unmediated: Can Flat Rate Pricing Stick?

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June 07, 2005

While flat-rate data pricing has encouraged adoption, it scares the operators with fears of eating into other revenues and overloading capacity. Combined with decreasing prices in competitive environments, will operators be able to keep it up?

Mobile operators are in a funny position when it comes to data pricing. They need to encourage usage -- but they're worried about too much usage. Pricing data in byte-sized chunks or even in minutes acts to discourage actual usage. When people aren't quite sure what they need mobile data for, having them watching the clock (or the byte total) isn't likely to do any favors in helping subscribers figure out why mobile data makes sense. Instead, they'll just let it slide.

NTT DoCoMo discovered this recently when it finally decided to offer flat-rate data pricing, which helped its FOMA 3G service finally catch on. However, even with the success it created, DoCoMo executives later admitted that flat-rate pricing was a problem for the industry -- not a boon.

A new article from the New York Times service highlights this issue. Japanese operators keep dropping the prices on data, leading more users to start using data instead of voice communications in many cases -- cutting into voice revenue. The article doesn't even take into consideration that the Japanese market is about to get much more crowded, with the entrance of three new entrants, including Softbank, a big believer in offering cheap services in the broadband world.

The NY Times article is supposed to be a warning to US operators -- but it's not clear what the solution really is. Without offering flat-rate data pricing, it's much more difficult to convince users why they should bother checking out the various data offerings. Having a ticking clock in the back of your mind isn't conducive to experimenting with creative new uses of technology. However, actually allowing widespread usage creates a capacity problem for operators who are afraid to overload the network.

One solution, that US operators seem to be taking right now, is to use pricing as a limiting factor. That is, they start out data offering with high prices almost to discourage too much usage, while still letting the early adopters to pay up and enjoy the benefits of high speed wireless broadband. However, that clearly isn't sustainable long term. Prices are clearly going to drop over time, especially as more competitors enter the market. A second option is to limit types of usage. Witness Clearwire's decision to block VoIP users from using its service. However, this also may be unsustainable long term. When people want access to data, they want access to all data. But, that will present problems as well. As data does get cheaper, people will figure out ways around blocks -- or demand the ability to use data service, even in cases where it can clearly take away voice revenue, such as by using Skype over a 3G connection.

The answer, unfortunately, is that there isn't a great answer for mobile operators. They need to understand that this is an issue they're going to be facing moving forward, and realize that it's where the market is headed. Offering some form of flat-rate data still looks necessary to be competitive. However, in order to do that, operators are going to have to make sure networks can really handle the capacity of people really using those networks. At the same time, existing business models are going to get squeezed, so operators need to be aware that the lifetime of certain cash cows may be approaching an end point -- and start seriously considering other options.

Originally posted by Mike Masnick from TheFeature.com, remediated by yatta on Jun 7, 2005 at 01:16 AM