Carriers - Business and Revenue Models

Carriers are turning to mobile data services as a new source of revenue and means for increasing ARPU (annual revenue per user). The first thing that any strategist creating a mobile business model must realize is that the economics of packet networks is quite different than the economics of traditional cellular networks.  Cellular networks support only per-minute and flat rate charging models, packet-based data networks open the door to a host of new revenue options -- some more suitable than others.

For companies -- network operators, content, software and service providers, and end users -- packet networks offer the potential for change in the competitive dynamic.  For instance, existing carriers are wedded to volume-based, per-minute business models. For these carriers to change will require painful steps very much like what ma bell AT&T had to go through when the Internet Access became popular in 1996. 

The business models which operators and their partners choose  will have a high impact on operator retained revenue streams. Mobile operators are caught between the steady decline of voice ARPU (annual revenue per user) and the cost of upgrading their networks to CDMA2000 1X, GPRS and UMTS. To solidify the business case for next generation mobile data services, operators need to focus first on building an robust network that provides application developers with the building blocks of back-office integration and flexible accounting mechanisms to allow traffic to be counted by and billed for user identity, transaction context and location.

Mobile Operators

• North American Carriers include: AT&T Wireless, Sprint PCS, Verizon, VoiceStream, Nextel, and Cingular Wireless; Canada [Telus Mobility, Bell Canada, Rogers]
• European Carriers include: Austria [mobilkom, maxmobil]; Belgium[proximus, mobistar]; Check Republic [eurotel, radiomobil]; Croatia [cronet]; Denmark [teledanmark, sonofon]; Estonia [Eesti Mobitelefon]; Finland [radiolinja, Tele Finland]; France [Itineris, SFR, Bouygues Telecom]; Germany [t-mobil , d2privat, eplusviag interkom]; Great Britain [ BT cellnet , vodafone , Mercury one 2 one , orange ]; Greece [telestet, cosmote]; Hungary [pannongsm, westel900 ] ; Iceland [Postur og Simi]; Ireland [digifone, eircell]; Italy [omnitel , tim ]; Latvia [LMT]; Luxemburg [PTT Luxemburg]; Netherlands [mobiel , libertel, telfort ]; Norway [netcom, telenor]; Poland [eragsm, polkomtel]; Portugal [telecel , optimus, Telemovies] ; Russia [NW GSM]
• Asian/Aussie Carriers include: NTT DoCoMo, Hutchinson, China [China Unicom, China China, China CTHK];  Philippines Globe Telecom, Taiwan [KT Telecom, Pacific Comms], Malaysia [TRI Celcom, Telekom Malaysia, Maxis, DiGi];  Australia [Vodafone, Optus, Telstra].

The Mobile Operator Challenge
The Internet while a huge "user" success. Yet, it was a business failure for the network operators like Sprint or AT&T. They could not figure out how to effectively monetize the IP traffic being generated by their customers. The mobile operators cannot afford to have the "Internet-Revenue-Capture-Fiasco" happen to them.  As a result, operators are under tremendous pressure to figure out a way to share in the value delivered on their mobile networks. 

The new revenue models need to address the following shifts:

• Shift from a simple voice-only, direct relationship with the user to only, to an increasingly complex one
• A portfolio of enterprise services with multiple partners and revenue sharing
• Increased competition with third parties (MVNOs) also targeting the end user
• Shift to becoming a system integrator requiring coordination of the complete value chain 

The basic challenge for operators is the integration of the Internet with Mobile -- at the device level, service level and the transport level.

Another challenge for operators is moving from Consumer Apps to Enterprise Apps. Carriers are increasingly looking for applications that entice business users from large companies. Traditionally, the business user has been a target segment for operators like Nextel and Cingular. This is now become the focus for many other operators like Sprint PCS.  This trend is good for application vendors as carriers look to differentiate themselves through software.

Acronyms used by Mobile Operators

Mobile Operator Revenue Models
The different revenue models for carriers, Mobile Virtual Network Operators (MVNOs) and other access providers (distribution networks) include:

Killer App - SMS
Wireless messaging is the #1 driver of data service revenue for wireless carriers especially European. Europe adopted SMS faster because they didn't have the paging network infrastructure that was dominant in the U.S.

SMS traffic exceeds 20 billion messages per month worldwide, at an average fee of $.10 per message. Popular in Europe and other parts of Asia such as Korea.

Big Barrier to SMS in the U.S. -- Until recently, inter-carrier messaging was not possible. That means that Cingular users could not send message to ATT Wireless users. This is now finally possible. Cingluar said it has experienced rapid growth in text messaging use over the last six months of 2001 and now handles tens of millions of messages every month.


Emerging Case Studies
Verizon 3G Express Service
VodaFone merged with AirTouch in July 1999. It then merged its US interests with Bell Atlantic and GTE, creating Verizon Wireless.

3G Network: CDMA2000 1X (Code Division Multiple Access)
Target Market: Verizon's service is targeted at laptop users who want to access e-mail and corporate intranets, download files and prowl the Web without wires at decent speeds, from practically anywhere, anytime.

Coverage: Express Network covers much of the Northeast, from Portland, Maine, to Norfolk, Va., and also in the San Francisco Bay area and Salt Lake City. Verizon plans to roll out the Express across most of the USA by the end of 2002.

Revenue Model:  Flat-rate pricing plan under which data usage counts against a customer's monthly airtime allowance.

Pricing: $300 for Sierra Wireless AirCard 555, $30 for monthly service on top of digital voice calling plan ($35 or more). Verizon also sells an alternative: Kyocera's $80 2235 phone and $80 Mobile Office connectivity kit. Starting March 16, data session airtime charges apply toward your voice allowance, with excess minutes costing 20 to 40 cents.

Comment: Verizon's data-rate pricing plans (like others from ATT Wireless) is aimed at reducing the confusion for the average user. Part of the mobile data adoption problem has been pricing confusion that discourages use, rather than encourage it. Simple, convenient data plans require a different pricing paradigm than voice, but few domestic carriers seem to have found the right formula yet.

Infrastructure Upgrade Economics
NTT DoCoMo's third-generation phone service, Freedom of Mobile multimedia Access, deployment has just begun. By 2004, all the i-mode phones will be replaced by FOMA-ready phones. Given the replacement cycle of 1.5 years, two full cycles will be enough for all mobile phones to go to 3G. As a result, there is tremendous pressure to upgrade the back-end infrastructure.

The operator infrastructure upgrade is required because speedy or bandwidth intensive mobile data services requires new types of switches and capabilities that operators' existing circuit-based, voice networks do not have -- nor do existing data communications equipment provide.

The point of upgrade is usually at the edge -- where the radio access network (last mile) meets the IP networks (data backbone) and where subscribers and data services are linked. Today, there exist two dominant upgrade paths:

• GPRS (Global Packet Radio Service), is based on the dominant global standard GSM. Cingular and AT&T Wireless, the nation's No. 2 and No. 3 wireless firms, are building out new networks with it.
• CDMA2000 1X (Code Division Multiple Access), is a technology developed by Qualcomm that runs on existing CDMA infrastructure.. Verizon Wireless and Sprint PCS, the No. 1 and No. 4 wireless firms, are taking this route.

AT&T Wireless (AWE) plans to have GSM / GPRS rolled out to 100% of its POPs by the end of 2002. The budgeted capex for this overlay is $1 billion in 2001 and $1.5 billion in 2002, equating to about $15 per POP. For AWE, the expenditures for the EDGE upgrade (providing data speeds of up to 384 Kbps) should run in the low hundreds of millions of dollars, and consists of software upgrades to compatible radios.This will also triple a cell site’s capacity (carrying three times the number of subscribers) at little extra cost to AWE.

GPRS to UMTS -- the software and hardware upgrade to UMTS should cost about $1 billion. AWE expects the total upgrade to cost in the mid-$20 per covered POP. Cingular, on the other hand, provided Capex guidance of $3 billion to overlay GSM on its TDMA networks in 2002 and 2003.

Opportunity - Reengineering the Billing Infrastructure
The biggest challenge for operators will be shifting from a one-service mind-set to a portfolio of services, new business models, multiple partnerships and complex relationships. Integration of the Internet with mobility will require a re-engineering of billing platforms.

Why re-engineer billing platforms? The high cost of current data pricing plans can be blamed partly on legacy subscriber billing platforms that were built to track voice usage. Because these systems were designed for use with flat-rate voice services, they can't easily or accurately account for the vast number of data-based transactions associated with 3G. As a result, carriers have focused on pricing plans that allow them to continue to use their current, inflexible billing systems.

There's a chicken-and-egg aspect to this: Though more sophisticated billing systems are available, many carriers are reluctant to invest in them until they're confident that there is significant demand for 3G.

Additional Reading
See Tahoe Networks's white paper: Unlocking ARPU through Killer Mobile Data Networks.