1. Right pricing LTE … and mobile broadband in general.
(a Technologist’ Observations).
Mind Share @ Informa’s LTE World Summit,
22th May 2012, Barcelona, Spain.
.
Dr. Kim Kyllesbech Larsen,
Technology, Deutsche Telekom AG.

2. Some key questions to be passionate about.
Do operators capture enough value of mobile broadband?
Do we understand data profitability vis-à-vis demand & cost?
How to change the pricing game from quantity to quality ... Is it possible?
Last but not least why should a customer pay extra for WiFi?

3. Would you give up internet for a Million Dollars?
For the rest of your Life!
A million USD
correspond to
ca. $20,000+
per year
for the rest of
your life.
Being inter-connected has a lot of perceived value!
Source: Full clip can be found at YouTube http://www.youtube.com/watch?v=0FB0EhPM_M4.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 3

4. Would you give up internet for a year?
…and for what price?
Cash today to
give up internet
for a year. Never 28%
1 Million Euro 39%
€500k 11%
€100k 11%
€20k 11%
0% 10% 20% 30% 40% 50%
The unthinkable? … “giving up the internet” (even for a year!).
Source: What amount of cash today would make you give up internet access for a year starting from tomorrow? http://linkd.in/J7fabN
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 4

5. Value of internet1…Worth massive lifestyle changes!
What would you give up 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, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 5

6. 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, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 6

7. The “arms race” of price reductions.
Current mobile data pricing is Lose – Lose Game.
Margin Change in market share to maintain margin
50% 30%
MNO A
40% 20% MNO C
10%
30%
Decision 0%
20%
interactivity -10%
MNO C
10%
MNO B -20%
MNO A
0% -30%
0% 20% 40% 60% 80% 100% -40% -20% 0% 20% 40%
Subscriber market share Change in price per customer
 MNO C has most to gain (and in principle  MNO C needs to add substantial less market
loose) from gaining market share. share in comparison to MNO A (& B) to
 MNO A’s margin is less sensitive to swing in mitigate (keep margin) price reductions.
market share. Its strategy should be different  This leaves MNO C to gain proportionally
from MNO C. more market share to not only keep margin
 Price changes will have impact on (while reducing price) but also gain margin
profitability as well as market share by over-compensating on market share.
dynamics between operators.
Illustration
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 7

8. The Game of Price…
Strategic lock-down on downward pricing direction.
Assume MNO A Raise Price
MNO A MNO C should Lower Price
Ranked Value of 55% market share
Data price
Strategy Price Price Assume MNO A Lower Price
Up Down MNO C should Lower Price
(2,3) Assume MNO C Raise Price
Price
Regulatory (0,2) MNO A should keep or Raise Price, other
Up no-no
MNO C
wise MNO A should Lower Price..
15% market
share A realistic strategic outcome (in this very
Price simplified example1) would be to lower price.
(3,0) (1,1)
Down
It will force both market players to reduce
their prices (i.e., tit-for-tat).
Quantitative pricing drives continuous price decline.
Illustration
1 This is only serving as illustration. In a 3 player market one would (obviously) have to consider all players and include the option of not changing
price in the market dynamics.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 8

9. 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, Mind Share, LTE World Summit, May 22 2012, Barcelona, Spain. 9

10. Dimensions of pricing
Enough to choose from … why then only volume?
Mobile Data pricing policies Most WiFi pricing policies
focus on Volume focus on Time or
bundled with
Volume Time mobile data plans
+
Fixed Data pricing policies
focus on Speed
 Mobile bundled
sometimes combined
products mainly
with Volume limits. Quality Product Voice, SMS, and Data.
 Fixed bundles with
Media, Broadband
Data, Voice & mobile
access (if available).
Illustration
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 10

11. Mobile data pricing almost exclusively volume driven.
It’s easy! but not a very meaningful driver!
Volume Time
+
Speed Product
Illustration
1 ….
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 11

12. Fundamentals.
How to price?
Price Ceiling Price
Price Strategic price
Range
Price Floor Price
leakage Maximize Revenues
Minimum
Profit Revenues
=
Price
× Missing
Quantity volumes
Cost Quantity
Subject to Cost
Illustration
1 ….
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 12

13. Fundamentals.
How to price or not to price.
Benefits internet1
?
Value of internet1
> 10×
Benefits = Value / Price Value Ca. €300+ pm
Benefits to Ca. 8% of GDPpc
Customer
Price Value
Ceiling Ceded
Total
Cost
Price Value
=
Price Value Added
f(Benefits)
Floor Extracted
Price of internet1
Cost of internet2 Profit of internet
> €18 pm <€30 pm
< €12 pm
Cost Profit @ 40% margin.
Price – Cost = Profit
Illustration
Source: K.E. Homa’s notes on Pricing Fundamentals, 1 BCG Report Connected World, perceived customer value. Analysis is fixed focus. 2 Opex only not considering
Capex.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 13

14. Right pricing LTE … Changing the game!
New philosophies … new dimensions.
Differentiate on Quality.
Speed.
Latency.
Coverage.
Quality1 Volume
Time.
Customer care & support, 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, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 14

15. A typical data traffic day in Europe.
Almost all Mobile data traffic occurs at Home & Work.
Illustration
data voice
00:00 6:00 8:00 10:00 12:00 17:00 22:00
Small Cells
@Home On the @Work On the @Home
(1 – 2 Cells) Go (2 – 4 Cells) Go (2 – 3 Cells)
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 15

16. Surprisingly? Across countries there is a high degree
pricing uniformity on a per MB level.
All countries follow a near perfect power-law behavior
US$-cent 1,000.00
per MB P(B) = C × B-d
P is price per Mega Byte, C is a constant, B is Giga Bytes for
a given price plan, d is the a constant exponent. Note If
100.00 pricing would be linear d would be 0 for = 0 (i.e., Price is
directly related to Volume). For >> B (i.e., customers pay
very high right-to use fee unrelated to usage), d would be
approaching 1.
10.00
DE
1.00 USA
NL
BE
PL
0.10 HU
FR
IT
Giga Byte
0.01 per
0.01 0.1 1 10 100 price plan
Source: Analysis based on Teligen, Strategy Analytics pricing data.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 16

17. Big variation in what consumers pay for mobile data
… pricing seems to have little to do with cost or value.
US$ per 100 P(B) = + B, It would expected that would
be close to zero (ideally zero), i.e., zero volume is
price plan priced at zero dollars. Data strongly indicates that data
pricing is NOT linear in nature.
80
DE
60
USA
NL
BE
PL
40
HU
FR
20
Giga Byte
0 per
0 10 20 30 40 50 60 price plan
Source: Analysis based on Teligen Strategy Analytics pricing data.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 17

18. … 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 (in
400 this example).
31%
200 46% 32%
58%
0
250MB 500MB 800MB 1GB UNLIM
Smartphone volume limit per price plan
Illustration
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 18

19. Relative cost and pricing … where did my margin go?
Technology Cost
of mobile data 2.00
In
€-cent per MB
1.50 Todays typical
Mobile data prices
1.00 ca. 0.5 – 10 €-cent per MB
0.50
Min 0.10±0.05 €-cent per MB
Long-term incremental cost:
0.00 €25 per incremental MB
Network BH Mbps
Illustration
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 19

20. What you really should care about! … Absolute cost!
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
Todays Total
Technology Cost Level
0
Network BH Mbps
(or equivalent time scale) Illustration
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 20

21. The land of plenty ..a fairy tale?
What really matters is the absolute NOT the relative.
Data volume vs Revenue – so what? Unlimited capacity provided … hmm!
CAGR +40% (*) Data Revenues / MB
CAGR +9% (**)
Data Revenues
Margin%
Data Volume Margin / MB
Time Time
(*) LTE data growth is 89%.
(**) at end point Msg & CS-Voice amounts to less than 10%.
Source: based on real market projections (from Pyramid Research) applying technology diffusion models to mobile data growth.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 21

22. Economical disconnect with most pricing strategies.
Volume is not an economical driver and thus problematic for pricing.
Same volumetric demand can cause vastly different network
Throughput cost and invest levels.
TRAFFIC PROFILE 4 HOURS
9 HOURS 2
1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Hour of Day
Traffic profile 2 To keep same user
same volume as 1 experience in busy Higher CAPEX level
but 40% higher hour more network and network OPEX
busy hour capacity needed. required.
throughput.
1 ….
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 22

23. Not all services are born equal.
Different use cases will have a very different Network and thus Cost!
Same volumetric demand canVolume in MB
cause vastly different network
@Home
surfing
100.0% cost and invest levels.
Peer-2-peer
generating
58.2%
53.2%
volume but
having little
42.4% throughput
impact
19.1% BH Throughput in Mbps
Mobile TV
8.1% 6.6% high BW
0.4% 0.2% 0.2% impact but
2.6% 2.1% 1.8% 1.2% 1.1% 0.5% 0.5% 0.5% 0.5%
relative little
volume.
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Illustration
Source: 2006 study, serves as an illustration on service impact on
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 23

24. Every new generation of smartphone increases data
load above & beyond the old ... and thus Cost!
Data volume
per Smartphone Improvements in
intrinsic smartphone speed
Dramatically increases the data usage
×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
likewise increases data usage 400 600 800 1000 1200 1400 1600
Smartphone CPU clock frequency
Source: Network data.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 24

25. The end-to-profit and excess spectral capacity …
”The writing on the wall” … why mobile data philosophy should be changing
Spectral efficiency cannot make up for Mounting cash pressure resulting in
increased mobile data demand1 End-to-profit exposure for MNOs.
The real “scissor effect”:
CAGR 33%
2014 - 2016 CAGR 26%
Mounting cash
pressure
Business
Spectral supply
model
breakdown
Spectral demand
Time
Western Europe assessment
Illustration
1 Analysis based on realWireless report for Ofcom,: 4G Capacity Gains, Final Report, January 2011.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 25

26. 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 as
<Speed> higher than 7.2Mbps Price
use cases might not be consistent Stdev less than 14.4 - <Speed>
with sustainable high speed 2
Range
<Speed> between 3.6 – 7.2 Mbps Price Minimum
Stdev less than 7.2 - <Speed> Range Profit
Price Minimum
Range
<Speed> < 3.6 Minimum
Profit
Stdev less than Profit
3.6 - <Speed> Cost
Cost
Cost
Illustration
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, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 26

27. Mobile data pricing overview.
FUP as a topline boost remedy may have its merits.
Policies at overage usage
Unhappy
customer
speed reduction
Sample of 45%
Topline 1,869 service stops
53% price plans
potential overage charge
Very unhappy
Illustration 1% customer
Source: Analysis based on Teligen Strategy Analytics pricing data; December 2011.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 27

28. FUP implementation.
There are fairly minor network benefits to be gained by FUP.
Daily Tail Volume Profile Daily Active Customer Profile
>2 GB usage > 2 GB usage
Max. 0.25% of total
55% of total traffic Active Base
-15% Drop Max -0.05% Drop
Pre-FUP
Max -10% Drop
Pre-FUP
Post-FUP
Post-FUP
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
As a top-line & educational remedy FUP might be more meaningful
Illustration
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 28

29. FUP or FAD?
Volume-driven FUP (of today) has little structural impact.
Time to 80% 98% < 0.5% FUP Addressable
FUP limit < 2%
>2,500 Years Example:
>250 Years
2,000 FUP relevant users
>25 Years
20,000 Cells in Network
>2.5 Year 50% of FUP in 20% of Cells
1,000 FUP served by 4,000 Cells
100 Days 30 Days = Reset
10 Days
BH mean value of users per cell
Days to reach 500MB is 185 (approx. log-norm distributed)
1 Day Days to reach 2GB in the Top 20% Cells.
2.5 Hour 1 FUP relevant customer would
compete for resources with at least
185 others in the BH (in max ¼ of
the Top-20% cells).
Illustration Daily usage per active user
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 29

30. Mobile data pricing sample as of April 2012.
Non-linear data pricing at play
US$-cent $c 18 VRZ 3G
VRZ LTE
per MB $c 16 ATT 3G
ATT LTE
TMUS 3G (market as 4G)
$c 14 CSL HK LTE
VF LTE Zuhause (1)
VF LTE MI (1)
$c 12
TMUK Sticks
TMUK smartphones
$c 10 TS SE 3G & LTE (1)
Orange FR (2)
Bouygues FR
$c 8
$c 6
$c 4
$c 2
$c 0
0 5 10 15 20 25 30 35
Volume limit in GB per price policy
Source: Tariff web pages of respective companies dated as of April 2012. (1) Speed dependent pricing with Volume limits, (2) De-coupled from
TV bundles (i.e., 0, 30 and 70 TV channels).
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 30

31. The higher the usage the lower the cost per usage.
On a log-log scale pricing do become clearer.
US$-cent
per MB $c 10.00
$c 1.00
VRZ 3G
VRZ LTE
ATT 3G
ATT LTE
TMUS 3G (market as 4G)
CSL HK LTE
VF LTE Zuhause (1)
$c 0.10
VF LTE MI (1)
TMUK Sticks
TMUK smartphones
TS SE 3G & LTE (1)
Orange FR (2)
Bouygues FR
$c 0.01
0.01 0.1 1 10 100
Volume limit per price policy
Source: Tariff web pages of respective companies dated as of April 2012. (1) Speed dependent pricing with Volume limits, (2) De-coupled from
TV bundles (i.e., 0, 30 and 70 TV channels).
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 31

32. 3G vs LTE pricing.
Mobile data pricing fairly independent of technology.
LTE pricing
3G pricing. A bridge to very high consumption.
US$-cent per MB US$-cent per MB
$c 10.00 $c 10.00
$c 1.00 $c 1.00
VRZ
ATT
TMUS VRZ
$c 0.10 $c 0.10
TMUK (1) ATT
TMUK (2) TeliaSonera (1)
Orange FR CSL HK
Bouygues FR VF DE (1)
$c 0.01 $c 0.01
0.1 1 10 100 0.1 1 10 100
Data Volume in GB per price policy Data Volume in GB per price policy
(1) Data Sticks, (2) Smartphones. (1) Speed-Volume combined pricing.
Source: Tariff web pages of respective companies dated as of April 2012.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 32

33. LTE pricing strategies.
What we know and what we do today.
Stimulate LTE migration LTE premium – fixed substitution.
US smartphone focused. Europe PC/Laptop focused.
US$-cent per MB US-$ per month
LTE
3G
ca. 15% less for LTE
3G
LTE
0 10 20 30 0 50 100 150
Data Volume in GB per price policy Up-to speed limit in Mbps per price policy
Source: Tariff web pages of respective companies dated as of April 2012.
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 33

34. Quality versus Quantity
Quality combined with Volume. Power-law of Data Pricing
$-cent per MB
$c 100.0 VRZ (1)
$-cent/MB VRZ LTE
Price ATT 3G
ATT LTE
TMUS 3G (2)
$c 10.0 TMUS 3G (3)
-60% ×2.5
Price $Cent per MB = 2.7732 Vol(in GB) -0.596
R² = 0.9735
$c 1.0
×18 in Quality
0 20 40 60 $c 0.1
0.01 0.1 1 10 100
Data Speed in Mbps per price policy Data Volume in GB per price policy
Source: Tariff web pages of respective companies dated as of April 2012. (1) 3G Smartphone tariffs, (2) Monthly payment, (3)
Mobile Broadband tariffs. nd
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22 2012, Barcelona, Spain. 34

35. WiFi is free! … ?
Think again!
Re-defining the meaning of Free1. WiFi MB higher priced than Mobile.
Mobile Data price in €-cent per MB
100.00 Mobile Data Price per MB
10.00
1GB 2GB 0.5GB
0.25
€c/MB 1GB
1.00 Cost of
Mobile
data
No WiFi
Incl. WiFi 0.30 0.40 0.50
€c/MB €c/MB €c/MB
0.10
0.01 0.10 1.00 10.00 100.00 Cost of WiFi Price per MB
Mobile Data allowed volume limit WiFi
1:10 – 1:20
WiFi premium between 34% and 3× of mobile data.
that of mobile data only
Source: Tariff web pages of respective companies dated as of April 2012. 1 Caution: Some care should be taken as the data interpretation is not completely un-
ambiguous due to the great variety in price plan structures even for same MNO (i.e., different bundling strategies).
Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 35

36. What we need to be (insanely) passionate about.
Understand data profitability vis-à-vis demand & 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.

37. Acknowledgement: I am indebted to Nicole Niedermeier, Bin Xi, Veli-Pekka Contact: kim.larsen@telekom.de
Kroger and Dejan Radosavljevik for greatly supporting and enhancing this
work. Last but not least I acknowledge my wife Eva Varadi for her great
Mobile: +31 6 2409 5202
support and understanding during the creation of this presentation. http://nl.linkedin.com/in/kimklarsen
http://www.slideshare.net/KimKyllesbechLarsen