| Appearances |
TieCon East
May 29-30, Boston
Moderating wireless panel
CTIA
April 1-3, Las Vegas
Ran Session on Mobile Video
Deloitte Consulting
April, Santa Monica
Spoke at TMT Retreat
WP Global Partners
March 4-5, Tuscon
Keynote speech
Summerhill Venture Partners
January 23, Boston
Panel session hosted by this leading venture capital firm
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| Greetings,
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There's been a lot of focus on pricing this year. But one area that has remained relatively untouched is what I call the "last bastion of 1970s era telecom pricing": international wireless rates. This is a top complaint of enterprise users. Why does it still cost $1.50 per minute to make a wireless call from London to the U.S.? Are profits unreasonable? What, if anything, can be done? On the news front, I am pleased to announce that I will be writing a monthly opinion column for Fierce Wireless starting in May. Fierce is the leading on-line publication for the wireless industry, reaching more than 75,000 readers daily across several publications. |
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International Wireless Pricing: The Final Frontier?
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We have gone through two transformations in the communications services business model in a generation. The first, which began in the 1980s, was the "death of distance": long-distance services, as we once knew them in the heyday of AT&T, MCI, and Sprint, have all but disappeared. The second transformation was the "spread of flat rate pricing models", starting in cable, spreading to Internet access, local telecom, and now wireless voice and data. Even if you're not on one of the "unlimited plans" from your wireless provider, chances are that between plans that include unlimited nights & weekends, free roaming/LD, mobile-to-mobile, and tons of bucket minutes, you don't think about wireless spending the way you used to. The "premium price for mobility" has steadily eroded.
But there's an exception to this: international wireless pricing, which I call the "last bastion of 1970s-era telecom pricing". This is the one area where the "meter" is still running in your head at all times. Calls from a wireless phone to a destination outside North America are blocked by default, unless you call customer service to "activate" international dialing. Standard rates can be more than 5x what you would pay if you were calling from a landline phone. A way to get the rates down to semi-reasonable is to subscribe to an international long distance plan of some sort, which ranges from $3.99-5.99 per month depending on the operator. This reduces the per-minute rate on a call to the U.K., for example, from $0.49 to $0.08 per minute on AT&T. Even then, pricing can be counterintuitive. Rates to Canada on Verizon Wireless for an international calling plan subscriber are 9¢ per minute, compared to 6¢ for the U.K. By contrast, many landline plans include Canada and Mexico in the basic package, or are very inexpensive. For calls to many destinations, there is a 2-3x "surcharge" for terminating a call on a mobile number - and how would the calling party know whether the called number is mobile or landline? And there are incongruities in prices to international destinations from the wireline and wireless divisions of the same operator.
Traveling abroad, wireless rates range from exorbitant to extortionary. International roaming rates range from $1.29/minute (many Western European countries) to $4.99/ minute. Japan is a jaw-dropping $2.89/minute. Users can shave about 30% off international roaming rates by signing up for an international calling plan, which ranges from $3.99-5.99/month depending on the operator. The only appreciable difference between the operators (other than the need for a specific "global phone" for Verizon Wireless and Sprint subscribers) is that T-Mobile USA does not require subscription to an international "plan" for its best rates. Note also that international wireless rates have not dropped significantly, as domestic wireless rates have over the past few years.
The premium for international roaming compared to landline is substantial. International rates using a calling card, while no bargain, are 50-75% cheaper than calling directly from a mobile. For example, a Verizon Wireless subscriber with the International Value Plan pays $2.29/minute to call the U.S. from Japan, while it is only $0.74/minute for a Verizon landline subscriber on an International Choice Plan using a calling card.
Why do these prices remain high? Is the $50 billion international roaming market a source of whopping operator profits? Surprisingly, no - particularly in the U.S. The main reason subscribers are getting milked is because of artificially high international roaming rates agreed to by the operators. It's not dissimilar to the proverbial $10 aspirin you pay in the hospital compared to the drugstore. Basically, the rate that a Verizon or AT&T pays Vodafone or some other international operator to terminate a call often exceeds $1.00 per minute, which of course is then passed on to the consumer. Similarly, we charge them an artificially high rate as well, so those traveling to the U.S. pay a lot to call back to their country, too. Even so, more of the blame for high roaming rates lies with international operators. They charge a premium for "mobile termination", and also have to charge more due to their "calling party pays" structure. This latter element has recently resulted in Verizon Wireless rates to certain Mexico numbers to increase by about 25% as of June 30. Roaming represents a much higher percent of revenue - and profit - for most operators outside the U.S. than it does today for the larger operators here. Roaming rates are so high in Europe, and such a source of consumer angst, that the Commission has pressured operators to lower their rates.
High roaming rates are the number one complaint of enterprise customers - those who comprise the bulk of those using their phone internationally. Many companies place strict limits on how much their employees can use their phones while abroad, or encourage greater use of SMS or email, which are comparative bargains. For those who travel abroad extensively, the most prevalent workaround is purchasing a local SIM card. This solution is suboptimal in many ways. To begin with, it's a hassle, and doesn't cover many types of calling scenarios. The operator loses both roaming revenues and, at least temporarily, the knowledge of the whereabouts of the subscriber. The user loses many core features when using a substitute SIM.
So, is there a solution to this problem? Since these roaming rates are reciprocal, it's largely a matter of who moves first, but I will say that leading operators in Europe and Asia remain surprisingly intransigent. And when it comes to calling internationally from here, U.S. operators remain stuck to the outmoded concept of requiring subscribers to buy an international calling plan in order to obtain the most discounted rates.
The longer this discontinuity prevails, the more we are likely to see alternative solutions come to market. I know of a number of companies working on innovative services, such as dual-SIMs or SIM farms. Another approach is to work through host operators to provide a local number to the visiting subscriber, using local home location registers (HLR). This eliminates the need for the user to have to manage multiple SIMs, and ensures greater portability of features. An attraction of this solution is that it involves working with operators, rather than around them.
Another - and more disruptive - scenario would be to download a VoIP client onto a device and use the Internet for calling. Such a solution is already selectively available. But it requires a higher-end device and the voice quality is not very good, even on a 3G network. Some operators, feeling this poses a threat to their business, have blocked VoIP calling. With the spread of more capable devices and "3G+" (HSPA, D-O REVA) networks, I expect some operators to offer VoIP as a mainstream alternative, much as VoIP has started to substitute for circuit-switched on the landline side. In order for this to be a profitable service, operators can charge a premium (which in the Internet telephony world means "higher than zero") for a good user experience, quality of service (QOS) for VoIP calls, and some value-added features. I don't expect VoIP to become a mainstream alternative for international roaming in the near term, but I think we will see a number of carriers trying it out.
Now that we've done about all we can, at least structurally, with domestic wireless voice pricing, let's turn our attention to international: the last, and final frontier, of reasonable and predictable wireless pricing.
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