Mallinson: It's time to flip the pricing models for voice and data

Keith Mallinson

A revolution in cellular service pricing was inevitable given the exponential growth in data in comparison to saturating voice minutes, with network capacity used by the former already exceeding the latter manifold, and with competition against operators from over-the-top service providers including Skype, Facebook, YouTube, Spotify, WhatsApp and many others. OTT services are attractive to consumers for many reasons including functionality, usability, branding and because they can typically be used on fixed and mobile networks for no incremental charges. Restructured pricing such as that of Vodafone Red is aligning operator revenues with usage and underlying network costs. It enables operators to compete more effectively with OTT offerings, including voice and messaging services in particular.

Key elements of Vodafone Red are unlimited calls and text messages--which the operator hopes will deter users from making use of web-based communications apps for chatting and messaging--along with "very generous data allowances" and "world-class cloud and online protection services to back up and secure personal data." Monthly data buckets are priced on the basis of their size in gigabytes. Monthly rates also depend on the customer-selected contract term and subsidy-level-dependent handset price.

Astute foresight

I can recall former Verizon Communications CEO Ivan Seidenberg saying publicly at one of the annual CTIA trade shows in the United States a year or so before he retired in 2011 that mobile operators had their voice and data pricing the wrong way around with usage-based pricing for voice and flat-rates for unlimited data. He was quite right, as industry developments are now demonstrating. Making the switch, as is occurring with various operator offerings in the U.S. and elsewhere including Europe with Vodafone Red, for example, is not really very innovative; but it is nevertheless an astute, dramatic and necessary strategic move.

Such changes are costly to implement and decisions require a delicate assessment of the risks, costs and rewards that come with action versus inaction. Voice and texting have been the cash cows which have been grown with operator demand stimulation including advertising. Unlimited calling flat rates limit opportunities there while calls may still be subject to variable costs such as call termination charges. OTT services can provide similar capabilities to operator voice calling and text messaging, as well as multimedia, while riding for free on the operators' "data" services.

Cellular voice had already gone flat rate with unlimited calling for many years in the United States. Since the early 2000s, Leap Wireless' Cricket service and MetroPCS have offered unlimited calling for a fixed prepayment each month and with no contractual commitments. Some of the major operators have introduced similar offerings including one from Sprint Nextel's Boost brand.

Flat rate data pricing for unlimited use was also very appropriate until the late 2000s due to the old problems with 3G and mobile broadband. These were the bad problems of people not using the services much, or getting poor service performance when they did. The name of the game was to stimulate use and improve performance. Flat rate pricing was helpful because it was easy to understand and low risk for customers, while being easy to implement and administer by operators. Since 2008, with the introduction of the iPhone 3G, Android devices, various app stores and with other ecosystem improvements data demand has mushroomed. This has created the good "problems" for operators of needing to manage demand growth, including increasing per-user performance, and do so profitably.

Innovation versus strategic shift

Little of what cellular operators conceive is truly novel or innovative, and where that does occur successfully it can be, and is, copied by competitors extensively. It is predominantly the technology vendors that innovate, including creation of next-G network technologies, multi-touch screens, OTT apps and service providers, etc. The benefits of these are shared widely among operators, after periods of exclusivity in some cases (e.g., with iPhone). Nowadays, fixed and mobile operators have very small R&D groups in comparison to those of the chipset, handset and network infrastructure vendors. On the other hand, gutsy multibillion-dollar 4G roll-outs, for example, with WiMAX or LTE, can make or break operators.

Innovative or not, strategic changes can have profound effects on competition and market positions for operators. Making these changes involves major risks and costs. In U.S. cellular, possibly the most ground-breaking commercial change was AT&T Wireless' introduction of its DigitalOne rate in 1998. This replaced the complexities of local and long distance, national roaming, and per-minute pricing with predictable monthly prices for calling from anywhere to anywhere nationwide.  Various technical challenges had to be overcome to make it all work, but the significance of all that pales in comparison to the strategic vision and commitment that was required to revolutionize the pricing model.

However, this innovation did not provide AT&T Wireless a sustainable advantage. With commercial success by AT&T Wireless, this soon became the widely adopted norm for all wireless carriers, selling minutes by the "bucket," in the U.S. In fact, AT&T Wireless subsequently foundered for other reasons and was acquired by Cingular in 2004. In 1994, Orange gained significant tactical advantage by being the first UK operator to offer per-second billing. It made great mileage in its advertising messages of the fairness to customers that came with this innovation. This pricing method was quickly adopted by many operators worldwide. MCI's "Friends and Family" concept, with free calling among selected numbers, introduced on fixed networks in the early 1990s, has also been copied by many fixed and wireless operators.

Flipping the way mobile voice and data are priced is a bold and yet essential move. Mobile operators can now benefit from and embrace increasing use of all kinds of in-house and OTT services and applications.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor publishes an Extended Mobile Broadband Forecast. This includes network equipment, devices and carrier services to 2025. Further details are available at: Find WiseHarbor on Twitter @WiseHarbor.