Consumers are hungry for mobile video content. A recent report from analyst firm ABI Research states that surge in streaming mobile videos from over-the-top players such as YouTube and Netflix will increase global data traffic more than seven times the current rate by the end of 2011. And there’s no end in sight. ABI Research also predicts that mobile data traffic will continue to rise by a 50 percent CAGR to 60,000 Petabytes by 2016 thanks to consumers’ love of watching video on their mobile devices.
While video represents a huge demand driver for mobile operators, it’s also a cause for headaches.
Video consumes a disproportionately large amount of network resources – 48 percent. And with its low tolerance for congestion, video requires smooth delivery to look and sound correct, making it not only a large contributor to network congestion but less tolerant of it as well.
As video usage swells, operators will need to examine new service definitions to handle growth. Clearly, usage-based pricing alone is not the perfect solution. To help operators define potential mobile video service plans, Tekelec conducted primary research in conjunction with Strategy Analytics in December 2010. The survey gauges user views regarding the relative value of mobile video as well as their reaction to various pricing models.
Consumer Value of Mobile Video
The monetary value given to video relative to other services is only moderate, according to our survey. Video ranks as the fourth-most valued application behind web browsing, email and navigation, and represents only 12 percent of the total value of mobile Internet services.
Notably, based on the distribution of responses, 42 percent of subscribers would purchase an a la carte video-only service that was priced at $5 per month. If that a la carte video-only service was priced at $10 per month, the percentage of purchasers drops to 20 percent.
New Types of Mobile Video Plans
Mobile video’s value to consumers is out of line with the amount of network resources it consumes (delivering 12 percent of value but consuming 48 percent of network resources). This dichotomy shows an opportunity for mobile operators to introduce new mobile video pricing plans such as these options identified in the survey:
• Option #1: Limiting Video Services for Only $5/Month
The most basic way to overcome the video consumption and cost gap would be to offer lower-priced services that limit or restrict video consumption.
About 40 percent surveyed would take a modified video service if it was $5 cheaper – a 17 percent discount (based on the respondents’ average $30 monthly data plan price point). Almost 60 percent would subscribe to the service if it was $10 cheaper – a 33 percent discount. Some basic calculations regarding cost allocations indicate the operator would be better off with this kind of plan, provided cost reduction assumptions hold.
The basic challenge to this approach is that research shows video users were more likely to take the cheaper service than the heavier video option, so the actual cost reduction may not be as great as expected. One solution could be a slight increase in the price of the no-video-limit service combined with an option for a discounted video-limited service.
• Option #2: Users Could Pay a $5/Month Premium for Unlimited Browsing and Video Limits
The value consumers place on applications does not always align with the cost for the operator to deliver that application. As a result, we sought to design a service bundle that would offer more value to the subscriber, lower cost to the operator and net a higher ARPU to the operator. In other words, we targeted service bundles that included applications subscribers would pay extra for while limiting less-valued applications. Since web browsing is the most valued application, we asked respondents about their willingness to pay for a plan that provided unlimited mobile browsing along with a limit on video. Users who already had unlimited data plans were excluded since they would find no additional value in this kind of offer.
There was strong interest expressed in this kind of service plan; roughly 40 percent to 50 percent would be interested if it was an additional $5. Twenty to 30 percent would be interested if it was an additional $10. In addition to generating top-line revenue growth, this would also increase the operator’s bottom line, assuming the extra ARPU plus the cost savings from the video restrictions earned the operator more than the extra cost resulting from unlimited browsing.
• Option #3: Users Could Pay a $5/Month Premium for Live Mobile TV that Would Not Count Against Monthly Data Allowances
We also asked about willingness to pay for premium video services in addition to basic mobile broadband—specifically, live television and premium video-on-demand services where the usage would not count against the user’s quota.
Twenty-four percent would purchase live TV for an extra $10, and 23 percent would purchase video-on-demand for an extra $10. However, the cost to deliver these services certainly must be taken into account. If this is truly representative of the price elasticity, then it would appear that a higher price (such as $20/month) might be the best approach to maximize gross profit.
Video is a significant contributor to the demand for and cost of mobile broadband. In order to make strides with the ongoing data surge, mobile operators need to realize these key points:
• Usage-based billing alone is not a perfect solution for addressing the growth of mobile video, at least for a significant portion of the customer base.
• There is a definite opportunity for operators to offer services to consumers that trade off less of lower value/higher cost applications for more of higher value/lower cost applications, perhaps in a way that increases revenue. Specifically, we found significant interest in unlimited usage of a higher-value service like web browsing along with limited or restricted video tested well.
• Premium video services can be a source of additional value, but the cost to deliver service must be balanced against the potential increase in revenue.
Randy Fuller is director of strategic marketing at Tekelec.