Re-thinking mobile data pricingRe-thinking mobile data pricing was written in association with the Economist Intelligence Unit.

Offering customers unlimited use of data for a fixed monthly fee is looking like bad economics for many mobile operators, but there are also dangers in abandoning this pricing model.

‘Our customers appreciate they now have a choice of data plans. From the feedback we have had, the classic one-size-fits-all approach doesn’t make sense any more.’

Mark Siegel Executive director of media relations, AT&T

Flat-rate pricing is usually a good thing for customers – provided, of course, the rates are low enough. There are no nasty surprises on the monthly bill, which is simple to understand. A service that customers might otherwise have been cautious about using (and paying for) suddenly becomes more attractive.

This has certainly been the case for mobile data services, particularly with the introduction of unlimited data for a fixed monthly fee – the ‘all-you-can-eat’ deal. True, many mobile operators (particularly in Europe) have placed caps on data use, but these are usually set so high that, in most cases, the customer can happily use the mobile phone for such things as web browsing, video, music downloads and photo-sharing without having to worry about the monthly bill. The result has been a mobile data boom. According to Heavy Reading, a market research firm, data traffic volumes on some 3G mobile broadband networks are now increasing, year on year, by a factor of 10.

Flat-rate pricing is not the only reason for the mobile data explosion. Faster mobile networks have also been a major factor, serving to drastically reduce waiting times for downloading. Another is the growing popularity of attractive and advanced end-user devices in the shape of smartphones (such as Apple’s iPhone). USB dongles, devices that plug into laptops and can access data from mobile networks, have also been an ingredient in the data surge.

77% of respondents agree that pricing mechanisms will play a more important role in mitigating future future traffic management issues.

64% agree that, in developing markets, the less complex the voice and data plans, the better.

But what is good for the consumer is not always good for the operator. While flat-rate pricing has helped persuade customers to sign up to mobile data packages, many mobile operators are beginning to view flat-rate tariffs as having outlived their usefulness. The data traffic volumes have been a boon for network use – and revenue – but costs must be incurred to increase capacity. If operators do not make this investment to meet capacity demand, there is a danger that network performance may deteriorate.

Meanwhile, data retail prices have tumbled. When Vodafone first started offering flat-rate data deals in the UK in June 2007, pricing started at £7.50 per month for 120MB of data transfer (with additional charges for use above that limit). Through a mixture of competitive and regulatory pressures, Vodafone UK’s flat-rate 3G data deals now start at £15 for a monthly download limit of 5GB. This means that, in little more than three years, Vodafone has dropped its megabyte price two-hundredfold.

Will it all end in tiers?

If their networks are becoming overly congested, and the economics of delivering increasing amounts of data do not stack up, then operators need to find new pricing models that can alleviate the strain. One possible solution is to move away from all-you-can-eat and flat-rate tariffs (with generous usage caps) to a pricing scheme that more accurately reflects use. One is the so-called tiered-pricing approach: the more data the customer uses, the more he or she pays. This would have the advantage of curtailing the small minority of heavy users who chew up a disproportionate amount of the network’s capacity.

According to Telefónica, a major mobile operator in Europe, 0.1 per cent of customers use nearly 30 per cent of network capacity. Stefan Wiessmeier, senior vice president, strategy and development with Telekom Deutschland, the parent of T-Mobile, says that his company ‘warmly welcomes the general market trend towards tiered pricing, especially as it ends cross-subsidisation of heavy users by medium and low-volume users’. (T-Mobile operators in the US, UK and Germany have recently announced the introduction of tiered data plans.) The danger of moving to tiered pricing is that it may hand over a competitive advantage to rivals that hold on to their all-you-can-eat deals, at least in terms of acquiring and retaining customers.

Mobile operators therefore have tough decisions to make on pricing strategies, but as yet there appears to be no clear consensus on the optimal route. In a recent survey of 391 international mobile industry executives conducted by the Economist Intelligence Unit, nearly half cite the development of new pricing models among the three most critical challenges operators will face over the coming three years. And although 55 per cent of all survey respondents agree that tiered pricing is the way forward in mature markets, that still leaves a sizeable minority who either have no strong views on this matter or even disagree. Moreover, 47 per cent of respondents say that all-you-can-eat data tariff plans are damaging operators’ ability to increase revenue, but a larger percentage either disagree with this notion or remain neutral about it. This suggests that a good number of mobile operators are still reaping the benefits of this type of pricing when it comes to attracting new data customers.

Sweden: unlimited data v caps

Sweden has led the way in commercial services using next-generation long-term evolution (LTE) mobile technology. Launched in December 2009 by TeliaSonera, the largest fixed and mobile broadband provider in Sweden, the LTE network offers customers downlink speeds ranging between 10Mbps and 80Mbps. TeliaSonera has evolved its mobile data pricing from a single tariff of SEK599 per month, with a data cap of 30GB, to a range of tiered packages involving different combinations of data speeds and volume limits.

By contrast, two LTE competitors to TeliaSonera in Sweden – Tele2 and Telenor – have opted for unlimited data deals, both of which are cheaper than the top-end SEK599 tariff offered by their great rival. Using a shared network, they launched LTE in November, so they have substantial mobile broadband ground to make up and clearly feel that unlimited data is more effective at attracting customers than tiered pricing.

Tele2 and Telenor risk attracting a lot of very heavy data users.And unlimited data may not turn out to be an effective customer acquisition strategy if most users prefer the cheaper options that come with tiered pricing, even if it means accepting some constraints on speed and volume. How long Tele2 and Telenor persist with unlimited data will reveal how useful that pricing strategy really is.

 You first: AT&T

One major operator that has decided to make the shift from all-you-can-eat to tiered pricing is AT&T, the first to do so in the US. Since June 2010, new AT&T smartphone users have no longer had access to unlimited data use, which had been priced at $30 per month. Instead, there are cheaper monthly deals available with data use caps that, says AT&T, more accurately reflect customers’ needs: $15 for 200MB per month and $25 for 2GB per month, with extra charges for customers who exceed those amounts. According to the operator, 98 per cent of its customers use, on average, less than 2GB of data per month and 65 per cent use less than 200MB.

‘Our customers appreciate they now have a choice of data plans,’ says Mark Siegel, executive director of media relations at AT&T. ‘From the feedback we have had, the classic one-size-fits-all approach doesn’t make sense any more.’

If what AT&T is saying is true in terms of customers’ actual data needs, then the overwhelming majority of its smartphone customers will benefit from cheaper mobile data packages. ‘The upside for us is that we should be able to persuade more customers to sign up to our mobile data packages, who may have balked previously at the $30 price tag,’ adds Mr Siegel. And with users of smartphones, which are much more data-friendly than ordinary mobile handsets, operators have greater potential to increase revenue from additional applications that are paid for on a per-download basis.

The big question is how comfortable customers are with restrictions placed on data use, even if most aren’t affected by them in practice. AT&T does not disclose the number of previous smartphone users on the $30 all-you-can-eat deal who have switched to one of the tiered pricing options, nor whether the rate of smartphone adoption has increased since June. Knowing this information would go a long way in helping operators in developed markets work out the pros and cons of tiered pricing.

But there are other factors at play in AT&T’s decision to opt for tiered pricing (other than boosting the smartphone subscriber base). Mr Siegel reports that wireless data traffic volumes have increased by 5,000 per cent in three years in the US and that AT&T carries half that total today. ‘No-one has had to face the challenges that we have had in handling in terms of wireless data,’ asserts Mr Siegel. This may help explain why AT&T has suffered from a number of network outages in recent months. By applying the brakes on its very heavy data users through tiered pricing, AT&T can help keep the majority of its customers happier.

As mobile operators move to next-generation networks, the economics tilt more in favour of all-you-can-eat pricing, because the cost of providing much greater capacity is reduced. Operators that are holding back on tiered pricing today may well have that in mind.

‘Traditionally, operators’ competitive concerns tended to drive pricing strategies, but we now increasingly see pricing used as a tool to manage traffic and data consumption. We expect this approach will have an impact on a number of regulatory issues, such as net neutrality or wholesale regulation.’

Thomas Tschentscher Partner, Freshfields

Contact the authors

Natasha Good natasha.good@freshfields.com

Thomas Tschentscher thomas.tschentscher@freshfields.com

Connie Carnabuci connie.carnabuci@freshfields.com

Europe’s digital dividend was written in association with the Economist Intelligence Unit.

The EU is making progress in harmonising digital dividend spectrum for mobile broadband usage, but operators may have to wait longer than they would like to get their hands on it.

Mobile operators invariably want more frequency airwaves (spectrum) to deliver voice and data services. That is because they do not feel they have enough existing capacity to serve customers adequately today – thanks to expanding smartphone adoption and burgeoning use of bandwidth-hungry data applications – or they anticipate customer demand will grow to such an extent they will need extra spectrum in the near future.

As spectrum is a finite resource, however, and various industry sectors have claims on it, governments and national regulatory authorities (NRAs) face tough decisions about who gets what and when. Regulators can rarely please everyone, and the mobile industry is no exception. In a recent survey of 391 mobile industry executives conducted by the Economist Intelligence Unit, more than a quarter of respondents said that shortage of available spectrum was one of the greatest risks facing mobile operators in mature markets over the next three years. The spectrum shortage looks even more severe elsewhere, with more than a third of survey respondents saying the same for operators in developing markets.

‘We would like NRAs to take a holistic approach towards the availability of spectrum. The worst thing for us is when spectrum is made available on a piecemeal basis, which makes it difficult to place a value on it.’

Robert Mourik, Head of European regulation at Telefonica

The so-called digital dividend, however, offers mobile operators the prospect of some spectrum relief. As broadcasters move from analogue to digital terrestrial TV, they free up spectrum (the digital dividend) that can potentially be used for purposes other than broadcasting.

The freed-up spectrum is particularly attractive in that it belongs to the sub-1GHz frequency range. This means not only better in-building coverage for wireless networks, but also that radio signals travel much farther than on mobile operators’ current 3G networks (which typically run in the higher 2.1GHz frequency band). For operators it would therefore be much cheaper – up to 70 per cent according to some analyst estimates – to achieve a specific level of wireless broadband coverage using digital dividend spectrum than it would using the 2.1GHz band. For regulators and governments aiming to extend access to broadband services nationwide, the digital dividend makes that goal much more achievable.

But how much digital dividend spectrum should be allocated to mobile broadband (or, in NRA parlance, electronic communications services)? And can a region as diverse as the EU, with 27 member states and 27 NRAs, successfully co-ordinate the management of the digital dividend so as to reap its full benefits? Without spectrum harmonisation, ensuring that the same frequency bands are available for the same purpose in different countries, services from the EU’s mobile operators will fall foul of cross-border interference and roaming difficulties, which will dampen revenue. Equipment costs will also be higher through lack of scale.

What do you see as the greatest risks facing mobile operators over the next three years in mature and developing markets? Select up to three in each group of markets.

Sounds of harmony

Despite the formidable logistics of creating an EU-wide digital dividend, mobile operators have grounds for optimism it can be achieved. The European Commission has been pushing hard, and with some success, for all member states to complete the process of switching from analogue to digital broadcasting by the end of 2012, which will free up spectrum. (Eight EU members have already completed the switch-over, as have individual regions in four others.) Much of this spectrum falls in the so-called 800MHz band and a growing number of Europe’s NRAs and governments, also with Commission encouragement, are committing to make it available for mobile broadband services.

In May 2010, the Commission announced a set of technical rules for each member state to follow if they choose to make the 800MHz band available for this purpose. The guidelines should minimise the potential for interference with broadcasting services in adjacent frequencies, as well as laying the technical foundations for harmonisation at 800MHz. Mobile infrastructure equipment and handsets, using the same radio specifications in this band, should now perform just as well in each EU country.

‘We are quite happy with the way things are going on 800MHz harmonisation, as it takes care of economies of scale and lowers equipment costs,’ says Robert Mourik, head of European regulation at Telefónica, whose European mobile operations include Germany, the Czech Republic, Slovakia, Ireland, the UK and its home market of Spain. ‘The question now is when the spectrum is made available and how it is made available. I would like to see the EU set a mandatory deadline of no later than 2015 for all member states to allocate 800MHz for mobile broadband services.’

Encouragingly for operators keen to get their hands on digital dividend spectrum, the allocation process has already started. In May, Germany was the first country in Europe to complete the auction of 800MHz spectrum. And operators in other parts of Europe may take heart from its organisation: a limited number of bidders, multiple frequency bands auctioned at the same time and no restrictions placed on use of the spectrum aside from those meant to preclude interference.

The new wisdom of auctions

A decade ago, spectrum auctions in Europe looked an easy way for governments to make lots of money – a windfall tax. As mobile operators and new entrants got excited about acquiring frequency airwaves that would enable them to offer faster mobile data services using so-called 3G networks, bidding often became frenzied. In the UK, successful bidders ended up paying a total of £22.5bn (€27m at today’s exchange rates) for 3G spectrum. In Germany, the auction process swelled government coffers by an enormous €50bn.

Ten years on, the mobile industry is – if not sadder – wiser. Germany’s new round of spectrum auctions completed in May, which will allow successful bidders to roll out even more advanced mobile broadband networks, raised a comparatively modest sum of just under €4bn. True, there were only four bidders in the German auction, which helps explain why prices did not spiral out of control, but mobile operators have also become much more conservative in their valuations of spectrum. Many have learned the hard way, through the 3G experience, that paying excessive amounts for spectrum can wreak havoc on the mobile broadband business case.

Discordant notes

There are still forces that may blow Europe’s digital dividend off course. One is operator resistance to 800MHz auctions taking place if there is no clarity from NRAs and governments about what they intend to do with other frequency bands. ‘We would like NRAs to take a holistic approach towards the availability of spectrum,’ says Mr Mourik. ‘The worst thing for us is when spectrum is made available on a piecemeal basis, which makes it difficult to place a value on it.’ In Ireland, Telefónica’s 900MHz GSM licence is due to expire next year, but Mr Mourik reports that the regulator has still to provide clarity regarding what will happen at this time. ‘It is important to know whether the existing licence period will be extended, or even whether Telefónica will be able to re-farm 900MHz for 3G services,’ he says. The answers to these questions will have a bearing on how Telefónica values 800MHz spectrum in Ireland, because they will largely determine how urgently the operator needs to access digital dividend spectrum.

There are also fears among Europe’s mobile operators (implicit in Mr Mourik’s call for a mandatory deadline) that some NRAs will drag their feet on clearing and awarding the 800MHz band for mobile services. NRAs may also find it difficult to implement an effective spectrum-clearing plan in a timely manner, as Mr Mourik concedes, if they are not responsible for both broadcasting and telecoms regulation.

Technical difficulties need to be overcome, too, explains Graham Louth, spectrum policy director at Ofcom, the UK regulator (whose brief does include both telecoms and broadcasting). ‘There needs to be co-ordination with neighbouring non-EU countries, some of whom use the 800MHz band for purposes other than TV broadcasting, and which could cause interference with mobile broadband services using digital dividend spectrum within the EU,’ he says.

But even if all the regulatory and technical problems are solved, the digital dividend may not be enough to sate mobile operators’ appetite for spectrum. ‘This allocation is very welcome but it is still a fairly small amount of spectrum, which will be used up fairly quickly if current mobile data trends continue,’ says Mr Mourik. ‘We may want to start a discussion in the next four to six years about making more spectrum available.’

‘The role of the regulators, in setting the framework for an efficient, technology- neutral 4G roll-out, is now more important than ever in helping rural areas gain equal access to broadband services.’

Thomas Tschentscher, Partner Freshfields

Contact us

Thomas Tschentscher thomas.tschentscher@freshfields.com

Julia Sommer julia.sommer@freshfields.com

Connie Carnabuci connie.carnabuci@freshfields.com

As co-editor of the 2010 Telecoms and Media Getting the Deal Through Natasha Good, co-head of mobile at Freshfields, shares her thoughts on what the changes in the regulatory landscape will mean for mobile operators around the world.

As the appetite for investment in the world’s fastest-growing telecoms markets remains high and is set to intensify, investors must overcome technical, financial, regulatory, intellectual property and transactional issues, which can make or break a deal, write Bruce Embley and Bertram Burtscher.

Investing in emerging markets: 10 key issues

Investing successfully in emerging telecoms markets takes careful planning and foresight. From our experience of working on some of the biggest international deals in recent years, here are some of the key issues investors need to factor into their thinking.

1. Understanding the local regulatory environment

Regulatory regimes are by no means uniform but many impose onerous constraints on operators. Regulators often model their activities on mature markets, where the need for sophisticated competition and consumer regulation is clear. As a result, regulation can sometimes seem years ahead of market need and may not necessarily square with the expectations investors derive from other formal statutes and regulations. Understanding the local regulatory environment in very practical terms and tailoring deals to succeed within it is vital to success. In numerous cases, we have helped clients negotiate with regulators, drawing on our in-depth knowledge of telecoms regulation across the world and our understanding of local priorities. Negotiating the best possible terms for entry into a new country or investment can have a huge bearing on the ongoing success of the target business. Further, face-to-face meetings with the relevant regulators is essential. Investors that short circuit this process may upset the regulator or worse. Such a meeting is also a great opportunity for an investor to understand the regulator’s view of the target investment and the telecoms market in that jurisdiction.

2. Selecting strategic partners

Foreign direct investment controls prevalent in so many emerging market countries mean that investors will rarely have the opportunity to go it alone and must look to work with local — and sometimes international — partners. Whether you need acceptable co-investors, infrastructure-sharing partners or suitable content providers, strategic partnerships are key. Negotiating partnership agreements that protect the long-term value of the investment is therefore an absolute necessity. When we help operators negotiate strategic partnership agreements we keep a fixed eye on likelymedium and long-term scenarios to help best maximise commercial objectives and subsequent success. We have been working with operators to do this in a large number of emerging market jurisdictions.

3. Structuring multi-jurisdictional deals

Some of the world’s biggest recent international telecoms deals are by their nature multi-jurisdictional. To succeed, investors need to work with advisers who can manage a complex web of overlapping work streams and can reconcile the demands of numerous regulatory, tax and government bodies. These transactions often involve an unprecedented level of detailed analysis for each jurisdiction, from negotiating change-of-control provisions to finding a workable foreign exchange structure.

4. Overcoming protectionist tendencies

In most economies, telecoms is viewed as a strategic industry — and sometimes it is regarded as being of significant importance to a country’s national security. Unsurprisingly, the sector is often subject to tight political control. The credit crunch has exacerbated nationalist sentiment in both mature and emerging markets so it has become increasingly important for operators to find solutions to potential protectionist trends, many of which go beyond day-to-day market regulation into the realms of international law and trade treaties. A government’s negative stance regarding any particular foreign investor does not have to be the end of the story. Use of bilateral investment treaties is an increasingly effective tool, and investors can structure their investments at the outset to maximise their effectiveness.

5. Managing infrastructure agreements

Since many target markets are new or immature, operators will often face the prospect of creating networks from scratch, working on greenfield sites. Whether rolling out a new network or investing in an existing one, operators will need to plan carefully how they manage their infrastructure. Overcoming engineering and logistical challenges is only part of the story. It is equally important to ensure that infrastructure-sharing agreements provide adequate protection for investors’ rights and royalties. Drawing up the right agreements to manage the network financing and procurement procedures is crucial.

6. Extracting value

Investment is not an end in itself. No deal will win financial and shareholder backing unless value can be extracted and adequate returns made. From the outset the right mechanisms – such as offshore licensing agreements and royalty payments – must be in place to allow capital to flow out of the jurisdiction and back to the investor. Structuring such deals requires intimate knowledge of local laws and regulation but also an understanding of overlapping international tax regimes and foreign exchange rules. The relevant legal environment also needs to be fully understood to ensure that any legal impediments to extracting value can be worked around.

7. Maintaining confidentiality

In-depth local market knowledge is not all about understanding rules and regulations. It’s also about knowing how local business culture works. Many investors approaching new and emerging markets are taken aback by the fact that ways of doing business can differ radically from what they are used to. Confidentiality is a case in point. It is seen as a fundamental principle of doing business in mature markets. In developing economies, however, attitudes to confidentiality can be far more relaxed. Investors must be highly selective about disseminating information. One solution is to hold meetings in a completely neutral and unconnected country to reduce the chance of leakage. It’s this sort of strategic planning that can make the difference to a deal’s success.

8. Sanctions

Norms of acceptable business practice vary radically from market to market. What’s seen as unacceptable behaviour in one may be considered legitimate in another. Recent laws, such as the US Foreign Corrupt Practices Act and the restricted list of individuals and organisations issued by the US Office of Foreign Assets Control, have become a major concern for organisations across all sectors investing in emerging markets. These laws aim to make sure that companies observe ethical business standards on issues such as bribery and corruption wherever they operate in the world. Of course, what constitutes bribery in one jurisdiction may be far more acceptable in another. But punitive sanctions can be imposed on those found to be in default. As public pressure for greater corporate and social responsibility grows, such international laws and policies are gaining in importance.

9. Successful outward investment

With economic power shifting from west to east, investment flows are also changing course. Many observers believe it is only a matter of time before the new telecoms giants in markets such as China and India mount a significant competitive challenge globally — as evidenced by Bharti’s $10.7 billion acquisition of Zain’s African business. And it’s not just a case of investing in networks. China has, for example, asserted its technological independence by establishing its own standard for 3G mobile telephony. Handset makers are beginning to offer cheaper devices and network equipment in more advanced jurisdictions and content providers are looking for new international opportunities. Operators need their advisors to be able to anticipate the needs of new investors, offer global market insights and understand appropriate tax regimes in order to ensure efficient funding of overseas investments.

10 Protecting your rights

Many emerging markets’ judicial systems are less developed than those in mature markets. Outside parties can therefore struggle to enforce their contractual rights, particularly in a sector as politically charged as telecoms. If a legal right is unenforceable as a matter of law or practice, then it is potentially meaningless. Operators need to work with their advisors to put in place legal and contractual frameworks to protect them against these risks. There is no one-size-fits-all solution, but it is crucial that businesses understand that their rights should and can be upheld. Protecting an organisation’s intellectual property is also often a key concern due to the number and complexity of potential issues such as licensed technology and brand. Structuring your IP portfolio to be tax efficient and commercially flexible also offers long term benefits.