With wireless operators expected to spend billions of dollars in the next several years introducing high-speed data capabilities onto their networks, the need for a return on investment is paramount. If consumer’s current uptake of wireless data is any indication, ROI may be hard to come by.
As wireless operators continue to rack up impressive customer addition numbers, the service that was supposed to be a big driver of adoption, wireless Internet, has had to play second fiddle to the old reliable voice services. For most carriers, wireless Internet users make up around 10 percent of their total customer base, with many customers using wireless data services only occasionally.
Lehman Brothers recently updated its wireless data subscriber numbers to compensate for the slower than expected growth from 164 million users in 2007 to 145 million users.
“This lower number of expected data subscribers reflects the delay on the part of the carriers in deploying next-generation services and the slower adoption rates we are seeing in the U.S.” Lehman Brothers said in an equity research report. “One should not read this as a sign of bearishness but rather a shifting of the data time horizon. We now expect data subscribers to surpass 164 million in 2009.”
The reduced estimates for 2007 are most alarming because most U.S. carriers have announced plans to roll out higher-speed networks by that time. Most estimates call for carriers to be well into third-generation deployment by the second half of this decade with network speeds approaching 2 Megabits per second.
While most of the nationwide wireless operators offer some form of wireless data service today, usually at speeds between 10 kilobits per second and 20 kbps, current technology and pricing plans have limited the impact to carriers’ bottom lines. At the most, carriers have reported wireless data services increasing average revenue per user by $1 per month, in most cases not enough to keep up with declining voice prices.
This is in sharp contrast to Japan’s NTT DoCoMo Inc., which in a couple of years has seen its i-mode wireless Internet access service grow to more than 20 million users, each spending an average of $25 per month on the service and reporting churn rates of less than 1 percent. All with data throughput of less than 10 kbps.
So why the somewhat sour forecasts for wireless Internet uptake? The most common response is carriers have yet to introduce applications designed to drive subscriber additions, the elusive “killer app.” Most carriers admit the killer application is currently voice, and is expected to remain so for some time.
According to a recent Yankee Group report, 57 percent of wireless customers said they don’t want or need wireless Internet services. Only 2 percent of respondents mentioned current network speeds were too slow. On the eve of high speed, and high priced, data services, carriers have their work cut out for them.
“So while there has been plenty of focus in the wireless industry on what must be done technologically to enable advanced services, more attention must be paid to what users want and need,” the Yankee Group report said.
The report showed applications most consumers showed interest in are all possible with current network speeds. Those applications include event-triggered alerts, location-based services and personalized information services.
“The rational that speed is the bottleneck is not entirely true,” said Richard Siber, a partner with Accenture and head of the firm’s Wireless Internet Practice. “Speed is one of the roadblocks to the adoption of wireless Internet, along with user interface and applications. Without having important applications, speed used in context does not provide value. You have to tie all of the loose ends together.”
Nextel Communications Inc., which has the highest wireless data penetration rate of the national wireless carriers at close to 15 percent, said it has been able to meet most of its customer requirements for services with its current circuit-switched and packet data networks operating at around 20 kbps. This is most surprising since Nextel’s service caters to business users who are often thought of as the biggest potential users of high-speed services.
“We have focused on narrowband applications,” said Tim Dunne, vice president of business development and e-business for Nextel Communications. “We definitely are not waiting for speed to get here.”
While Nextel plans to introduce compression technology onto its network later this year doubling its current data speeds, and is expected to overlay cdma2000 1x onto its network within a few years, Dunne said he was not convinced that some of the potential applications high-speed networks allow, including streaming content, are what customers are asking for.
But, for other carriers, high-speed networks will open up a whole world of services customers will find too compelling to ignore.
“The faster speeds allow you to do more,” said Ritch Blasi, spokesman for AT&T Wireless. “With what DoCoMo is doing with 9.6 speeds, think about what we can do with 100 kbps in both an enterprise and consumer basis.”
Blasi noted wireless gaming is a prime example of applications that will benefit from high-speed networks, allowing users to experience a more enthralling application than what is available with current network speeds.
CDMA carriers have also pointed out that in addition to more compelling applications available from 1x technology, they will see an increase in voice capacity from their next-generation plans-a side benefit they will gladly take in case high-speed wireless data fails to ignite consumer desire.
“We really are focusing on our core business of voice,” said Jeffrey Nelson, spokesman for Verizon Wireless. “But, we are clearly positioning ourselves with the data marketplace.”
Nelson noted Verizon will be rolling out data applications for its 1x service in the near future. In preparation for that future, Verizon Wireless recently announced it had upgraded its network in New York and Northern New Jersey for 1x services, with plans to upgrade additional markets by the end of the year.
Another issue carriers have to address is how they will bill consumers for use of high-speed services. Currently, wireless data offerings are either charged a flat rate for unlimited usage or on a per minute of use basis. These models have been designed to ease consumers into wireless data services, but may end up hurting carriers later when they try to charge subscribers for high-speed services.
“Current pricing models show a lack of forward thinking by U.S. carriers that make the U.S. look antiquated,” Siber said. “They are hurting themselves for later value propositions.”
Those later value propositions will be trying to explain to consumers how they are being charged for a packet of data as opposed to the amount of time they spend on the service, something most consumers have come to expect from wireless service.
Dunne said Nextel purposely simplified its pricing models for its wireless Internet service, allowing unlimited usage per month for a flat rate, to get customers used to the service. Dunne also noted he was not convinced subscribers would be willing to spend more money for additional services.
“While we understand the need for operators to recoup 2.5/3G network and service development costs as soon as possible, without lower and more flexible pricing we seriously doubt that consumers will be enthused and that a mass market will be created,” said Farid Yunus, senior analyst for the Yankee Group’s Wireless/Mobile European research and consulting practice.
Siber noted consumers will only pay for applications if they find value in them and the pricing models carriers lay out are simple.
“The price needs to be affordable,” Siber explained. “I-m
ode is 300 yen per month and is not cost prohibitive to the customer. Pricing models in the U.S. have to change. Conte
nt cannot be given away for free. But on the consumer side, it has to be a simple pricing model.”
AT&T Wireless has taken a big first step in packet-based pricing plans with its launch of GPRS service in its Seattle market. The carrier is charging users a $50 monthly service fee for 1 megabyte of data and 400 voice minutes per month. Each additional kilobyte of data will be billed at less than 1 cent.
While the buzz of high-speed networks will continue to garner its fair share of the lime light, for carriers to attract customers to those services, they have to make sure pricing plans and applications are available to support the networks or high speed data may stall in the fast lane.
