While initial flat-rate unlimited mobile data plans have done much to drive customer adoption, these offers are being overtaken by Tiered Pricing (or Speed Tier) plans for a number of reasons:
- Critical mass adoption – i.e., a primary objective of flat-rate data plans, has largely been achieved. 3G (and now 4G) Mobile broadband-capable smartphones represent half of all handsets currently sold in Western Europe and U.S. (Gartner). And the typical smartphone generates 24 times more mobile data traffic than the typical basic-feature cell phone, according to Cisco’s annual Visual Networking Index (VNI) Global Mobile Data Traffic Forecast.
- Need for more effective market segmentation – Tiered Pricing plans, which let users select from varying levels of downlink bandwidth rates and fair usage quotas, enable the operator to target users at all levels of the mobile broadband usage spectrum. Cisco VNI forecast also showed that the top 10 percent of mobile data subscribers now generate approximately 60 percent of mobile data traffic, down from 70 percent at the beginning of the year, indicating a more natural usage distribution is evolving. Low, medium, and high-volume subscribers are worth different ARPU, and each creates unique incremental cross marketing and up-selling opportunities.
- Too Much of a Good Thing – the downside of critical mass adoption is that users are experiencing congestion and quality issues, and many operators believe that the ongoing surge in mobile broadband traffic has become a burden and worry going forward.
- Need for better network capacity management and expansion planning – operators can gain a better understanding of expected demand from a segmented and tiered subscriber base. As incoming Verizon Communications CEO Lowell MacAdam put it: "Tiered pricing is like gravity. The industry has to get there eventually, because there just isn't unlimited spectrum."
Operators Shift Gears
More and more operators globally are offering Tiered Pricing plans to better monetize high-paying performance-oriented customers and attract more lower-paying value-oriented users. AT&T ended its $30 all-you-can-eat plan and replaced it with speed tier options: $15 for 200MB; $25 for 2GB; or $45 for 4GB — a move that AT&T CEO Ralph de la Vega has said has been successful in signing up price sensitive low end users. And T-Mobile USA has eliminated unlimited plans and launched tiered data plans for smartphones at four levels, ranging from $10 for 200MB/month to $60 for 10GB/month, all of which include unlimited Wi-Fi access at T-Mobile hotspots all over the US. Users exceeding their monthly data quotas will see speeds throttled down to 2G/EDGE levels, so technically, these are still "unlimited" data plans. Telenor Norway has announced new “multi-sized” (S, M, L, XL) Komplett price plans that bundle voice, messaging and mobile internet with fair usage quotas ranging from 50MB to 3GB. And Singtel Mobile is also introducing mobile broadband speed tiers which will let high-end plan customers receive higher speed connections, regardless of network demand. Verizon announced new usage-based pricing starting July 7, allowing users to choose one of four options: $10 for 75 MB per month, $30 for 2 GB, $50 for 5 GB, or $80 for 10 GB. There will be an overage charge of $10 per GB of data.
Many operators are looking at the launch of LTE services to provide enough capacity to truly deliver – and enforce – a speed tier-based service model. Vodafone’s LTE Tiered Pricing model (for USB dongle) in Figure 1 is a good example.
Figure 1. Tiered Price Plans for Vodafone Germany LTE Service
Quota / Month
Price / Month
Operators Like the Course
We recently released a custom Cisco-commissioned Heavy Reading study, based on a global survey of 50 operators, with some interesting findings in the areas of Monetization, Optimization, and Video services. In this research, Operators viewed downlink speed tier-based pricing as the most attractive monetization use case, with 44% ranking it as “5-Very Important” to revenue generation, and over one-third of respondents stated that it would generate $5-10 or more in additional monthly ARPU.
HSPA+ networks have enough capacity to segment service offerings by download speed. While the Mobile Packet Core and IP Core networks have the intelligence to support QoS and differentiated services, there are challenges in implementing guaranteed QoS and downlink speeds over the mobile radio link due to variations in coverage, signal strength, and cell congestion. This means that speed tier-based offers are really “up to” service tiers, where the user can select, for example, up to 3.6Mbit/s, up to 7.2 Mbit/s, or up to 21 Mbit/s. Alternatively, some operators are marketing “expected” speeds. When quota is exceeded, it’s common practice for operators to limit users’ data rates for the rest of the month. For example, a user on a 3.6 Mbit/s plan might see downlink speed restricted to 256kbit/s when quota is exceeded, unless she “tops up” her account. Operators expect an increased capability to deliver speed tiers with LTE, which will support quality of service and provide enough capacity to actively segment, manage, and enforce such Tiered Pricing offers. Furthermore, operators are actively investing in the intelligent mobile/evolved packet core and Policy and Charging Control (PCC) solutions necessary to deploy new mobile broadband services such as Tiered Services. These intelligent IP solutions give operators the flexibility, performance and scalability to dynamically deliver varying speed tiers with data quota enforcement across the tiered subscriber base.
Users Need a Racing Fan Guide
Subscriber conditioning is critical to success of Tiered Pricing plans. Users don’t know what Mbit/s speeds or MBs of consumption represent. Users need to understand how much their applications are consuming to be comfortable with usage-based pricing models. A user can burn through a monthly 5 GB plan with 5 hours of video. Operators are providing web-based consumption calculators, alerts and notifications on low data quota, and other ways to educate and inform users to avoid surprises. In fact, the majority of users will be comfortably served by 500MB of data per month, likely to be a less expensive tier for most operators. Which means that many users will end up paying less with Tiered Pricing plans than they did with unlimited plans. Additionally, there is research to support the position that usage-based pricing practices can accelerate the realization of near-universal broadband wireless access.
In the next blog in this series on Monetization, we’ll take a look at family/group data plans, multi-device plans, and other ways operators are beginning to offer “value packages” for incremental revenues.
See the Mobile Internet Monetization Showcase for case studies, data sheets, and other information on a wide range of revenue-generating "Use Cases" that operators can offer.
Continue Reading: Monetization #3: A Family Affair