02 and AT&T Data Caps: From the frying pan into the fire?

The inevitable has happened. AT&T and O2 have bitten the bullet and introduced data caps to their previously unlimited smart phone and iPhone offers. They will be the first of many operators to do so. The ‘all you can eat’ mobile broadband business model has finally collapsed under the burden of unsustainable cost levels and crippling quality of service issues. By introducing these usage thresholds operators are hoping to leave behind the bad press and welcome a new era of mobile broadband profitability and consumer satisfaction.

If only. Evidently operators have valid concerns regarding broadband service quality and profitability which require positive action from their side. But the usage cap is too blunt an instrument to effectively create a sustainable business model for mobile broadband. Are operators moving from the frying pan into the fire?

First of all usage caps raise all kinds of difficult questions for the consumer: So what exactly does a Megabyte give me? What happens when I overspend? Will I get notified in time or can I expect a huge bill if I am not careful? Will I suddenly not be spending a lot more? Although operators are at pains to assure that only a small percentage of their consumers will be affected, the impact is very likely to be very high on consumers in terms of perception, spend, confidence and satisfaction.

Perhaps more importantly, the usage cap is only addressing the symptoms of the problem, not the fundamental cause. Today, video easily accounts for 60% of smart phone traffic and is generating the majority of problems on operator networks. With the iPhone 4’s video calling capabilities, a new ‘network killer’ service is likely to appear. The consumer, in the mean time, is largely unaware of the effects of such services on the network and is in no way incentivised to alter behaviour.

This is where Acision believes the crux of the matter lies: consumer awareness. Consumers have no idea what the impact of a video service is; let alone what ‘a Megabyte’ relates to. Operators in our view therefore should consider the following approach:

• Offer a low price all you can eat package for the most elementary services: Most services, such as browsing and e-mail, don’t cause any major network problems. They could therefore be offered as part of an unlimited bundle, freeing the consumer from any hassle in these service areas.
  
• Treat resource intensive services differently: But in such a way that the consumer can relate to. This is where a cap could apply. But not a cap in Megabytes but in a measure that the consumer understands, which for video could be number of minutes. Video calling would of course fit such a model easily as voice calling is no different.
  
• Differentiate the offer: Operators could start differentiating their offers based on these specific resource intensive services, as long as they are able to explain it clearly to their customers. So for example offer two hours of video for $10 - as a bolt on package to the standard all you can eat service.

This is where we believe operators should focus. Creating a blended model of all you can eat basic services combined with transaction based premium services which consumers understand and relate to. Such an approach will enable long term sustainability in mobile broadband which balances consumer confidence and satisfaction with a viable operator business model.