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Mobile Internet and the Broadband Incentive Problem

We helped to facilitate the GSM Association’s Mobile Entertainment & Advertising Summit in New York last week, and presented to a pretty senior crowd a summary of our recent report on ‘Telcos in Advertising Value Chain’ (background here, and the exec summary of the report here). More on this to come in later posts…

…but in the meantime, on this week’s theme of the ‘Broadband Incentive Problem’, I was approached at the end of the event by a Director from Hutchison 3G (an innovative and disruptive European mobile operator) who challenged my assertion that offering flat-rate data tariffs to stimulate mobile data and content usage (the operator becoming in affect a MISP, ‘mobile internet service provider’) would lead to the same ‘Incentive Problem’ that fixed ISPs are facing.

My point was that we need much more sophisticated advertising models than we are currently considering, to overcome this and other problems related to realising the potential of mobile entertainment and advertising. His point was that 3UK (and other mobile operators) had so much spare 3G network capacity that the broadband incentive problem is not really an issue - it’ll take a long time for the pipes to be filled.

I was a jet-lagged and tired at the end of the event, so didn’t want to defend my point there and then. I also wanted to check with my colleagues how valid his objection to our thesis was - how pertinent is the Broadband Incentive Problem to mobile as opposed to fixed operators/ISPs? So, I asked our Chief Analyst, Martin Geddes, to respond, here:

“Hutchison 3 might have a tactical break on it as the disruptive 5th player in the UK market, but as a strategic problem it remains an issue. They can’t offer affordable flat-rate price plans that let users do anything they want because a few users will go haywire and flood the network’s capacity. They can do what T-Mobile have done, and use contract terms to limit streaming, etc on the basic product.

So there are ways of tackling and mitigating it, but it probably needs a multi-pronged approach: not only ‘sticks’ to ban P2P, but also ‘carrots’ to give the users the content they crave via efficient and affordable delivery means. You might also innovate in the pricing model, for example offering flat-rate but supported by “gold”, “silver” and “bronze” priority levels — with network hogs causing congestion finding their throughput increasingly throttled.

The broadband incentive problem I think is real for mobile operators as well, and it is mainly driven by video.

E-mail, web, and VoIP have all been about sending text, images and audio. These are comparable in “value per Mb” to within a couple of orders of magnitude. For metered usage, value roughly corresponds to volume, so it’s a fair charging mechanism. Flat-rate gives you a fairly short and predictable usage curve — there’s only so many email and web pages you can read in a day.

P2P music distribution was the first taste of the Broadband incentive problem, when you have a ton more low-value traffic which pushes the value-volume link out of kilter by maybe another factor of 10. Furthermore, unlike Web pages which you tend to read, you may speculatively download libraries of music when you only have an intention of sampling a small proportion of them.

Video breaks the Internet model because it imposes too many costs on the delivery chain without any regard to the value of the content, capex of peak hour usage, or efficiency of delivery. The download-to-view ratio (how much of what you receive to you view) is quite low — maybe as low as 10% from one stat I saw.

Finally, if I were Hutchison 3, I wouldn’t want to crow too much about low utilisation levels of 3G spectrum…”

Editor - more on this topic as we analyse the output from the Telco 2.0 brainstorm…

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I believe that the BIP (Broadband Incentive Problem) is an illusion, created by legacy thinking and the integration of carriage and content. I doubt there's a congested fibre anywhere in the world, more light can still go through it, and there's more modulation we can do. Given. Known.

Thus laying the infrastructure is simple and relative to others cheap. Endpoints, always the difficulty for the centralised command and control homogenous telco, well, that's pretty much over and the customer will decide on the vast bulk of the investment, at the end point. Revenue for utility fibre, cost plus and certain. Services? Now the edge can take the risk, they do and as most evolutionary processes consisting of many small bets outperform stodgy centralised ass-covering, they do a great job. "Will IPTV be Skyped by Joost?" Great question considering how obvious the answer.

"Finally, if I were Hutchison 3, I wouldn't want to crow too much about low utilisation levels of 3G spectrum..."

What? Crow? I think the representative was pointing out they were doing something about getting it used, I wonder what the rest of the industry's utilisation is...

On the asserted to exist "Mobile BIP" despite the existence of Vodem's and other high capability always on terminals, the vast majority of payers are likely to be limited by their mobility (oddly enough, it does keep people doing other things), performance and storage capacity, so I expect that for every desktop "hog" there will be hundreds of smaller scale users. If we can get over the philosophical and moral issue of a customer trading off mobility for mass traffic, sometimes called "free riding," one can see the carriers not losing out of any of it.

Finally, liked the KPN line, "We must adapt, it is the only option!" Uh uh, steam ships and buggy whips didn't adapt, they moved on, and that might not be a bad consideration for these once arrogant, self-serving relics of a scarcity that no longer exists.

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