Building a new billing model: content may be king—but how do you charge for it as applications become increasingly complex?

Telecom Asia, March, 2004 by Joseph Waring

Mobile network operators across Asia Pacific are moving seriously into the content services market. The introduction of an array of data services such as multimedia messaging, where the link between an event and its size is breaking down, is forcing mobile carriers to rethink the way they bill for new content. Everyone agrees that the new pricing models have to factor in both the cost of the service and the value to the customer. But how they translate these into actual pricing structures is where the challenge lay.

According to John Delaney, principle analyst in Ovum's wireless group, the rating model is in flux at the moment. "Carriers are trying different things, and it's not clear right now what will work."

Ross O'Brien, managing director of Intercedent Asia, a Hong Kong-based consulting and research company, goes a step further: "I think carriers are being surprisingly uncreative in coming up with pricing solutions."

But without knowing user characteristics and what will be in demand, it's a gamble for carriers to package these often-expensive services using a new, untested billing model, such as a flat rate. Virat Patel from PA Consulting Group in Hong Kong notes that to protect themselves, carriers would have to price the service so high that it wouldn't be attractive.

The baseline for new data services has been the SMS model of charging by the message--usually regardless of the number of characters. But with services like MMS, the size of a message can vary by as much as a factor of three without any changes to a phone's settings. This makes it less predictable for the customer to know what he/she will be billed for.

"From the end-users' point of view it's unacceptable to be charged different prices for the same event," Delaney insists. "But for the operator margins become much less reliable when there is no direct link between the service provided and the actual size."

He says the majority of carriers are using event-based billing, and wisely so. "Operators face an uphill battle trying to market their multimedia services. Volume-based pricing will protect their margins, but they need to change consumer behavior to create traffic and boost revenue."

He thinks that charging by event is not sustainable in the long run. "Event-based pricing is the lesser of two evils. It's manageable at the moment as the size of MMS files isn't huge. As the size and value of data services increases, operators have to find a new business model."

Everyone seems to be looking at each other for answers, and all eyes are focused on 3's experience with its 3G launches.

Trial and error

O'Brien sees the need in the short term to stick with event-based charges because they have a great deal of context in people's minds. This will enable consumers to become comfortable using new applications. But in the longer term he expects a move away from charging for discrete events in order to generate demand and increase usage of new services.

"People are probably going to use them less if they're thinking about each download," O'Brien points out. "Looking to the future, consumers are not going to have an always-on mindset if each event has a price tag."

Patel believes carriers will offer a portfolio of services, much like with cable TV, which consumers can pick and choose from. "Packaging these services in an easy-to-understand way that appeals to different audiences will be key to creating demand," he says.

"At the moment the industry needs a success story. They haven't had a runaway success since SMS. Rather than worry about pricing something too low, carriers should be willing to put up with [low margin] applications that could create huge demand, then readjust prices after one takes off," Patel suggests.

As capacity on networks becomes more abundant and subscriber growth slows, the fiat-fee model for data services is likely to become a more competitive option. As far as the consumer is concerned, a flat price is one of the easiest to understand. This model has been extremely successful for Internet service providers, which saw penetration and usage soar with the launch of unlimited usage plans.

The flat-rate model, however, has severe limitations in an "always-on" environment as it keeps the operator from adjusting rates based on the value of the specific content. Billing on a per-minute basis faces the same constraints by eliminating the operator's ability to bill for complex services and applications.

In need of flexibility

Pat Richardson, HP's director of marketing, operations domain for network and service providers, says the current rating systems are not geared toward the complex services that are emerging. He predicts that operators will move to a different charging system over the next 18 months. "As more sophisticated services are introduced, you'll see new structures that not only rate by time or volume, but the type of content as well. No one is doing this is the region. The vendors are ready, but it's not here yet."