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Right Pricing Mobile Broadband ... Examining the Business Case for Mobile Broadband

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Delivered this presentation at the Informa's Pricing Mobile Broadband conference 26 & 27th August 2012 in London. While some of the slides are similar to the ones in my Mind Share document you will …

Delivered this presentation at the Informa's Pricing Mobile Broadband conference 26 & 27th August 2012 in London. While some of the slides are similar to the ones in my Mind Share document you will find new slides and re-worked material giving another twist to Right Pricing Mobile Broadband. Enjoy and should you have any questions/comments just get in touch! Don't be a stranger!

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  • 1. Right pricing mobile broadband. Examining the business case for mobile broadband. Informa’s Pricing Mobile Data Conference. 27th June 2012, London, UK. .Dr. Kim Kyllesbech Larsen,Technology, Deutsche Telekom AG.
  • 2. Some key questions to be very passionate about. Do operators capture enough value of mobile broadband? Do we understand data profitability vis-à-vis demand, supply & cost? How to change the pricing game from quantity to quality ... Is it possible? Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 2
  • 3. Value of internet1…Worth massive lifestyle changes!What would you give up for a year for internet access. 80 80 75 74 68 48 30 27 22 1 Source: The Boston Consulting Group Report on “The Internet Economy in the G-20”, March 2012. Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 3
  • 4. Value of internet1 …the customer perspective.Need, Love and (then) taken for granted? Perceived Value of Internet Perceived Value of Internet (relative to GDP per Capita) (relative to GDP per Capita) 40% 40% Internet penetration < 50% Internet penetration > 50% 30% 30% Taken for granted Japen & South-Korea 20% 20% 10% 10% ! 0% 0% 0% 2% 4% 6% 0% 25% 50% 75% 100% Price of Internet Internet Penetration (relative to GDP per Capita) The perceived value of internet drops as internet becomes a commodity 1 Source: Analysis based on The Boston Consulting Group Report on “The Internet Economy in the G-20”, March 2012. Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 4
  • 5. Price setting in mobile.Today’s data price philosophies are volume centric. Price ( Volume ( Quality, Product, Time ) , Cost, Competition1, Regulation) Volume Time e.g., MTR, roaming tariffs, … FUP based feedback Quality2 Product COST mainly driven by Quality & Product Illustration 1 Most price levels are NOT designed in isolation from competition, In fact often competition is the main “inspiration” for pricing. 2 Quality could be speed but is not exclusively so. nd Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27 2012, London, UK. 5
  • 6. Price & profitability … Pricing the ByteVolume is easy and gives a (false) sense of being almost avoice minute Volumetric customer Marketing & demand Sales Maximum Cost per Byte Profitability can be “safely assumed” if the “Price per Finance together Byte” is chosen somewhere in-between with M&S Minimum Cost per Byte Volumetric network capacity Technology REMINDER! Vastly different data-traffic profiles and Cost can result @ the same volumetric demand. Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 6
  • 7. Why data profitability is a *****Every data service, mobile app, smartphone, contributes to theBusy Hour differently and thus COST and Profitability. Volume in MB Home surfing 100% (wireless DSL) Relative contribution to Mobile TV BH bandwidth demand as high BW impact but 60% Function of service type relative 50% little volume in 40% this illustration . 20% BH Throughput in Mbps 8% 7% 3% 2% 2% 1% 1% 0.5% 0.5% 0.5% 0.4% 0.2% 0.2% Note: the above example from the pre-smartphone pre-mobile-apps (2006) but nevertheless it illustrates the challenges we have when trying to define data profitability in a meaningful way. nd Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27 2012, London, UK. 7
  • 8. Every new generation of smartphone increases dataload above & beyond the old ... and thus Cost! Data volume Improvements in per Smartphone intrinsic smartphone speed dramatically increases the data usage AND COST! ×4 @ UL=5.8Mbps Data volume @ UL=384kbps per Smartphone GPRS ×6 iPhone 0 10 20 30 ×5 Max. DL Speed in Mbps ×2.7 Improved air-interface speed increases data usage 400 600 800 1000 1200 1400 1600 AND COST! Smartphone CPU clock frequency Source: Network data. Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 8
  • 9. Right pricing mobile broadband…Changing the game!New philosophies … new dimensions. Differentiate on Quality. FUP as Speed & Latency. top-line Coverage (e.g., deep indoor) remedy Time. Quality1 Volume Customer care & support, Handset, device, etc.. Always-Best-Connected Leverage Fixed and Mobile. Reduce Small Cell deployments. WiFi / Femto-cell off-load, etc.. Product value add-on VoIP. Product Time Msg & notifications. Internet Access. Social media. Mobile media player. Cost of Handset, etc.. Providing data Illustration 1 Quality could be speed but is not exclusively so. Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 9
  • 10. … not all customers eat what they pay for! MByte 1,200 Policy Limit LIMIT & AV USAGE Average Used 1,000 800 Unlimited average 600 usage is 60% +60% higher than 1GB capped usage 400 (in this example). 31% 200 46% 32% 58% 0 250MB 500MB 800MB 1GB UNLIM Smartphone volume limit per price plan Illustration Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 10
  • 11. Relative cost and pricing … where did my margin go? Technology Cost mobile broadband data In 2.00 €-cent per MB Todays typical 1.50 Mobile data prices approx. 10 down to 0.5 €-cent per MB 1.00 Data pricing is in perpetual decline and will impact margin & data profitability. 0.50 Min 0.10±0.05 €-cent per MB 0.00 Demanded Network BH Mbps (allowing for HSPA+ LTE LTE-advanced) Illustration Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 11
  • 12. What you really should care about! … Absolute cost!The profitability auch! … Profitability crunch exposure Relative 2014 – 2018 (pending on country and MNO) Mobile Data 8 TCO Limited resources 6 A Gap too far to bridge? 4 “Unlimited” resources 2 ! ! Technology Mobile Data Todays Total Baseline TCO Technology Cost Level 0 Network BH Mbps (or equivalent time scale) Illustration Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 12
  • 13. New business! Defend philosophy! QoS, IoT,, Media, FMC, …Business case logic Stop / Slow Revenue Decline + New Revenue? Disruptive region … Iliad Free 3% market share Total Revenue Profitability in 6 month, Ebitda>0 @5% share − Usage Cost 50% Efficiency game − Market Invest SAC & SRC Defend / Slow Ebitda Decline 40% − Personnel CostEfficiency − Technology Cost (ca. 15% – 20%) 30% Incumbent region … Diminishing return of − Other Cost 20% most actions = EBITDA (WEU ca. 37% 1) MNO C 10% MNO B − Network Depreciation MNO A 0% 0% 20% 40% 60% 80% 100% − Spectrum Amortization Customer market share Increased cash pressure − Spectrum invest (0.8 – 0.05 € per MHz-Pop) New technology / Modernize Scale − Capex (new rollout < +10+% of Revenue) Red color represent Technology driven cost 1 BoA ML Global Wireless Matrix 1Q11, margin data for 4Q 2010. Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 13
  • 14. Spectrum position, investment & cost.2.6 GHz up-to 10× more costly to deploy compared to 800MHz. DL power UL power (typical limitation for coverage) 2.6 GHZ 800 MHz Very small Large Coverage area 10 6 4.5 Re-farm 1 2.6 GHz 2.1 GHz 1.8 GHz 900 MHz – 800 MHz (digital dividend) 190 MHz 2 60 MHz 2 75 MHz 2 35 MHz 2 30 MHz Total bandwidth 2 20 MHz 2 10+ MHz 2 20+ MHz 2 10 MHz 2 10 MHz Typical bandwidth per MNO High LTE HSPA+ LTE HSPA+ LTE Low Available bandwidth Illustration
  • 15. Backhaul will force re-thinking the network design.LTE’s extremely power-full air-interface, i.e., 100+ Mbps, willrequire extensive AND COSTLY backhaul fibre deployment. LTE air-interface 30mean to 100+peak Mbps (per sector) 100 Gbps Evolved eNode DWDM Packet Core 100 GbE FTTS 100+ Mbps eNodes per element 32:1 320:1 3200:1 BH Throughput 3+ 32+ 320+ In Gbps Illustration Dr. Kim Kyllesbech Larsen, ETSI’s Business Innovation Summit, October 4 th 2011, London. 15
  • 16. LTE the ultimate off-load weapon for HSPA in overload.More LTE spectrum available across a wider range of frequenciesBUT will not replace HPSA for quiet some time. 40% HSPA uptake 40% LTE uptake CEE CEE WEU 32% Geo coverage 80+% WEU 30% 30% 20% 20% 17% Geo coverage 50+% Early adaptors 10% 10% 11% 100% Smartphones 6% CEE 0% 80% WEU 0% 83% 66% 60% 50% As long as LTE has not reached critical 40% mass (i.e., >20%) WiFi will remain a 35% strong off-load enabler 20% & WiFi capable! 0% Source: Pyramid Research, March 2012. Dr. Kim Kyllesbech Larsen, ETSI’s Business Innovation Summit, October 4 th 2011, London. 16
  • 17. Cost-optimized mobile broadband deployment models.A wide range of frequencies will be essential for economicaldeployment reducing cost while coping with future demand. Throughput / Capacity up-to 3.6 GHz (TDD & FDD)New business Typical BW per Operator ≥ 2×20 MHz models Hot- Femto, small cells & smart-antenna systems. to emerge. Spots More fixed-DSL substitution (FMS) business model: P2P / CPE-based. 2.6 GHz Rural Fixed-like & deep indoor coverage LTE Typical BW per Operator ca. 2×10 MHz Urban – Suburban: LTE connectivity @ 800MHz 1800 MHz LTE – 2100MHz HSPA Rural / Nation-wide: 800 MHz LTE & 900MHz HSPA Illustration Note: main LTE bands in USA are the 700MHz and AWS bands, with some PCS band LTE deployment as well (i.e., Sprint). In Asia LTE is more concentrated around TDD and the 2.3 and 2.6GHz bands. Dr. Kim Kyllesbech Larsen, ETSI’s Business Innovation Summit, October 4 th 2011, London. 17
  • 18. So speed differentiated pricing is the solution?QoS or Speed guaranty in a radio environment is very difficult1! Price X for Price Y for Price Y for up-to 3.6Mbps up-to 7.2Mbps up-to 14.4Mbps Speed differentiated pricing might not be the magic bullet <Speed> higher than 7.2Mbps Price as use cases might not be Stdev less than 14.4 - <Speed> consistent with high speed reqs 2 Range Minimum <Speed> between 3.6 – 7.2 Mbps Price Profit Stdev less than 7.2 - <Speed> Range Price Minimum Range <Speed> < 3.6 Profit Minimum Stdev less than Profit 3.6 - <Speed> Cost Cost NOTE! LTE & LTE-advanced does Cost provide an easier bandwidth – Illustration speed-based QoS differentiation. 1 Some may even argue that it is impossible to provide a guarantied cellular service. Though one may not need to be exactly right but only statistically right to the level where the customer perceive his service to be in line with the price paid. 2 A customer may have paid for high speed price plan but dominantly using lower bandwidth applications. Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 18
  • 19. What we need to be (insanely) passionate about. Understand data profitability vis-à-vis demand, supply & pricing. Price innovation! … changing from quantity to quality based pricing. Understand mobile data is fundamentally different from mobile voice. Narrow the gap between customer perceived value and actual price. Dr. Kim Kyllesbech Larsen, Pricing Mobile Data, June 27nd 2012, London, UK. 19
  • 20. The key value proposition of a mobile network is ....Acknowledgement: To my great team behind the scene for their insights, Contact: kim.larsen@telekom.desupport and suggestions. Also many thanks to Olga Holin, Zahid Ghadialy Mobile: +31 6 2409 5202and Paul Cosway for suggestions and making me think about new ideas. http://nl.linkedin.com/in/kimklarsenLast but not least I am indebted to my wife Eva Varadi for her great supportand understanding during the creation of this presentation. http://www.slideshare.net/KimKyllesbechLarsen