Feature Article

October 04, 2012

Premium Pricing for LTE is a Virtual Certainty

France Telecom CEO Stephane Richard says the coming Long Term Evolution 4G network will be priced at a premium to the 3G network. That isn’t terribly surprising. The established pricing model for fixed or mobile broadband access is that faster networks cost more than slower networks.

And since there’s a relatively linear relationship between network speed and data consumption, as a rule, there will be a tendency for usage-based plans to cost more when customers are on faster networks.

Beyond that, service providers have always used “new features” or “new capabilities” as a rationale for higher retail prices. Aside from the fact that LTE is more bandwidth efficient, an advantage for carriers, LTE does feature lower latency, for example, an advantage for end users.

And as a practical matter, expensive networks, with high fixed costs, facing significant loss of current revenue will necessarily look to price increases. Consumers of electricity and water services, for example, are sometimes exhorted to “reduce” use as a “green” effort, or to conserve resources.

But if too many electricity or water customers really do so, revenue for the suppliers drops, and they raise their prices.

So, in a real sense, the growing competition in the market, not just evolving product demand, would also force suppliers to make up revenue losses, somehow.

Executives of European carriers including Vodafone and Spain’s Telefonica say European regulators need to ease restrictions on consolidation to free up resources for investments into faster networks.

“There are hundreds of telecom operators in Europe while there are three or four in major markets like the U.S. and China,” said Jose Maria Alvarez-Pallete, Telefonica’s COO.

For all of those reasons, higher mobile broadband pricing is coming, as mobile service providers build 4G LTE networks.

In fact, at least some observers think even mobile broadband demand will not grow as fast as most of us expect. At least in some markets, "severe contraction" is possible, with data growth “dangerously slow” and network costs “unhealthily low,” according to Analysys Mason.

In other words, industry executives and observers might be overestimating the amount of revenue growth broadband access services can supply, at least in some markets.

Instead of worrying about the impact of a mobile data explosion, mobile operators in the West should worry about ensuring that it happens in the first place, according to Analysys Mason.

The firm estimates compound annual growth rate of volume of mobile data traffic will be below 50 percent from 2011 to 2016 period, and just 40.8 percent for 2012 to 2017. In most businesses those would be astoundingly good rates of growth.

But bandwidth is a product whose price falls dramatically with volume. In fact, there’s a direct and linear relationship between volume and price per unit.

The implications are startling. “Growth in mobile data traffic will not be enough to stop a contraction within the mobile industry in western economies,” Analysys Mason argued.

Those problems today are seen most clearly in Western Europe, where a variety of pressures –including lower mandated wholesale tariffs and product substitution in voice and messaging, plus competition, creating market pressure to reduce prices – is reducing mobile data’s potential to completely replace lost voice and messaging revenue.

Analysys Mason points out that Western Europe is forecast to have the lowest growth rate in mobile data in eight regions of the world.

Unit transport costs are declining at about 30 percent a year. So costs and revenue are balanced at consumption growth rates of about 42 percent, the firm says.

Data consumption, though, is predicted to grow by only 29 percent annually in Western Europe.

"In an uncompetitive market, falling costs would lead to rising margins, but in a mature, competitive market such as Western Europe they result in a contracting business," said Rupert Wood, Analysys Mason principal analyst.

Between 2012 and 2017, traffic in Asia-Pacific and Latin America will grow by a multiple of 9.1 and 6.8, respectively, 3.6 in Western Europe and 4.5 in North America. 

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Edited by Braden Becker

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