3G Pricing: Is it a show-stopper?

Many consumer surveys published during the past 12 to 18 months suggest that the average consumer is not interested in sophisticated multimedia applications like streaming music, location-based commerce and videoconferencing. The surveys show that while wireless users demand higher quality of service, they are very concerned about costs and have a strong aversion to paying higher prices to access wireless Internet services.

Consumers are more interested in what will be useful to them while on the go (for example, accessing telephone directories and traffic information) than they are in luxury capabilities such as downloading music, managing their bank accounts, gambling and playing online games. For carriers who are counting on premium access charges to recover the significant upfront cost of building next-generation wireless networks, these results are unsettling.

Devising the right pricing strategy for 3G services is an interesting problem for the business units of operators. The market will probably see various pricing schemes for 3G. It is highly likely that the pricing models for 3G services will consist of combinations of the two basic rate types offered by wireline voice service providers—a monthly flat rate based on connection speed and quality of service plus an added component for premium services. Charging only flat fees similar to those of their satellite, DSL or cable-modem counterparts would be problematic, because demand for the service could be unlimited while the reward would be extremely limited. Users are likely to flood the network with traffic, which will affect the voice quality of the service and leave little room for profit among operators.

Alternately, charging per minute might prove prohibitively expensive for some users, since connections and download experience are dramatically affected by quality of service and connection speed. Wireless access speed is also affected by user’s mobility and location and, as already stated, by the level of voice traffic congestion. Per-minute charging, however, has a proven track record in countries such as Japan and South Korea. DoCoMo charges the equivalent of US$2.50 a month for its iMode service, plus packet charges of about 2.5¢ per kilobyte for the data transferred. The service currently has more than 32 million subscribers.

If customers choose to subscribe to a content site—a game portal, for instance—they pay an additional monthly fee, which is not more than $2.50. Of these fees, 91% goes to the portal operator. The average DoCoMo customer spends between US$12 and $13 per month on these services. There are more than 56,000 sites available to iMode subscribers.

Users’ expectations in countries like Japan and South Korea are different from those in the West. The relative scarcity of personal computers means that cell phones play a different role in those countries. Japanese and South Korean consumers are also already accustomed to paying by the minute or by the byte for phone calls, e-mails and web downloads. Nevertheless, per-minute pricing is not conducive to mass-market uptake in most of the rest of the world.

Other factors that must figure in mobile data pricing strategies include the question of revenue sharing with content partners. While at the outset the majority of the revenues will go to wireless carriers, revenue will shift to application and portal providers as the market matures and content becomes more valuable. T-Motion, the German mobile Internet portal, is offering a package of premium wireless services that includes sports, financial and music news, and a food guide at approximately US$9.00 a month. Following the business model of DoCoMo, T-Motion will share up to half the revenues with its content providers.

From a cost-of-operations perspective, pricing has to be a function of specific applications. It is hard, for example, to determine how much to charge 3G subscribers to send e-mails or hold a videoconference. But what is clear is that each application places a different amount of strain on the network. An e-mail is an average of nine kilobytes, while a high-quality audio copy of a song weighs in at about five megabytes, or more than 555 times as large as an e-mail. From a marketing perspective, charging consumers a lot for an application such as e-mail—especially one that is available for free on most PCs—does not make much sense. Videoconferencing is a different story. Prices can be relatively high, but the real question is: How much market demand is there for this application?

When all is said and done, per-megabyte or per-minute pricing is not conducive to mass market acceptance. The average user will not and cannot keep track of data usage, which will cause the average user to hesitate to use the system. For 3G data services to take off, carriers should offer customers a monthly flat fee for commodity transport based on data speed and quality of service and an incremental component for premium services similar to cable’s pricing structure for basic and enhanced services. The trend in the near future, however, is toward seamless mobility—and all wireless carriers should be on board.

Goli Ameri is the President of eTinium, Inc., a telecom consulting and market research company specializing in wireless and switching technologies.  She can be reached at gameri@etinium.net or at 503.968.8437. eTinium has recently released study on this topic, titled Seamless Mobility: The Marriage of 3G and Wi-Fi.