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"Gigabyte-ready" network pricing could boost mobile broadband growth

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The widespread deployment of HSPA has increased the speed and data capacity of 3G networks dramatically, removing technology barriers of launching true mass market mobile broadband. But simply upgrading to HSPA technology is not sufficient if operators are also to profit from new & faster mobile data services. The mobile network sourcing consultants of Rewheel believe that MNOs and network vendors must develop new equipment pricing schemes minimizing the operators' risk of losing money on exhorbitant capacity upgrade costs while still maintaining healthy margins for the vendors.

Historically, telecom infrastructure vendors have been pursuing "pay-as-you-grow" pricing models where operators buy software licenses that gradually unlock telecom equipment capacity as voice and data traffic load grows. This is a "win-win" arrangement allowing the operators to spread out capacity investments over several years while the vendors benefit from the operators' success in the form of steady capacity-driven income.

"The approach was adequate as long as the average usage per data subscriber was in the range of tens to few hundreds of megabytes a month because the required incremental network capacity was a good proxy for the growth of the operator's mobile data business", says Antonios Drossos, Managing Partner at Rewheel, the Finland based mobile data strategy and infrastructure sourcing specialists.

The basic concept behind the pay-as-you-grow approach is that suppliers receive an indirect share of operators' revenues. But the explosive growth of the average usage per subscriber has broken the direct link between the operators' business growth and the required incremental network capacity.

"A typical €20 data ARPU dongle subscriber is now using 1 to 10 gigabytes a month, imposing ten to fifty times the traffic load on the network that a typical €20 ARPU data user did 3-5 years ago when many of the 3G infrastructure supply deals had been signed", says Mr Drossos.

If software license unit prices had been calibrated to the pre-mobile broadband era subscriber usage levels, there is a real chance that the incremental license fees paid to the suppliers will eventually exceed the incremental retail revenues that the operator gains by acquiring new mobile data users.

One vendor strategy would be to take advantage of the situation and maximize income from capacity software licenses by protecting the originally contracted pay-as-you-grow pricing model as long as possible.

"This may sound like an obvious approach but remember that the operators' network CAPEX and OPEX budgets are limited. They can respond to increased capacity related expenditures by reducing gigabyte caps on broadband services, by throttling traffic, by allowing congestion to degrade the end user experience, or by cutting back coverage expansion investments", says Mr Drossos. "Any of these actions would soon reduce the addressable market of mobile broadband, and this is obviously not the aim of equipment vendors. Of course, re-negotiating the commercial conditions of a key income stream is not a convenient exercise for any supplier. But they may well accept the situation provided that they are faced with the right arguments," points out the sourcing expert.

According to Rewheel a thorough data market and traffic demand forecasting exercise followed by in depth network cost structure analysis involving the radio access network, access transmission, packet core and operations support systems can produce strong supporting arguments for a potential supplier contract re-negotiation.

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Tags: hspa  3g  opex  license fees  broadband  packet core  congestion  era  true