MWC: The disconnect between how operators and consumers value mobile data

BARCELONA -- As Mobile World Congress passes its mid-point, it goes beyond the obvious to state that mobile data is the key theme of the show as every operator and vendor touts the Internet services and applications they’ve brought or plan to bring to the wireless network. But this year, there’s also an underlying feeling of dread that didn’t cast its pall at last year’s Congress.

Ahead of the show, several studies emerged that laid out just how much data was starting to impact the network both for good and for bad. A couple of key highlights:
- Cisco Systems (NASDAQ:CSCO) always detailed Visual Networking Index showed the predicted huge surges in mobile traffic in 2010, but it also tallied a few metrics that were a bit of a surprise. For instance, Cisco found that the mobile tablet contributed very little to overall device penetration in the U.S.—not a surprise considering the first connected iPad went on sale six months into the year—accounting for only one half of a percent of all data devices in the market. But that tiny number of tablets accounted for 2% of all mobile data traffic in 2010. We’re not talking about WiFi here. Cisco only counted traffic over a mobile connection. We thought the smartphone was filling up mobile networks, but the tablet is set to cause some real havoc.

- Allot Communications (NASDAQ:ALLT) semi-annual survey of traffic patterns over its customers' networks found a single service, YouTube, accounted for 45% of global video traffic, which itself contributed to 37% of all mobile data growth in the last six months of 2010. Its survey also found that although Google (NASDAQ:GOOG) Android smartphones have surpassed the Apple (NASDAQ:AAPL) iPhone in sales, Android users still have some catching up to do when it comes to using the “smart” features of their devices. In the second half of the year, 89% of all application store traffic came from the iTunes App store, while only 9% came from the Android market.

- In what was perhaps the most ominous study to emerge from a vendor this year, Tellabs (NASDAQ:TLAB) and CCS put out a report showing that the cost of delivering mobile data traffic is quickly outpacing the revenues operators receive for that traffic. For the first time a study put a timeline on the trend, Tellabs and CCS predicting that U.S. operators would start losing money on mobile data services as soon as the first quarter of 2013, while European operators likely would face the same dilemma a year later.

Taken all together, these studies paint a picture of a mobile industry expected to deliver more and more volumes of network capacity but without a business model that adequately monetizes that traffic. So what are the answers? Just charge more for mobile data would seem to be the obvious answer, but as another study published by Tekelec (NASDAQ:TKLC) demonstrates, that answer might be a little bit too simplistic.

The basic problem is, according to the study conducted by Strategy Analytics, that the services that consume the most bandwidth aren’t the ones that customers value the most. Tekelec and Strategy Analytics polled consumers throughout Europe, asking them how much they would pay for a particular application if services were billed a la carte. Web browsing came in at number 1 with respondents saying they’d pay an average of $6.94 a month for unfettered access to the mobile Web. Email was number two, set at a price of $5.20. Navigation was third at $4.82. In fourth place was video streaming and downloading, which respondents said they would only pay $4.49 a month.

Are you beginning to see what’s wrong with this picture? Video consumes far more mobile data capacity than any other application—Cisco estimates video accounts for 56% of all mobile data traffic in the U.S.—yet it’s not even close to being at the top of the list of applications consumers value most. If video use keeps expanding, operators will be forced to charge more for their mobile data, either increasing prices for unlimited plans or by moving to usage-based models. But the consumer likely won’t feel he or she is getting much more value out of their mobile data service for those higher prices.

Take the example of two consumers on an AT&T 200-MB smartphone plan. The first uses his smartphone primarily for email, synching work and personal accounts to the phone’s onboard messaging clients. That person could use that phone constantly, sending and receiving a hundred emails a day, without getting anywhere close to using up his 200 MB allotment. Now take a casual data user who doesn’t do much of one thing in particular with his device. Some email, a few games and a couple of YouTube videos each week. Those YouTube videos would easily eat up his 200 MB within a week or two, kicking in additional use fees.

In the former case, you have a hardcore smartphone user and the latter case you have a casual user. The first would likely pay his $15 a month without any overages while the second would see his bill come in double and sometimes triple what he expected to pay. The first would feel he got every ounce of value out of his data plan given his constant use of email. The second likely feels he didn’t get much value at all given, from his perspective, his only spare use of data services.

Building an adequate mobile data business model will require not just matching delivery costs to price plans, but also matching consumers’ notions of value to the prices they pay. According to Tekelec Director of Strategic Marketing Randy Fuller, there’s no way carriers can do that while charging by the byte.

“Most consumers aren’t even remotely aware that one YouTube video consumes exponentially more data than an email,” Fuller said. “Using bytes consumed as the way to value data is not an ideal way to do things. Customers don’t understand bytes, they understand services.”

Tekelec’s answer is to use policy management to bring the perceived value of services more in line with the real costs of delivering those services. If customers really don’t value video, then why not de-prioritize video traffic on the network, letting it through unimpeded when the pipes are empty and restricting video or restricting its quality as the pipes fill? Bandwidth thus would be conserved for applications that customers value more. For customers that really do value video , carriers could offer premium video plans that would bring their video streams back up to the QoS chart. Or customers who value it only moderately, carriers could reconfigure their services to allow a certain amount of high-quality video each month while restricting the rest?

The big obstacle to all of those proposals is the looming issue of Net Neutrality. Particularly in the U.S. consumers don’t take kindly to operators discriminating against one application versus another. Nor do they like the idea of being charged extra for a service the operator technically isn’t delivering. Consequently, operators have tread very carefully with policy charging technologies, and that’s not likely to change soon.

Fuller believes that as long as customers are given a choice among different data plans that would allow them to decide which services they value most—and pay accordingly—their concerns over net neutrality will be assuaged. I’m not sure. The notion of an open unhindered Internet is an extremely powerful one here. On the other hand, there may be few alternatives, unless operators can fundamentally change how the public views mobile data.