TMCnet Feature
June 15, 2011

What is the Next Big Shift in Service Provider Retail Pricing?

By Gary Kim, Contributing Editor

Service providers almost constantly adjust prices, terms and conditions of service in response to marketplace changes, though major shifts in retail packaging happen less frequently. In the mobile business, for example, a few shifts, such as the move to "Digital One Rate" pricing of domestic calling, were major innovations. As I recall, it was Sprint (News - Alert) CEO Dan Hesse who championed that change while he was at AT&T's (News - Alert) mobile unit.  

One might also point to calling circles ("Friends and Family," an MCI innovation, as I recall) and bundles as the key shifts in packaging that have happened over the last two decades. "Bucket of minutes" plans likewise were a major spur to mobile usage in the U.S. market. In the Internet access space, a similar big shift was AOL's (News - Alert) abandonment of metered usage for an "unlimited" approach. What most of the plans have in common is that they simplify pricing, reducing consumer fears of "bill shock" caused by excessive usage. 

You might argue recent moves towards usage caps, and away from unlimited usage, therefore will depress consumer use of broadband services.  That undoubtedly will prove an unwarranted fear. For starters, service providers are not about to create revenue barriers for themselves. 

Also, historically, "unlimited" usage tends not to be an actual issue for most consumers, who just want protection from sudden overage charges. People have proven adept at figuring out what bucket works for them, usage-wise, and few consumers are actually "very-high users" of bandwidth resources. Some of us would argue that caps, in and of themselves, will have no harmful effects on usage. 

Critics will note that there are likely to be pricing effects, and that is more likely to materialize, in part because ever-increasing consumption means ever-increasing consumption, which means ever-increasing investment in facilities. Back in the "old days," that wasn't an issue. Carriers had a relatively easy time of "dimensioning" network capacity, and essentially could allocate capital investment largely on a "replace worn out facilities" basis. That's why capital budgets were relatively fixed, back in the "monopoly" days. As a rough rule of thumb, service providers could expect to replace or repair about 10 percent of all facilities in any given year, with virtual replacement of all facilities about every 10 years or so.

That's not the case anymore, as bandwidth consumption grows 60 percent or so on most backbone networks. But there's another dynamic at work. Where telcos once made their money from voice services, that largely is going away. In the mobile space, revenues from both voice and text messaging are under pressure, and expected to keep dropping. In the cable TV business, there is the threat of substitution as well. 

So beyond accelerated network investment, there is the simple matter that the economics of the bulk of all all networks will, over time, have to shift to broadband services. That means pricing that earns enough to sustain continuous investment primarily from broadband services. Put simply, revenues lost from declining voice, texting and video have to be recouped from broadband services.

So will there be retail pricing implications? Of course. As a crude baseline, adjusting for inflation, the monthly average revenue now earned from a triple play or quadruple play suite of services will in the future need to be maintained even as some of the revenue contributors decline. 

It isn't immediately clear how this will happen, but it will happen.

It might be hard to predict when the next big shift in packaging occurs, or what form it might take, as those changes tend to be seen as valuable both to end users and service providers. In other words, the incentives have to line up. 

It seems likely that volume-based pricing tiers, which arguably supply some value to the end-user, will have to change to supply higher value. Time of day parameters, content-specific parameters, buckets that blend fixed and mobile usage and new features are likely to develop. See  Telco 2.0: Guest Post: Mobile Pricing Strategies at “Web Speed”. And that's just on the end user side of the business. More changes will happen as business-to-business customers and partners gradually become more important.
Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Rich Steeves
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