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Charging and Tariffing Strategies in a Mobile Video World

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October 14, 2011

Charging and Tariffing Strategies in a Mobile Video World

By Patrick Lopez, Founder and CEO, {Core Analysis}


In January 2009, when Cisco (News - Alert) released its first Visual Networking Index, a forecast of data traffic in mobile networks, the first reaction from the market was incredulity.


Cisco was projecting that, based on traffic observed over the last 5 years, mobile data traffic was to double every year. Even more remarkable, mobile video, then a mere 20 percent of the overall traffic would rise and account up to 64 percent of the traffic by 2013.

The industry met these projections with raised eyebrows and many dismissed the report as a simple attempt for vendors to sell more network equipment. While the intention behind the report is undoubtedly to bring carriers to the conclusion that they need to strengthen their network and prepare for huge CAPEX spending, the observations remain relevant.

By the summer of 2009, networks started experiencing data outages (AT&T). While the trend seemed to accelerate and spread (Verizon, Sprint, Vodafone Germany, Vodafone UK, O2 UK, Orange (News - Alert) UK), carriers and vendors alike started to look at identifying and defining the issue.

Mobile data indeed was growing fast and video seemed to be a large part of it. Additionally, the outages seemed caused by a variety of factors, from radio access network (signalling) to core (congestion) instability.

It is clear that the massive take-off of smartphones and tablets, coupled with the change in media consumption patterns by mobile subscribers had taken all by surprise.

The main cause, in my mind, for this surge and instability in mobile network traffic is not to be found in the technology but rather in the business model.

At the beginning of 2000, the wireless world is in ebullition. 3G licenses are being sold for billions (with UK auction the most expensive at £22.4Bn). Wireless operators embark on the promise of wireless internet (WAP) and multimedia messaging. These promises were not delivered on, and many started to look for content and applications to fill their new-found bandwidth.

USB dongles proved popular for the enterprise market, to provide data connectivity on the go. Along that time, flat fee, all-you-can-eat, unlimited data packages start to appear. While there wasn’t that much attractive content available, these plans proved effective in drawing throngs of subscribers and became a weapon of choice in the customer acquisition arsenal.

Fast forward to 2011 – with the rise of social media, the introduction of smartphones and tablets as new categories, the explosion of user-generated-content and the emergence of apps as the preferred way to access or interact with content in the mobile world – networks find themselves flooded with data usage.

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.

Let’s look at some of the strategies in place for data pricing in a video world:


Unlimited usage:
This category tends to disappear as data demand increases beyond network capacity. It is still used by new entrants or followers with a disruptive play.

  • Fair limit: even with unlimited packages, many operators tend to enforce a fair limit, usually within 90 percent of their subscriber’s usage.


Capacity capping:
this mechanism consists in putting a limit to the subscriber’s capacity to use data on a monthly basis. It is usually associated with a flat monthly fee. It is mostly a defensive measure. Past that limit, the operator has four choices:

  • Hard cap: no data usage is allowed beyond the limit. The subscriber must wait for the next period to use the service anew.
  • Hard cap with overage fee: Once the customer has reached her limit, a fee per metered usage is imposed, traditionally at a very high rate. For instance, 20 € for 2GB and 1 € per additional 10MB
  • Soft cap: The operator introduces several levels of caps and usage and once a customer reaches a cap, she switches to the next one.
  • Soft cap with throttling: The operator throttles the speed of delivery of data past the cap. Usually at a rate that makes it inefficient/impossible to use data intensive applications such as video. It is called as well “trickle-loading”.
  •  

Speed capping: As video, P2P and download usage becomes close to fixed broadband, operators have started to provide means to measure and charge for different speeds and usage. It allows to create different packages for the type of usage 

  • low speed for transactional (email)
  • Medium speed for real time (social network, internet music and radio)
  • High speed for heavy use (downloads and videos)


Application bundling:
This method consists in grouping applications or usage by bundles with individual tariffing schemes. For instance, free, unlimited IM, Facebook (News - Alert), Twitter, Email at 20$ per month up to 2GB, No P2P...


Metered usage:
This method consists on charging based on the amount of data consumed monthly by the subscriber.


Contextual charging:

  • Content based charging: This is the target of many operators, being able to differentiate between the types of content, origin, quality and create a tariff grid accordingly. For instance: a pricing structure that will have different rates for HD and SD video, whether it is on deck or off deck, whether it is sport or news, live or VOD.
  • Time of day charging: This is a way to make sure that peak capacity is smoothed throughout the day or to get the most margin from busiest times.
  • Location based charging: Still embryonic. Mostly linked to Femtocells (News - Alert) deployments.


 

Pros

Cons

Unlimited usage

Customer friendly, good for acquisition and churn reduction

Hard to plan network capacity

Will be a real differentiator in the future

Expensive, if data usage continues doubling on a yearly basis

Fair Limit

Provides some capacity planning

The limit tends to change often, as the ratio of abuser vs. Heavy users goes down.

Hard Cap

No revenue leakage

Not customer friendly

Easy network planning (max capacity needed = max number of users x caps)

Does not allow to capture additional revenue

Hard cap with overage fee:

Can be very profitable with a population that has frequent overage

Many customers complain of the bill shock.

Soft cap

Customer friendly, easy to understand

Not as profitable in the short term

Soft cap with throttling

A better alternative to hard cap in markets where video usage is not yet very heavy

Becomes less and less customer friendly as video traffic increases

Speed capping

Very effective for charging per type of usage and educating customers

Requires sophisticated network (DPI + Charging + subscriber management)

Application bundling

Popular in mature market with high competition, where subscribers become expert at shopping and comparing the different offerings.

Complex requires sophisticated network, requires good understanding of subscriber demographics and usage to maximize revenue

Metered Usage

Very effective way to ensure that capacity planning and revenue are tied

Not very popular, as many subscribers do not understand Megabytes and how 2 minutes of video could “cost” from 1 to 10 times .

Content based charging

Allow sophisticated tariffing that maximizes revenue

Complex requires sophisticated network, requires good understanding of subscriber demographics and usage to maximize revenue. Technology not quite ready.

Time of day charging

For operators who have a “prime time” effect with peaks an order of magnitude higher than average traffic, an effective way to monetize the need to size for peak.

Not very popular. The network is still underutilized most of the time.

Location based charging

Will allow operators with “hot spots” to try and mitigate usage in these zones or at least to finance capacity.

Most subscribers won’t accept having to carry a map to understand how much their call/video will cost them.


As with many trends in wireless, it will take a while before the market matures enough to elaborate a technology and a business model that is both user-friendly and profitable for the operators. Additionally, the emergence of over-the-top traffic, with now content providers and aggregators selling their services directly to customers, forces the industry to examine charging and tariffing models in a more fundamental fashion.

Revenue sharing, network sharing, load sharing require traditional core network technologies to be exposed to external entities for a profitable model where brands, content owners, content providers and operators are not at war. New collaboration models need to be thought of. Additionally, while the technology has made much progress, the next generation of DPI, PCRF, OSS/BSS will need to step up to allow for these sophisticated charging models.


Patrick Lopez (News - Alert) is founder and CEO of {Core Analysis} and consults on mobile broadband, video optimization, policy management and messaging. To read more of Patrick's articles, please visit his columnist page.









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