed & Latency.

Coverage (e.g., deep indoor)

Time.

Customer care & support,

Handset, device, etc..

Always-Best-ConnectedLeverage Fixed and Mobile.

Small Cell deployments.

WiFi / Femto-cell off-load, etc..

Product value add-onVoIP.

Msg & notifications.

Internet Access.

Social media.

Mobile media player.

Handset, etc..

Differentiate on Quality.Speed & Latency.

Coverage (e.g., deep indoor)

Time.

Customer care & support,

Handset, device, etc..

Always-Best-ConnectedLeverage Fixed and Mobile.

Small Cell deployments.

WiFi / Femto-cell off-load, etc..

Product value add-onVoIP.

Msg & notifications.

Internet Access.

Social media.

Mobile media player.

Handset, etc.. Illustration

9

1 Quality could be speed but is not exclusively so.


FUP as top-lineremedy

0

200

400

600

800

1,000

1,200

250MB 500MB 800MB 1GB UNLIM

LIMIT

AV USAGE

… not all customers eat what they pay for!

10

Smartphone volume limit per price plan

MBytePolicy Limit

&Average Used

31%32%46%

58%

+60%

Illustration

Unlimited average usage is 60% higher than 1GB capped usage(in this example).


Relative cost and pricing … where did my margin go?

0.00

0.50

1.00

1.50

2.00

Demanded Network BH Mbps(allowing for HSPA+ LTE LTE-advanced)

Technology Cost mobile broadband data

In€-cent per MB

Illustration

Min 0.10±0.05 €-cent per MB

Todays typical

Mobile data prices approx.

10 down to 0.5 €-cent per MB


Data pricing is in perpetual decline and will impact margin

& data profitability.

What you really should care about! … Absolute cost!The profitability auch! …

Network BH Mbps(or equivalent time scale)

RelativeMobile Data

TCO

Illustration

0

2

4

6

8

Todays Total Technology Cost Level

“Unlimited” resources

Limited resources

Profitability crunch exposure2014 – 2018 (pending on country and MNO)

! !

12

A Gap too far to bridge?


Technology Mobile DataBaseline TCO

Business case logic


0%

10%

20%

30%

40%

50%

0% 20% 40% 60% 80% 100%

MNO C

MNO B

MNO A

Scale

Profitability

Customer market share

Disruptive region …Iliad Free 3% market share

in 6 month, Ebitda>0 @5% share

Total Revenue

Technology Cost (ca. 15% – 20%)

Usage Cost−

Market Invest SAC & SRC

−

= EBITDA (WEU ca. 37% 1)

Personnel Cost

Other Cost

−

−

−

Network Depreciation−

Spectrum Amortization−

Capex (new rollout < +10+% of Revenue)−

1 BoA ML Global Wireless Matrix 1Q11, margin data for 4Q 2010.

Spectrum invest (0.8 – 0.05 € per MHz-Pop)−

Red color represent Technology driven cost

+ New Revenue?

Defend philosophy!Stop / Slow Revenue Decline

New business!QoS, IoT,, Media, FMC, …

Incumbent region …Diminishing return of

most actions

Efficiency

Efficiency gameDefend / Slow Ebitda Decline

Increased cash pressureNew technology / Modernize

Spectrum position, investment & cost.2.6 GHz up-to 10× more costly to deploy compared to 800MHz.

800 MHz

DL power

Coverage area

UL power (typical limitation for coverage)

Illustration

×10 ×6 ×4.5 ×1 900 MHz – 800 MHz (digital dividend)

2.6GHZ

2.6 GHz

Available bandwidth

LargeVery small

LowHigh

190 MHz

2.1 GHz 1.8 GHz

2×60 MHz 2×75 MHz 2×35 MHz 2×30 MHz Total bandwidth

2×20 MHz 2×10+ MHz 2×20+ MHz 2×10 MHz 2×10 MHz Typical bandwidth per MNO

Re-farm

LTE HSPA+ LTE HSPA+ LTE

DWDM

DWDM

DWDM

DWDM

100 GbpsDWDM

EvolvedPacketCore

Backhaul will force re-thinking the network design.LTE’s extremely power-full air-interface, i.e., 100+ Mbps, will require extensive AND COSTLY backhaul fibre deployment.

15

FTTS 100+ Mbps

LTE air-interface30mean to 100+peak Mbps

(per sector)

eNode

100GbE

Illustration

32:1 320:1eNodes per element 3200:1

BH Throughput 3+ 32+ 320+ In Gbps

Dr. Kim Kyllesbech Larsen, ETSI’s Business Innovation Summit, October 4th 2011, London.

LTE the ultimate off-load weapon for HSPA in overload.More LTE spectrum available across a wider range of frequencies BUT will not replace HPSA for quiet some time.

16Dr. Kim Kyllesbech Larsen, ETSI’s Business Innovation Summit, October 4th 2011, London.

17%

32%

0%

10%

20%

30%

40%CEE

WEU

6%

11%

0%

10%

20%

30%

40%CEE

WEU

HSPA uptake LTE uptake

Early adaptors

35%

66%

50%

83%

0%

20%

40%

60%

80%

100%CEE

WEU

Smartphones

Source: Pyramid Research, March 2012.

& WiFi capable!

Geo coverage 80+%

Geo coverage 50+%

As long as LTE has not reached critical mass (i.e., >20%) WiFi will remain a

strong off-load enabler

Rural / Nation-wide: 800 MHz LTE & 900MHz HSPA

Cost-optimized mobile broadband deployment models. A wide range of frequencies will be essential for economical deployment reducing cost while coping with future demand.

17

Urban – Suburban:

1800 MHz LTE – 2100MHz HSPA

Hot-Spots

2.6GHzLTE

Throughput / Capacity

up-to 3.6 GHz (TDD & FDD) Typical BW per Operator ≥ 2×20 MHz

Femto, small cells & smart-antenna systems.

Rural Fixed-like & deep indoor coverageTypical BW per Operator ca. 2×10 MHz

Illustration

Dr. Kim Kyllesbech Larsen, ETSI’s Business Innovation Summit, October 4th 2011, London.

Note: main LTE bands in USA are the 700MHz and AWS bands, with some PCS band LTE deployment as well (i.e., Sprint). In Asia LTE is more concentrated around TDD and the 2.3 and 2.6GHz bands.

More fixed-DSL substitution (FMS) business model: P2P / CPE-based.

LTE connectivity @ 800MHz

New business models

to emerge.

So speed differentiated pricing is the solution?QoS or Speed guaranty in a radio environment is very difficult1!

1 Some may even argue that it is impossible to provide a guarantied cellular service. Though one may not need to be exactly right but only statistically right to the level where the customer perceive his service to be in line with the price paid. 2 A customer may have paid for high speed price plan but dominantly using lower bandwidth applications.

Cost

Minimum Profit

PriceRange

Price X for up-to 3.6Mbps

Price Y for up-to 7.2Mbps

Price Y for up-to 14.4Mbps

Cost

Minimum Profit

Price Range

Cost

Minimum Profit

Price Range

<Speed> higher than 7.2MbpsStdev less than 14.4 - <Speed>

<Speed> between 3.6 – 7.2 MbpsStdev less than 7.2 - <Speed>

<Speed> < 3.6Stdev less than 3.6 - <Speed>

Illustration

18

Speed differentiated pricing might not be the magic bullet

as use cases might not be consistent with high speed reqs 2


NOTE! LTE & LTE-advanced does provide an easier bandwidth –

speed-based QoS differentiation.

What we need to be (insanely) passionate about.

Price innovation! … changing from quantity to quality based pricing.Price innovation! … changing from quantity to quality based pricing.

Understand data profitability vis-à-vis demand, supply & pricing.Understand data profitability vis-à-vis demand, supply & pricing.

Understand mobile data is fundamentally different from mobile voice.Understand mobile data is fundamentally different from mobile voice.

Narrow the gap between customer perceived value and actual price.Narrow the gap between customer perceived value and actual price.


Thank you for your interest!

Contact: [email protected]: +31 6 2409 5202http://nl.linkedin.com/in/kimklarsenhttp://www.slideshare.net/KimKyllesbechLarsen

Acknowledgement: To my great team behind the scene for their insights, support and suggestions. Also many thanks to Olga Holin, Zahid Ghadialy and Paul Cosway for suggestions and making me think about new ideas. Last but not least I am indebted to my wife Eva Varadi for her great support and understanding during the creation of this presentation.

The key value proposition of a mobile network is ....

Freedom& Mobility

http://nl.linkedin.com/in/kimklarsen

http://nl.linkedin.com/in/kimklarsen

Right Pricing Mobile Broadband ... Examining the Business Case for Mobile Broadband

Technology

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