High-speed packet access (HSPA) technology, often referred to as ‘mobile broadband’, is being rapidly adopted by operators worldwide as a main or supplementary type of broadband connection. It constitutes between 12% and 20% of broadband subscribers in several markets (see Figure 1 below) and is still growing.
Figure 1: Take-up of HSPA (dongles/data cards) for broadband over the period 2005–2008 [Source: national regulators]
The speed and timing of take-up depends on the wealth of the country and the state of its fixed broadband market. One of the key success factors for the rapid take-up of HSPA has been the introduction of flat-rate pricing, either with unlimited usage or very large inclusive data bundles.
The high level of take-up is also being accompanied by very high usage, with subscribers downloading on average between 1GB and 2GB per month1 – not dissimilar to usage levels on fixed networks. The high usage is being driven by a large proportion of subscribers using their connection at home. Ofcom reported that 75% of adults in the UK used their mobile broadband connection at home despite nearly 68% of mobile broadband subscribers having a fixed-line broadband connection.2
However, while the rapid take-up of mobile broadband has provided impetus to revenue protection/revenue growth, concerns remain regarding the future profitability of the flat-rate model due to the high usage. In Sweden, where HSPA broadband adoption has been extremely successful, Telia has announced it is reviewing its flat-rate pricing approach ‘otherwise it will be difficult to run this business’.3
Several factors threaten the potential future profitability of mobile networks with the successful adoption of mobile broadband:
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The high usage is having a significant impact on the increase in radio capacity, new site requirements and backhaul costs. Backhaul costs are expected to reduce EBITDA margin by between 1.5%–3%.
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The profitability of mobile broadband services has been based on calculating profits for a mobile broadband service cost on the basis of incremental cost. While this approach can be considered appropriate when mobile broadband only constitutes a small proportion of network capacity, we expect that with 8%–12% of the subscriber base taking up mobile broadband services, the network capacity requirements for mobile broadband could exceed that of voice. Therefore, a service whose cost is based only on incremental charges would result in insufficient recovery of mobile broadband costs.
The challenge on profitability therefore raises key questions on business strategies. Most significant among the cost management strategies are:
- The competitive dynamics between a mobile-only operator and an integrated operator – integrated operators are increasingly evaluating femtocells as a potential approach to taking traffic off the cellular network (and providing better in-building coverage) to combat high home usage – e.g. Mobilkom (Austria), PCCW (Hong Kong), StarHub (Singapore) and Chunghwa (Taiwan) are some of the publicly known trials. Additionally, integrated operators are better placed to take advantage of existing fibre backbones to reduce backhaul costs.
- Pricing strategies – operators face the risk that moving away from a plain-vanilla, flat-rate model could make mobile broadband less attractive to customers and hinder adoption. An accurate cost allocation is a starting basis to understand profitability under different models.
- Traffic management – for all ISPs, traffic management is a critical part of cost management – with both identification of abusive users as well as traffic shaping, where appropriate.
These key questions will need to be addressed to take advantage of a significant revenue opportunity and to secure the future profitability of the mobile business.
1 PTS (Sweden), Analysys Mason projects
2 See http://www.ofcom.org.uk/research/cm/cmr08/
3 See http://www.analysysmason.com/About-Us/News/Press-releases/Have-we-seen-an-end-to-mobile-broadband-price-wars/