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May 28, 2009

Thought Leadership for the Wireless Industry
In This Issue
Revisiting Mobile Broadband Pricing
App Store Evolution: Business Models
App Store Evolution: Personalization
Always On Venture Summit East
May 20-22, Boston
Moderated Mobile Session

Trends in Mobile Internet Devices
Hosted by Rudyard Partners and the British Consulate
May 20, Boston

Wireless & Broadband Forum
Hosted by Rutberg & Co. and Ericsson
May 6, Boston

April 1-3, Las Vegas
Moderating Session on Mobile Search

Future of Mobile Innovation
April 7, Boston
Opening talk

Wireless Innovations
March 17-18, Redwood City, CA
Speaker: Shifting Wireless Landscape

Hello all,
AT&T's CEO said yesterday that wireless operators are not prepared for the deluge of data brought by the surge in smartphones and other connected devices. Innovative products such as the recently announced MiFi expand the options for mobile connectivity. But the price structure for mobile broadband is not aligned, in my view, with evolution of the market. Some thoughts on new pricing models are the focus of this May Lens.

Also included are links to a two-part piece I wrote for Fierce on the evolution of the app store: Business Models and Personalization.

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Time to Revisit Mobile Broadband Pricing
Even though the wireless industry has fared comparatively well in this economic downturn, mobile broadband (MBB) growth has seen a marked slowdown. This is evident in the recent results of a couple of the industry's leading card vendors, Sierra Wireless and Novatel, whose unit shipments have declined some 25% compared to a year ago. "Attach rates" (the percentage of those who subscribe to a service after they buy the module) on embedded modules have also declined.

Certainly the economy is a factor, as enterprises are being much more careful about their spending and business travel is down. MBB is already quite well penetrated among the "need to have" segment - business travelers and mobile professionals who are on the road a lot. But the next wave of adoption will be driven by the "nice to have segment": mobile professionals and consumers whose MBB needs are occasional, and temporary. The other driving force is the proliferation of connected devices leveraging 3G and 4G networks - laptops, smartphones, connected PDAs such as the iPod Touch, Netbooks, tablet PDAs, digital photo frames, portable gaming devices, and so on.

I believe the evolution of the MBB market - new types of users, varying usage patterns, and explosion of connected devices -will force a restructuring of MBB pricing. This is a more in-depth exploration of a topic I wrote about in a Fierce column in January.

We are close to hitting the wall on those who are prepared to shell out the typical price of $60/month for a MBB subscription. Although the price level is an important part of the discussion, the broader strategic question centers on issues of price structure, flexibility, and applications context. As a backdrop, one must be sensitive to an operator's economics: what it costs them to deliver a MB of data (and how this will change with added capacity), and their need to get a return on the huge investments in 3G/4G spectrum and infrastructure.

Let's first look at the MBB spend. The next wave of MBB adopters - the "nice to have" professionals and consumers - is undoubtedly more price elastic. They must weigh a $40-60 monthly bill for MBB as part of their total monthly spend on communications and digital media, be it home broadband, DVR, satellite radio, etc. Their need for MBB is not as frequent or continuous: they might travel only occasionally, or have reasonable substitutes where they go - such as free WiFi in some spots. Also, I believe the smartphone surge is causing some MBB substitution, between their multi-functionality, WiFi capabilities (on some of them), and the $30-40 monthly spend required for a smartphone data plan. All these factors will pressure operators to lower their MBB prices in order to trigger greater adoption. But this is a complex issue: each operator's network/capacity equation is different (and changing); and they don't want to cannibalize the profitability being delivered by the today's $60-80 per month MBB subscribers. But with continued improvements in network infrastructure, additional spectrum, and the build out of 4G networks, major operators are going to have a lot more capacity, which should allow room for lower MBB pricing. Over the next two to three years, I expect entry level MBB pricing to drop from $40 to $20-30, and for today's predominant $60 price level to move into the $35-40 range. We should also consider a model that is less reliant on card/module subsidization. From a subscriber's perspective, the price of a "free" or reduced price PC card is not worth the circa $1,500 commitment required from a two-year MBB contract. Unfortunately, with some of the first wirelessly enabled netbooks, we have gone the other way so far, heavily subsidizing the new HP and Acer devices with embedded wireless modules in return for a contract commitment.

More flexibility in the MBB pricing structure is an equally important part of the discussion. We need to have a greater variety of pricing options. Some operators are starting to offer per day options, in the $15 range, a la WiFi. This is a start, but I think we need to be more creative for those who need MBB on an occasional or temporary basis (note there is a difference between those two concepts). There should be per-hour/day/week month options, for those who go on the occasional business trip, family vacation, etc. Or the ability to buy ten "day packs", say for $100, that can be used for any 24-hour period, sort of like renting a On Demand movie from your cable company.

Next, we should think about what this multi-device world is going to look like. Over time, users are going to have a range of devices they are going to want to connect. Each of these devices will have different usage scenarios and connectivity requirements. For example, the terrific new MiFi portable wireless router gives WiFi-enabled devices, such as the iPod Touch, a wide area connectivity option, which is great for the user who needs to be connected but is out of range of or does not want to pay for WiFi. But the WAN service pricing does not align with what will be an occasional, and temporary, need for MBB. An option would be to offer a monthly subscription price that can be used across a number of devices that are given "permission", similar to how one iTunes account can be used across several PCs. Netflix provides an interesting case study on pricing, having adopted an effective "multi-screen" distribution and pricing model that has been well received by customers (see the April Lens for more).

Capacity utilization is going to be an important consideration here. The breadth of connected devices will be accompanied by a greater range of how much data they will consume. A video-centric device consumes more data than a wirelessly connected e-reader, for example. Without getting users into the whole game of having to understand the intricacies of file sizes, or having them be upset because a friend sent them a 50 MB video file, we need to develop some "low-medium-high" consumption options as part of our pricing structure. Ironically, this might be similar to today's voice pricing plans, with "buckets of gigabytes" instead of "buckets of minutes". The tiered rates for DSL are another template we can borrow from. Consumers do need to get more educated about wireless data economics, and should understand that multimedia costs more than messaging, and that downloading a movie on a wireless network will come at a premium compared to doing it on a fixed network (although I believe we might also see more tiered fixed broadband pricing too with the growth of video). still cost them more than if they did it on FiOS. Another approach would be some sort of "warning system", whereby the user wanting to Sling, download a large multimedia file, or play a rich multiplayer game over the wireless network is charged a premium - for that particular application, similar to how cable providers charge a little extra for the HD version of an On Demand movie. We need to ensure that subscribers do not receive surprise bills, such as can happen today on some low-tier data plans.

We should also consider more innovative MBB price plans for groups. Either multiple devices can share or a sizeable bucket of "gigabytes" monthly data subscription or a MB-based plan can be shared across people and/or devices. A small insurance company, for example, might share a few high-end imaging devices across a few agents. Families might share devices not associated with a particular person, such as kids' laptop, digital photo frame, and wireless-enabled portable gaming device.

Finally, I'd like to see more aggressive bundling of services. We have expected for some time that integrated providers such as AT&T, Verizon, and the cable companies will sell a mobile add-on to their home broadband service as part of a "quad play". I'd like to see this concept expanded to additional mobile devices. For example, provide "add a line" incentives for additional devices, like we see with Family Plans. Each additional "line" or "device" costs X, depending on type of device and/or expected consumption (ie. adding MBB for a laptop costs more than adding a data plan for a feature phone).

Now, these might be neat ideas, but we all know that in telco world, billing and back office systems might affect the ability to or timing involved in implementing some of these concepts. But if we consider that the next five years are going to see an explosion in the range of potential connected devices, and a significant increase in network capacity to accommodate this terrific innovation, the development of the underlying infrastructure will be as important as the creative pricing strategy to drive adoption.  

App Store Evolution, Part 1: Business Models 
With so much investment and effort going into the app store ecosystem, I think it's an opportune moment to consider what the future might look like. In this column for Fierce Wireless, I focus on the evolution of the app store business model.
App Store Evolution, Part 2: Context and Personalization
With the explosion in app stores, what will the next generation of capabilities look like? I argue that a more personalized, contextualized applications experience is needed. Read More
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