I am become iPhone, destroyer of MNOs

I am become iPhone, destroyer of MNOs

Summary: Whether you were impressed by the iPhone 4S, or were disappointed that it doesn't have a 5 in its name, there's no question that it will continue the disruption of telcos' mobile data business models. But with research suggesting that running a mobile network could become unprofitable within three years, can carriers change their ways before the iPhone and its ilk chew up our airwaves like locusts buzzing the plains?

SHARE:

There are many ways to look at Apple's new iPhone 4S — and not all of them, as hordes of incensed Twitterati proved this morning, are positive. Yet, even as mobile network operators (MNOs) rush to step back from suggestive advertising, and online vendor Kogan rushes to redesign its iPhone 5 priority sign-up page, the new phone and its inevitable popularity is likely to have carriers looking at it from a most different angle: as a disruptive, problematic force that will hasten what one recent research report is warning will be the end of profitability for mobile operators.

The findings of that report — conducted by carrier-equipment vendor Tellabs, based on modelling data from research firm Analysys Mason — is a sobering warning for every MNO in the world. Steep growth curves in mobile data usage, the report warned, are pushing carriers to invest so much in their networks that their capital expenditures will eventually outstrip revenues, and it will no longer be profitable to run a mobile network.


They may look all cute and shiny, but iOS 5 and the iPhone 4S are the worst things to happen to mobile carriers since VoIP and Visual Voicemail.
(Credit: Apple)

Asia-Pacific markets have until late 2013 or early 2014 until this point of singularity is reached, driven largely by a steep downward trend in the market value of a gigabyte of wireless data. In a region with the world's highest rate of growth in data consumption, customers are using more data and expecting to pay less for it — and so, in highly competitive markets like Australia, carriers cannot boost prices to keep their profitability up.

We've already seen the effects of this in the disaster caused by Vodafone's chronic underinvestment and resultant network overhaul. We've seen it in Telstra's decision to fast track its 4G network upgrade — which is driven by the technical desire to boost spectrum efficiency, as well as being a political tool in the company's NBN battle — and we've seen it as Optus, which in May dismissed Telstra's 4G plans as "bragging", is now hightailing it towards 4G and plans to be live with the technology by early next year.

Steep growth curves in mobile data usage are pushing carriers to invest so much in their networks that their capital expenditures will eventually outstrip revenues.

Yet even these investments aren't likely to stave off the inevitable, if Tellabs is right. And while many may dismiss vendor research as inherently biased, the company's analysis of the results is spot on. "Operators can spend themselves into the red trying to add capacity to keep up with demand," company spokesperson Sonny Waheed said. "That's ultimately a losing battle, because they're fighting on the wrong front...Bigger dumb pipes won't reverse the slide toward unprofitability."

Remember Mickey Mouse trying to keep up with the multiplying water-carrying brooms in Fantasia? That's how our three carriers are going to feel as they rush to both bring services to new areas, and also add additional capacity in high-demand areas, like our CBDs. But this time, there won't be any magic to save the day — especially not with what are likely to be millions of customers that start using their iPhone 4Ses when the new device ships later this month.

Every smartphone sold is contributing a little bit to this trend, but the iPhone 4S will be a particularly problematic culprit, because its entire differentiation now rests on services like Siri — the cute talking assistant — and iCloud, the company's broad cloud-storage strategy that seems to be largely designed to suck down as many gigabytes of mobile data as possible.

I'm reminded of Visual Voicemail, that feature that Apple debuted with its iPhone 3G but which only, at first, debuted on Vodafone's network. It was a revolution in message taking — but it was resoundingly and continually ignored by both Optus and Telstra for two years, until Telstra finally relented and launched the service in March.

Vodafone may have seen Visual Voicemail as a competitive advantage, but Optus and Telstra saw it in the same way that all the carriers have seen VoIP: as an unwelcome replacement for a service that generates significant revenues for them. No matter what mobile plan you're on, you probably already pay a great deal every month for the privilege of listening to your voicemails; you even get to pay a charge every time someone leaves you a voicemail.

Carriers are loathe to cut off revenue streams until they absolutely have to. Visual Voicemail is a perfect example of the dichotomy between what Apple wants — to enable users to use amazing new networked applications — and what carriers want, which is to maximise revenues while minimising network consumption. The bandwidth for the applications costs money, after all, and Apple sure isn't paying for it.

With the impending launch of the iPhone 4S and its underlying iOS 5, you can add Siri, iCloud, GameCenter and related online innovations to the list. Assuming it works like Google Voice search tool, Siri is a heavily network-aware application that records everything you ask it to do, sends the file into the cloud, parses your voice, runs an online query and returns the results to you in real time. Do this once, and it might not use much data; do it regularly, and that data is going to add up quickly.

Ditto iCloud, which will task carriers with not only keeping you and Siri connected with the internet, but also with streaming music to your iPhone over already-struggling mobile networks. Since the phone doesn't support 4G in any shape or form, this significant boost to traffic volumes can only drag down overall network performance further. Call me a cynic, but users can expect erratic performance that might not get better for some time; carriers are now redirecting investment funding towards 4G, after all, and won't be pouring capital into their 3G networks just so you can listen to your Sneaky Sound System tunes online instead of syncing them the old-fashioned way.

Call me a cynic, but carriers won't be pouring capital into their 3G networks just so you can listen to your Sneaky Sound System tunes online instead of syncing them the old-fashioned way.

The iPhone 4S isn't the only culprit, of course: smartphone makers of all stripes are getting very good at taking carriers for granted — and as the appetite of smartphones for data outstrips those phones' ability to store and manage that data, their mobile data usage will trend towards continuous. This, in turn, presents problems for carriers that have so far responded by keeping the cost of mobile data as high as possible, charging like wounded bulls for seemingly simple services, like mobile roaming.

Even this, Tellabs's analysis warns, won't be enough to save them, since it still represents a scattershot approach to overcharging for bandwidth, and is actually likely to alienate price-sensitive customers who jump ship with impunity. Rather, it recommends — self-servingly, of course, but not entirely incorrectly — that carriers move towards application-based charging.

It's not a crazy idea: instead of charging customers the same rate per megabyte to stream a 1GB movie as to send a 10KB email, why not add network intelligence so that carriers can charge a flat rate per email sent, or per movie downloaded? Why not offer Visual Voicemail and charge $0.10 per message downloaded, rather than selling services at a flat monthly rate and absorbing the hit when chatterboxes get 50 voicemails per day? And why not charge mobile gamers less to use the iPhone's GameCenter to play games online late at night, or charge business users more for a videoconference during business hours than at 2am, when overall usage is lower?

We already pay these sorts of prices for peak and low-tariff electricity; applying a similar model to a carrier's service would allow carriers to develop more predictable revenue models based on indicative pricing for content, rather than simply providing a dumb pipe with no upper limit and all of the inherent scalability issues that this model presents. Time- and application-based costing would enable more flexible billing, plan and bundling structures, whilst helping carriers shape the behaviour of their customers and the smartphones that they're wielding. It might seem like a big jump now — but the way things are going, it could be a matter of survival less than 100 weeks from now.

What do you think? Will you be racing in to get an iPhone 4S, and will you make heavy use of its networked applications? And would you embrace a charging model that tied your application and data usage to a more predictable price structure, in exchange for more predictable network performance from your MNO?

Topics: Apple, iPhone, Mobility, Networking, Samsung, Tech Industry

About

Australia’s first-world economy relies on first-rate IT and telecommunications innovation. David Braue, an award-winning IT journalist and former Macworld editor, covers its challenges, successes and lessons learned as it uses ICT to assert its leadership in the developing Asia-Pacific region – and strengthen its reputation on the world stage.

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

6 comments
Log in or register to join the discussion
  • "why not add network intelligence so that carriers can charge a flat rate per email sent" this model describes MMS, and users hate it (me anyway).
    DanielB1
    • A very good point. I personally like MMS because I can send pictures with it, but it has always been an arbitrarily limited service (100KB attachment limit if memory serves) for the exact reasons I've discussed above.

      Forget email, though: What about Skype? Right now you pay Skype for the call and Telstra/Optus/Voda for the bandwidth to carry it. Would you be happy paying your telco a flat rate per minute to make a Skype call, knowing you'd have a more predictable quality of service because the carrier can cost and allocate bandwidth more proactively?
      braue
  • I wouldn't be so concerned, necessity drives innovation so the networks will have to figure out a way of doing things as a lower cost which in turn means companies that provide/develop infrastructure will also have to innovate more cost effective ways of supplying services.
    ninjabassonline
  • This is a really pessimistic way to look at the problem.

    Why punish consumers for using devices the way they were intended, and sold, by the networks? It's obvious that they support the trend because they promote smartphones and data use over any other property. Why? Because it sells phones.

    Telstra make more then any other carrier because they charge the full cost of the handset to the consumer with very little subsidies. As a result, they make significantly more revenue then the same Optus/Voda plan because they are collecting the full cost of the hardware. The MRO Bonus they give back is a pittance compared to the enormous profit margins they make on text and voice calls that cost next to nothing.

    They've been clever enough to take this money and pump it back into NextG, and will continue to, even as 4G rolls out, because 99% of their load is, and will for at least 2-4 years, be on their 3G network. There are already new technologies that compress and prioritize data, reducing load on the network, but turning around and penalizing users will do nothing but cause them to move carriers to the one guy who doesn't.

    Once apon a time networks were worried they didn't have enough capacity to meet growing demand for voice calls...
    sremorse
    • I agree – but the situation outlined is a real one as the growth curves for bandwidth demand and bandwidth supply are on very different slopes. As has already been discussed extensively, keeping up with wireless demand requires more towers in denser configurations – which of course relates to capital investment. Which skews those curves further.

      There will of course be innovations to continue increasing supply, and LTE offers better spectral efficiency – but it will be interesting to see whether carriers get pushed towards different service models when acting as dumb pipes just doesn't work anymore. It won't be today or tomorrow, or even maybe in 3 years like Tellabs suggests, but I think it's not an unreasonable end-game suggestion when looking at the way the market is going.
      braue
  • Thanks for bringing the study to my notice, but can I just nudge you to say this is a report produced by an equipment vendor to say the only way for mobile operators to survive is to buy more stuff from me. That should make you nervous.

    So should the fact that all you get given is an executive summary with some pretty stylish graphs. I'm reliably informed there is no science to the Alalysys Mason revenue forecasts - merely straight line projections. I also think that the Australian market doesn't fit much of the detail as mobile download per user isn't increasing, the operators here have a lot of spectrum and they are using it already (1.8 GHz) to deliver LTE. These are features explicitly excluded from the model.

    In the end device specific apps fail the one thing users want most - any-to-any connectivity. iCloud will not destroy the MNO's; Facebook and Skype are where the challenge comes from. But most importantly, profitability never ends - sensible operators merely stop investing.

    Vodafone's issues were far more merger related than straight network under-investment.

    Finally, operators already are using quite a variety of "price differentiation" strategies - just mostly in the way they deal with calls. The problem with differentiation in what is in reality just IP traffic is in counting it in a way the customer can relate to. But as usage changes carriers will adapt their charging models. Just don't go feeling sorry for them or think we've reachjed "the end of profitability."
    dhavyatt