Between 2006 and 2009, the US mobile operator AT&T’s mobile data traffic grew by a whopping 4932%. This was the period when the US witnessed its first real wave of smart phone uptake, with penetration jumping up from below 20% to around 40%.
There are three reasons why this coming of the “data wave” was actually not very good news for the industry.
Firstly, operators were offering “all you can eat” data packages to subscribers which meant that as usage grew faster than revenues.
Secondly, moving data packets over mobile networks was threatening to become costlier than the revenue itself.
Finally, lesser and lesser of what users were spending on web-enabled services were resulting in new revenue streams for the operator.
With data usage shooting up, but costs threatening to spiral and revenue growth getting limited, you can probably see why the industry got into a huddle about data profitability and growth. Let’s go back to our US example to make sense of these three reasons:
- The trap of “All-you-can-eat” unlimited data plans - In the mid-2000s operators were eager to offer pricing plans which did not set any real limits (there were some, technically) to how much data you could use. Because of these unlimited data bundles, in the initial days of the mobile data surge users used more and more of data but operators didn’t get paid any more money. This is why revenue growth lagged usage growth.
- The threat of data spiraling transmission costs - In the mid 2000s many operators were fast-tracking the development of radio networks but neglecting fixed access solutions or near-field technologies such as Wi-Fi. By the late 2000s, it was evident that a mainly radio-enabled strategy for connecting customers would never work in data as well as it had for voice. Overwhelming traffic growth was going to result in huge capital costs (e.g. network) and operating costs (e.g. energy). Operators suddenly remembered that Wi-Fi offered 10x the speeds of 3G at 70 percent lesser costs, and started thinking about how to give users a richer mobile data experience by seamlessly managing multiple devices across 3G, 4G, Wi-Fi and fixed networks. But that wouldn’t come easy, or fast.
- The curse of becoming a “dumb pipe” – As if cost escalation wasn’t bad enough, operators were also wondering about how they could capture a reasonable share of the new revenue growth. Data revenue was increasingly for “mobile internet” access, ie people paying a monthly or per megabyte fee for accessing the web. But when users spent on web-enabled services (e.g. travel booking, buying books or music, etc), the operator was usually bypassed completely in such transactions. So while operators were building the networks that would enable growth, they feared the threat of being edged out of any share of that growth! One indication of how they were being bypassed is that between 2006 and 2009, US operators’ share of all page views onto their own sites plummeted from 57% to 27%, and from a ranking of number 1 all the way down to number 10.
My prediction is that India will see a surge in smart phone uptake from around the end of 2015 onwards. Why?
Device price points, form factors and replacement cycles are all converging. Mass uptake of services might follow a year or two after that (by the time applications providers and operators offer services which appeal to the mid-tier user).
So I’d say the industry has anywhere from two to four years in which to start the journey to a network transformation that enables Indian mobile data users to have a good data experience using handsets, laptops or tablets, whether at home, office or on the move. To be successful, this strategy needs to manage costs and enhance customer experience.
One thing that AT&T and others did to stem the tide of cost growth as mobile data exploded was to introduce “tiered pricing”, linking customers’ per month tariffs to “slabs” of data usage rather than leaving it completely unlimited. That’s a great way to prevent cost from spiraling at the outset, but a long term network strategy is needed to enable us to be free to do what we want, at the right price, and have a great experience.
 Source: Merrill Lynch estimates, 2010