So, after meeting with my faculty adviser and reading "Pricing Internet Access" (Greenstein, Shane. IEEE Micro, 0272-1732/01, 2001.) I think I'm a little closer to a thesis.
The current business model for telecoms in LATM is not sufficient to successfully support deployment of a 4G network. (I think I can show evidence of this based on margins in LATM and the problems that Alcatel-Lucent had in India.) With margins so squeezed already, it is going to be impossible to justify building the new network.
There are several barriers preventing telecoms from recouping their CAPEX investments. One of these barriers is failure of the 4G ecosystem to CREATE all the potential value of a 4G network. Mobile, wireless broadband still lacks the "killer ap." 4G networks have more capability than either 3G networks or terrestrial broadband - BUT, we're still doing the same things on the new network that we've done on the old networks. We need some application (and device quite possibly) that truly takes advantage of the high bandwidth and ability to move around (mobility.) Once we have that, there will be much more value on the table for service providers and consumers to share.
Another barrier, is the difficulty capturing that value. It is easy to apply a lot of the lessons of internet pricing to 4G access pricing. Taking this view, the current system is inadequate. Current pricing is either takes the form of an unlimited plan or a pre-pay, pay-as-you-go type of plan. This, like past internet pricing is not economically optimal. On the side of the unlimited plan, consumers will over use the network - accessing the network when the marginal utility they receive is less than the marginal cost for service providers. On the other hand, the pre-pay plans are analogous to metered internet pricing - utility is destroyed on the consumer side because no one likes to keep an eye on a meter ticking down the time they have for a web session. Value is also destroyed for the providers, because of the additional costs of administering this system.
Lastly, the diffusion of hardware in these areas make it difficult to capture value. Subsidizing the CPEs for WiMAX or LTE networks will be much more costly than subsidizing, say, a 2G handset. Until, laptops, phones and other devices are widely available, there won't be enough people using WiMAX to create significant value.
This could be a good portion of the paper and I believe there is a lot of research I can cite to support my claim. I'm a little disappointed at the negative bent this is taking, but I still hope to have room in my paper to propose some potential solutions.
Sunday, October 19, 2008
Sunday, October 12, 2008
Is tiered pricing appropriate for mobile broadband?
Right now I'm concentrating on the question of 4G pricing in Latin America. Should it be flat, or will providers need to find ways to offer tiered, pay-for-use models? I have some DCF models from this summer ROI for providers WiMAX providers. I hope to do some tweaking of those models and see what happens with tiered pricing. The problem with that is (as always) these models will only be as good as the assumptions and right now, who knows how accurate those assumptions will be.
In the meantime, I think it is informative to think about whether tiered pricing could even be used for 4G. The best historical analogy for this issue is the pricing of internet service. So some papers that look at internet pricing:
#1 - Andrew Odlyzko wrote an interesting piece in 2001: His thesis was basically that internet pricing models would follow historical patterns for communication technology - namely that prices would decrease and tiered pricing would slowly give way to simple pricing plans.
Interesting, so how does this relate to my project? I'd say a couple of ways. First, Odlyzko talks about how the simple pricing plans helped improve diffusion. So even if WiMAX needs to use tiered pricing in Latin America to cover infrastructure investment, that pricing may hurt adoption. Second, would wireless, mobile broadband be a just another means to access internet service or is it a fundamentally different product altogether? If it is different, then tiered pricing models will be more feasible.
#2 Jorn Altman wrote about internet pricing in 2001. He noted that because users are not faced with the true marginal cost of excess usage that they tend to over-use internet service. Thus, flat rate plans are inefficient. He also found that users did not like a "ticking clock" of metered plans. Not super groundbreaking, Jorn. I agree that flat rate plans are inefficient, but what to do about it?
After a summer of working with people on all sides of the wireless industry, this is the situation I see: 4G wireless (whether WiMAX or LTE) can bring a lot of value (or utility, or economic benefit) to a lot of people - but it's not cheap. Especially in developing markets, low margins for service providers will make it difficult to justify for the CAPEX for a WiMAX network. Finding an economically efficient way to price WiMAX or LTE service would help make up that CAPEX. Still looking for that solution . . .
I give myself 2 more weeks on this topic, before I need to move away from pricing questions. Luckily, I'm taking classes from one of the foremost authorities on internet service pricing: Dr. Shane Greenstein.
In the meantime, I think it is informative to think about whether tiered pricing could even be used for 4G. The best historical analogy for this issue is the pricing of internet service. So some papers that look at internet pricing:
#1 - Andrew Odlyzko wrote an interesting piece in 2001: His thesis was basically that internet pricing models would follow historical patterns for communication technology - namely that prices would decrease and tiered pricing would slowly give way to simple pricing plans.
Interesting, so how does this relate to my project? I'd say a couple of ways. First, Odlyzko talks about how the simple pricing plans helped improve diffusion. So even if WiMAX needs to use tiered pricing in Latin America to cover infrastructure investment, that pricing may hurt adoption. Second, would wireless, mobile broadband be a just another means to access internet service or is it a fundamentally different product altogether? If it is different, then tiered pricing models will be more feasible.
#2 Jorn Altman wrote about internet pricing in 2001. He noted that because users are not faced with the true marginal cost of excess usage that they tend to over-use internet service. Thus, flat rate plans are inefficient. He also found that users did not like a "ticking clock" of metered plans. Not super groundbreaking, Jorn. I agree that flat rate plans are inefficient, but what to do about it?
After a summer of working with people on all sides of the wireless industry, this is the situation I see: 4G wireless (whether WiMAX or LTE) can bring a lot of value (or utility, or economic benefit) to a lot of people - but it's not cheap. Especially in developing markets, low margins for service providers will make it difficult to justify for the CAPEX for a WiMAX network. Finding an economically efficient way to price WiMAX or LTE service would help make up that CAPEX. Still looking for that solution . . .
I give myself 2 more weeks on this topic, before I need to move away from pricing questions. Luckily, I'm taking classes from one of the foremost authorities on internet service pricing: Dr. Shane Greenstein.
Saturday, October 4, 2008
Research for the upcoming quarter
So, my last couple posts have been basically statement of purpose papers pasted into a blog. From here on out, posts will be less formal and more focused on what I'm researching and my methodology. That said, I'll get down to business.
I left things off with a paper last year discussing the overall business model for a WiMAX telco. I touched on diffusion (demand), costs (supply), and other technology (substitutes.) Clearly all of these issues will be a factor for a business selling WiMAX, but now I want to focus on demand in Latin America. Specifically, I want to answer the question: How can companies package and price wireless, mobile broadband products in a way that will create and capture value in Latin America?
This approach, I believe has several advantages to looking at the broad business plan of WiMAX in Latin America.
First, I don't think I can add a lot of value in assessing the cost side of this business. The cost of deploying a WiMAX network is something that is well understood by the engineers at telecos and equipment manufacturers. Given, my business training, I can predict trends for these costs (lower costs as the technology moves down the learning curve, lower costs in developing markets where telecos have low margins.) But my contributions in this area would not be especially useful.
I also want to avoid getting into a protracted discussion of WiMAX vs. LTE vs. 802.11n. The standard of choice is, of course, very important to companies investing in infrastructure. However, from my perspective, the important thing is that long-range, wireless broadband will become available in the next five years and someone will be selling that service.
I want to understand, what products (service configurations) at what prices companies should offer in Latin America. I see three potential sources of information that will inform my research and conclusions:
1. Research on market entry in Latin America. There has been much literature written recently on "Bottom of the Pyramid" business opportunities. Papers discussing entry into Latin America will be useful - especially if they discuss entry of services. By analyzing how companies have successfully adapted and priced service offerings for the Latin American market, I hope to identify patterns and strategies that can be applied to wireless broadband service.
2. Research on the internet service pricing throughout the world. There is a large body of literature discussing various pricing strategies for internet service - especially in lieu of the net-neutrality debate. Wireless broadband service prices will clearly be informed by last ten years of pricing strategies by ISPs throughout the world.
3. Current mobile phone services and pricing in Latin America. Maybe this should be first. In order to understand how LATM telcos must change, we need to understand where they are starting from. A survey of what products and pricing are currently offered will serve as the base from which I hope to see how the companies need to evolve.
I left things off with a paper last year discussing the overall business model for a WiMAX telco. I touched on diffusion (demand), costs (supply), and other technology (substitutes.) Clearly all of these issues will be a factor for a business selling WiMAX, but now I want to focus on demand in Latin America. Specifically, I want to answer the question: How can companies package and price wireless, mobile broadband products in a way that will create and capture value in Latin America?
This approach, I believe has several advantages to looking at the broad business plan of WiMAX in Latin America.
First, I don't think I can add a lot of value in assessing the cost side of this business. The cost of deploying a WiMAX network is something that is well understood by the engineers at telecos and equipment manufacturers. Given, my business training, I can predict trends for these costs (lower costs as the technology moves down the learning curve, lower costs in developing markets where telecos have low margins.) But my contributions in this area would not be especially useful.
I also want to avoid getting into a protracted discussion of WiMAX vs. LTE vs. 802.11n. The standard of choice is, of course, very important to companies investing in infrastructure. However, from my perspective, the important thing is that long-range, wireless broadband will become available in the next five years and someone will be selling that service.
I want to understand, what products (service configurations) at what prices companies should offer in Latin America. I see three potential sources of information that will inform my research and conclusions:
1. Research on market entry in Latin America. There has been much literature written recently on "Bottom of the Pyramid" business opportunities. Papers discussing entry into Latin America will be useful - especially if they discuss entry of services. By analyzing how companies have successfully adapted and priced service offerings for the Latin American market, I hope to identify patterns and strategies that can be applied to wireless broadband service.
2. Research on the internet service pricing throughout the world. There is a large body of literature discussing various pricing strategies for internet service - especially in lieu of the net-neutrality debate. Wireless broadband service prices will clearly be informed by last ten years of pricing strategies by ISPs throughout the world.
3. Current mobile phone services and pricing in Latin America. Maybe this should be first. In order to understand how LATM telcos must change, we need to understand where they are starting from. A survey of what products and pricing are currently offered will serve as the base from which I hope to see how the companies need to evolve.
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