Speed-Based Pricing Points The Way For Carriers To Respond To OTT Attacks On Communication Services

 

This summer Switzerland’s incumbent carrier, Swisscom, launched a simple but revolutionary new mobile tariff, Natel Infinity. Infinity is a speed-based tariff that comes in the versions XS, S, M, L, and XL, which represent download speeds ranging from 200 kbit/s to 100 Mbit/s. Prices range from CHF59 to CHF169 per month (€49 to €139). Significantly, the tariff throws in unlimited national voice, SMS messaging services, and data usage without any additional charge (XL even comes with unlimited international calls to most destinations and SMS).

The idea is simple: The greater your urge for fast mobile services, the more you pay — irrespective of which apps you use and how you wish to communicate. All that matters is speed. In this respect, Swisscom has replicated for the mobile world a tariff approach that is already fairly common in the fixed-line world. I believe this move by Swisscom is noteworthy in two respects:

  • It effectively pulls the rug from under the OTT voice and messaging services like WhatsApp and Tango by removing the arbitrage potential created by time- or distance-based pricing schemes.
  • It brings in line capital spending on and actual demand for network infrastructure capacity.

But speed-based pricing is a clever move as:

  • Users always experience “speed” but don’t feel “data download.” This makes it easier for carriers to emphasize their comparative advantage vis-à-vis over the top providers of voice and messaging services, as well as “lame” carrier peers with a poor-quality network infrastructure.
  • Carriers create a platform for a wide range of new revenue streams. For instance, speed-based pricing opens wholesale opportunities for more sophisticated embedded-connectivity offerings. A future tablet that is embedded with 100 Mbit/s connectivity for interactive gaming is the equivalent of a BMW with a 12-cylinder engine.
  • Carries find an elegant way around net neutrality obstacles. By charging more for faster connectivity, carriers avoid the traffic prioritization debate. Charging based on speed does not constitute any restriction of content nor interference with applications, services, and devices.

Of course, there are downside risks of speed-based pricing:

  • Users who don’t need speed are likely to downgrade their packages. Users who mostly use non-time-critical apps such as email or social messaging will shift to a lower-revving “engine.” However, over time, people will develop a greater taste for multimedia apps on their mobile device, and more and more people will upgrade their engine to a speedier version.
  • Carriers could be challenged to guarantee speed in high-traffic zones. Carriers will need to plan network topology carefully in football stadiums, exhibition malls, train stations, etc. Clearly, traffic prioritization to ensure throughput for high-end subscribers is not an option, as it would immediately have regulatory implications. Speed-based charging requires carriers to rethink their common practice of overbooking capacity. The smart carriers will use this opportunity to turn this repositioning into a quality debate. Or do you want to be seen with a snail-pace smartphone?

In my view, speed-based pricing will become a much more widespread charging approach. Flat rates and usage-based packages constitute only a half-baked solution to deal with the OTT onslaught. The problem with simple flat rates is that they open the door to OTT providers and “data-free-riders,” where a small percentage of users consume an over-proportional percentage of data traffic. In this respect, flat rates distort the carrier investment incentives and potentially harm the market.

The report Voice And Messaging Are Not Dead - Prepare For The Implications Of Over-The-Top Communications discusses this and several related trends.