Uncommon Wisdom

Jun 30 2011   2:06PM GMT

Tiering up: The carrier shift toward usage-based pricing is starting

Tom Nolle Tom Nolle Profile: Tom Nolle

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Telecom

Verizon is preparing to move to tiered pricing for mobile data in early July. There’s a growing conviction among operators that everyone will be charging for usage on mobile networks by the end of this year and that everyone will be charging for wireline usage by the end of 2012.

The move to usage pricing isn’t being heralded as a victory; network operators would prefer to get their profits from other sources. The problem is that they’re becoming convinced they can’t roll out a monetization strategy in time to sustain infrastructure investment without a bandwidth-cost kicker.

Mobile data use is growing by 50% per year worldwide, and that’s creating not only a backhaul cost but also a multiplication of towers as cells become congested with more users and more traffic per user. The whole metro infrastructure is stressed by the mobile traffic load, and wireline streaming video traffic is also contributing.

The rumors that Google will be offering a YouTube-branded streaming multi-channel “cable replacement” service aren’t making operators happy either. In fact, it’s streaming competition for TV that’s generating the conviction that they need usage pricing even more than concerns about the pace of their monetization progress. Only usage pricing can stem the exploitation of incrementally free bits by OTT players, as operators see the situation.

The Google offering, if it’s real, will be a test of the complex relationship between content cost, content cost recovery and content quality. Any streaming service that purports to replace channelized TV will have to offer viewers something that’s equivalent in quality.

For Google, whose service is rumored to be involving only 10 to 20 channels, the issue is even more significant because the traditional solution to things like summer reruns has been to let customers flee to cable channels. What happens when there aren’t any? What happens if the prime networks are never there? You can’t just stream old episodes, because they’re already available online through a variety of sources, from Amazon to Netflix and from many networks themselves, and in on-demand form to boot.

The pricing model relates to content quality. If you have first-run movies and original series like HBO or some other pay-for channel, you can charge the consumer directly and forego advertising. If you want to draw on network TV or older content, you’ll likely need to get revenue from advertising, at least as a supplement. The challenge there is that the per-impression rate for ads in streaming video is about one-thirtieth that of a TV commercial, and you have to pay for content out of the total of what customers and advertisers pay you, either to produce it or license it.

Video in TV and movie form doesn’t always work, and these models of content consumption have been with us for decades. We’ll have to see how a streaming model can work, which Google may demonstrate, either in a positive or negative way. We’ll also see how this will relate to usage pricing.

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