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The impact of moving away from flat rate plans

John Yeomans Director, FirstCapital Elsinore House 77 Fulham Palace Road London W6 8JA, UK Tel: +44 (0)20 8563 1563 www.firstcapital.co.uk

First Capital and John Yeomans

+44 208 563 1563

FirstCapital is a leading boutique investment bank, established in 1999, advising high growth technology companies. Our team has collectively advised over 220 clients, from technology start-ups to multinationals, on over $145bn of domestic, international and cross border transactions. Small Investment Bank of the Year 2009

John is a director of FirstCapital. He focuses on communications and digital media, is an angel investor and director of 3 new media businesses.
Previously as Head of HSBC TMT corporate finance, John built the department to a $120m global business. Before then he was a TMT strategy consultant with KPMG and Regis McKenna, and in sales, marketing, product management and strategy roles in Mitel and in growth telecom venture companies. John has a starred first class degree in Electrical Sciences from Cambridge.

Summary:

The impact of moving away from flat rate plans

Not a lot

The problems of data growth are different

And very challenging for operators

What will be the impact of moving away from flat rate plans?

Distribution curve for users, and market penetration

Data becoming mass market Many lower users naturally Pay as You Go, like voice So in that sense there will be growth of usage based data tariffs

Market penetration

Laggards: low usage Typically pay as you go

Early adopters: high usage Typically contract bundle

But theres nothing new here

Is the need to invest to avoid network overload a reason for more usage-based tariffs? No. Its a case for proper planning to match customers to network capacity Example:

O2 UK leader in Smartphone adoption 2008/9

Dec 8 2008: MocoNews.net But the number of data-capable phones is definitely growing faster than network capacity, so overload is just a matter of time M Mace, VP Product Planning, Palm. Aug 5 2009: Neowin.net For the third time in three weeks the O2 data network was unavailable for many. Dec 21 2009: Daily Telegraph O2 would not say how many of its customers have been affected, but it is understood a large chunk of its more than a million users have been having a problem since Saturday.by early afternoon on Monday the network was still experiencing problems. May 11 2010: Engadget.com So word has it that O2's network's been a bit dodgy in some parts of the UK this evening.

To add balance

Other operators have experienced loading problems too

Some Smartphones poor signalling to network has helped create network overload

With GPRS, the data traffic can block out voice calls (LTE is different)

Never mind investment, expect congestion within five years where there are delays in making new spectrum available

.all of which reinforce usage tariffs not the solution to managing data traffic growth

But what about funding investment?


April 2010: US mobile data traffic exceeded voice, but with a fraction of the users 10 years after fixed network, where data is now o. 10-100x more Long term drivers of tariffs: Once network well established, incremental cost of data carriage for a user will be very small Naturally a dynamic for fixed or nearly fixed tariffs Compare with fixed broadband 1990-2010 or fixed telephony 1950-1990: early focus on usage based tariffs moved to fixed rentals as market evolved Short term: the challenge is ramping up network capacity quickly enough to cope with growth in smartphones and mobile data usage. Expect trend like fixed networks, but a decade on many argue it favours a usage based tariff, to recognise the capacity constraints and investment costs. Does it? NO. Matching capacity to customers is more about planning than tariffs: Tariffs are only the issue if you cant fund the investment other ways.

So if data tariffs arent the issue as data catches on, what is?

1. Customer retention, competitiveness and profitability?


which argues in favour of conventional tariffs with bundles

2. Who owns the customer?


Smartphone or network; services or bitpipes

3. Cannibalisation?
IP data can knock the bottom out of voice and SMS service revenues

4. Data with QoS (defined Quality of Service measures)?


in a few years, customers will want guarantees of eg capacity and delay eg for video services

1. What are the main business dynamics for operators in growing mobile data?
1. Maintaining or improving market share ie customer retention and competitiveness 2. risk of losing power users to competitors, if tariffs are strongly usage based bundling gives security eg voice/data bundles

Avoiding cannibalisation of core voice and SMS revenues, through adding on data bundling helps, but in time more will be needed

3.

Funding investment its a consideration, but large operators have lots of ways to fund growth also the cost of data capacity across a network is more geographically based

The priority is growing profitability through customer retention and competitiveness at least for large operators in mature markets usage based tariffs are not the obvious way to do that: tariff bundles still are.
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2. Who owns the customers: operators as service providers or for bit transport?

What the customer sees of the supply chain: Voice End to end service from operator, but phone brand is visible

SMS

End to end service to operator

Data

Operator offers bit transport. Customer mindshare diminished

Apps/services Smartphones Operator Data forces emphasis on bits, not services For decades telcos have functioned like this for data.

Walled gardens are dead

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2. Service provision or bit transport more reasons for bit transport Smartphones are destabilising the traditional handset network balance
in favour of the Smartphone building independent brand and mindshare

Standards in handset operating systems have opened up the app platforms


some of which in 3 years are already as big businesses as network operators

Which operator has the image of Facebook or Apple in consumer eyes?


none

Net neutrality is used by some as a tool to hold down the operators


Need to support all the applications rather than differentiate their own

Scope for new services for operators?


Yes mobile wallet is the most obvious. Need for ubiquity could favour operators. But other players in the value chain must take the lead

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3. LTE apparently threatens to cannibalise core voice and SMS operator services

Comparison of price per bit in my tariff bundle


nb logarithmic scale

(600 mins; 500 texts; 3GByte per month)

Data

Often seen as bit pipes

Voice

Sold by operators as service

SMS

Sold by operators as service


1 10 100 1000 10000 100000

Operator gets 40x as much per voice bit and 4000x as much per SMS bit - assuming an equal basis of cost allocation between data, voice and SMS
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3. LTE and cannibalisation of core voice and SMS operator services cont.

LTEs end to end IP leaves voice and SMS wide open to substitution
compare with Skype in fixed environment

A few provisos
very uncertain quality of service for packetised voice (delay, capacity) network architecture: existing voice calls will continue to be supported? A end and B end: end to end service will need gateways until both ends have LTE

But a massive revenue threat remains when LTE is penetrated enough


tariff bundles reduce the incentive (if youve paid for 600 minutes, why not have them) but data only subscriptions, the telco way to charge you more, undermine the bundles
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4. Defined QoS: will it keep operators in service, rather than bit pipe business? What would it be for?
reliable delivery of services like video and voice

Can a service actually be offered?


guaranteed bandwidth? guaranteed delay? in a mobile network architecture and topology? across a network with different technologies and loadings in different places

How long until it happens?


a long time until there is full end to end LTE deployment

How would it be tariffed?


as a premium tariff bundle

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Conclusion

Usage based tariffs


a natural consequence of data in the pay as you go market not a means to finance investment or deliver fair tariffs to users

Bit pipes.
a great place to be for the next decade demand will just keep going up; supply per bit will get cheaper and cheaper

The tariffing priority


remains tariff bundles, voice/data/text, for customer loyalty

The challenge
cannibalisation of voice and text revenues by clever apps low end, usage based pricing packages used to cannibalise core services !

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