We have all likely read recent press releases from Verizon and AT&T about new data caps and the associated pricing changes due to the mobile video revolution and it begs the question: How will these changes impact each part of the mobile ecosystem?
The Consumer: Blowing Through New Data Caps
Let’s take Jane. Jane is an iPhone 3GS user. Jane loves watching old episodes of Seinfeld using the Sony Crackle app on her iPhone. During her daily commute over a month, she will have gone over her 2GB data cap, consuming 1 episode a day. Consumed MBs will only increase as she upgrades to the iPhone 4 and eventually the iPhone 5, and when you factor in the advent of HD on mobile, it’s easy to see Jane’s number of available MBs, and hence viewing minutes, will keep decreasing. She either will start paying overages or drastically modify her data consumption.
For a second example, let’s take Jack. Jack is a college student with a Motorola Droid and he’s a major video buff. He consumes around 10 minutes of ad-supported video content on it every day. Because the content he enjoys is ad-supported, he ends up watching about two minutes of ads per day. He’s willing to watch the ads to get to the videos, but Jack will eventually realize that he’s spending more than just time watching ads. He’s using up about 15 percent to 20 percent of his data cap watching video ads. This means he watches less content for the same data spend. If not careful, he could be bumped into the next tier of data, which would increase his data spend every month.
Both of the above scenarios are possible for the typical smartphone user. Carriers report that average data consumption is about 450 MB per user per month compared to the 2GB data cap. But with HD video on the way plus additional long-form content and better networks, consuming large amounts of video content is proving to be quick and enjoyable. So enjoyable, in fact, that an average user will blow through data caps without even realizing it.
The typical consumer will start visiting portals that will give them the biggest bang for the buck such as mobile sites that compress and deliver videos better than other sites. They will also start monitoring their usage very closely. There will also be consumers who will start considering using reasonably priced paid applications and services so they do not burn their data caps and can avoid watching video ads.
Content Providers: The Importance of Data Compression
Frankly, data caps may not be as big of an issue from the content provider point of view because there is such a massive demand for video that content will be consumed one way or another. The only question is whether content moves from being completely ad-supported to being a partial premium offering (subscription or pay-per-view). However, in order to drive more views for a single consumer, content providers will look to more efficient data compression platforms and services when delivering video. While we see this trend already, consumer sensitivity to data caps will drive this awareness further and faster.
Advertisers: A Call for Innovation Around Video Ad Units
On the other hand, the data cap could quite negatively impact the advertising world. With some amount of premium video content moving from being ad-supported to being subscription and pay-per-view supported, premium video ad inventory will be reduced. That reduction in inventory means fewer ads for consumers who don’t want to burn 10 percent to 20 percent of their data caps just on viewing video ads. This will lead to more expensive CPMs since content providers still need to make the same amount of money per minute of video viewed. This means that we need more innovation around compelling video ad units (e.g. in-video product placement) to improve conversions without explicitly burning data on video ads or stepping back into the world of banner ads.
Carriers: Rethinking the Model
The carrier that figures out how to best balance user experience around mobile video with smart pricing will blow the competition away. Given that backdrop, it’s not a question of whether to solve this problem – but rather how quickly and effectively can it be solved?
There are alternative models that carriers should consider. For one, they should partner with or develop in-house expertise to work directly with advertisers. This way, carriers can participate in the incremental revenue upside and effectively subsidize data costs. This will lead to carriers potentially increasing data caps that aren’t as easy for consumers to hit.
Another option for carriers would be to work with content providers and offer premium subscription or pay-per-download products that don’t count against the data cap. Consumers would consider this idea if the content truly was premium, the pricing was reasonable and if it offered relief against their data cap.
The third action that carriers should consider is to partner with video publishers to better optimize video content for the networks while balancing user experience. This is beginning to happen very quickly with a number of recent announcements by companies such as YouTube, Vuclip, Skyfire and others.
Summary
In conclusion, the demand for data is insatiable and shows no signs of slowing down. Carriers are worried about carrying a data load that isn’t monetized. With clogged data pipes and pricing plans not equipped for the consumption of massive amounts of data, they are facing a crisis if video consumption continues apace without any sort of optimized delivery to consumers. Consumers, content providers and advertisers are also potentially impacted by the rapid changes in the ecosystem when it comes to data intensive services, such as mobile video. While this could be a major opportunity for those that figure out the problem, the downside of not figuring it out is as extreme as the upside. This is going to lead to some very innovative video compression techniques and business models.
Nickhil Jakatdar is a serial entrepreneur and CEO and co-founder of independent mobile video service Vuclip.