Wednesday, January 14, 2015

When Does Revenue Per Megabyte Matter?

As a rule, mobile and fixed network Internet service providers must care about revenue per megabyte and cost to supply megabytes, since revenue growth now often is driven by Internet services, and Internet services dominate overall network bandwidth issues.

But mobile now is a multi-product business, and each type of key app has distinct revenue per megabyte profile.

The price of various telecom services varies by as much as four orders of magnitude, per megabyte, with text messaging having the highest profit margin, voice having a high to moderate profit margin, video entertainment having moderate margins, and Internet access having widely-varying margin.

Of course, that is product profit margin, not “profit per megabyte.”

Does that matter? Not in some cases. Text messaging and voice consume such little bandwidth that profit per megabyte is not an issue, though other concerns--such as revenue per unit or unit volume--clearly are issues.

Buckets of mobile data usage likely are not particularly troublesome. So long as the service provider understands its costs, prices reasonably in relation to costs and consumers continue to believe the price-value relationship is reasonable, profit margin should not be a particular issue.

The issue is what happens as consumption continues to grow rapidly and consumption is related in some direct way to cost. And then there is Moore’s Law, and its analogies in the bandwidth business.

Long Term Evolution fourth generation mobile networks are desired for any number of reasons, but among them is network efficiency, often said to be at least 30 percent more efficient at supplying megabytes, in addition to providing higher latency performance.

Some might argue LTE is much more spectrum efficient than that, perhaps as much an an order of magnitude more efficient. Others say LTE is a rather minimally more efficient network .

It might yet be reasonable to argue that more mobile capacity will be gained by use of multiple techniques, though, including new spectrum allocations, spectrum sharing, small cell architectures, modulation and air interface changes, offload, retail pricing and packaging and possibly, in some cases, device or app performance improvements.

One study has shown that some  mobile apps consume significantly more data--seven to 21 times more--than the same content accessed using a browser.  It is conceivable more efficiency could be wrung out of app performance.

Still, the demand side changes will be key. If consumers increasingly rely on their Internet connections to consume video, the amount of data consumed will skyrocket, growing a minimum of two to three orders of magnitude in perhaps a decade. If consumption is a product purchased “by the pound,” that will pose a key challenge.

Consumers are unlikely to spend two to three orders of magnitude more money on their Internet access services.

Unlimited pricing of Internet access is where the clear trouble lies, since the service provider easily could find consumers consuming vastly more data than is matched by revenue, putting huge pressure on profit margins.

The revenue per bit problem is easy to describe in another way, in the fixed network domain.

Assume a fixed network ISP sells a triple-play package for a $100 a month retail price, where each component--voice, Internet access and entertainment video--is priced equally (an implied price of $33 for each component).

How much bandwidth is required to earn those $33 revenue components? Almost too little to measure in the case of voice; gigabytes for Internet content consumption and possibly scores of gigabytes for video.

So, by some estimates, where voice might earn 35 cents per megabyte, revenue per Internet app might generate a few cents per megabyte. Recall that actual revenue per megabyte is statistical: it hinges on how much a user consumes after paying a flat fee for the right to use bandwidth.

There are potential analogies in the mobile segment as well.

McKinsey analysts have argued in the past that a 3G network costs about one U.S. cent per megabyte. The problem, in many developing markets, is that revenue could drop to as little as 0.2 cents to 0.4 cents per megabyte, for any mobile Internet usage.

That implies a strategic need to reduce mobile Internet costs to as little as 0.1 cent per megabyte, or an order of magnitude. Tellabs similarly has warned about revenues per bit dipping below cost per megabyte, leading to an "end of profit" for the mobile business.

But some apps arguably require very low prices per megabyte to be viable products, entertainment video being the best example. In such cases, low revenue per megabyte, or low profit margin per megabyte, is a precondition for offering or supporting the product.

So does gross revenue per megabyte matter? Yes, but less than gross revenue per account, device or line. It is doubtful anybody really cares about voice revenue per megabyte. Revenue per device, yes; revenue per account, yes; revenue per user, yes.

Is profit per megabyte important? Yes, especially for retail plans that feature unlimited usage.

Service providers that have moved to some metered form of usage, where consumption and price are somewhat related, might not have to worry about profit margin per megabyte.  

When revenue per megabyte is very high, application bandwidth is very low, customer demand poses few, if any, peak load issues and marginal cost is negligible. revenue per megabyte is not much of an issue.

When does gross revenue per megabyte matter quite a lot? When revenue per megabyte is low, costs of supplying capacity are high, there are serious peak load issues, marginal cost is somewhat high and unlimited usage is the charging method, revenue per megabyte is an issue.

Also, there are instances where low profit margin actually is the desired outcome. Where the alternative is losing an account, low profit margin might be the preferred problem.

In markets where people are using voice and text messaging less than they used to, the telecom industry’s biggest problem is declining demand--not just profit margin. In such cases, lower revenue per service (especially when incremental bandwidth and other costs are quite low) is better than losing an account, since the incremental revenue arguably is more valuable than the actual profit margin.

Also, it can be very hard to determine what profit margins actually will be, in advance.

In many markets, such as the United States, mobile service now comes with truly unlimited domestic text messaging and voice. Actual profit margin depends on how much people use those services. No matter how low the retail price, if a customer uses very little of the resource (sends and receives few text messages, places and receives few calls), actual price per message, or price per call, can be quite high.

The same is true for many other services, including high speed access. Actual profit is statistical. If a consumer pays $20 a month, and talks 50 minutes, the price per minute is 40 cents. At 300 minutes, the price per minute is about seven cents.

And even if some do use the services at higher rates, the volume does not stress the network, and marginal costs are quite low.

To be sure, there are no telecom products other than content services that show an upward-sloping revenue trend.

Aggregate volume is growing but price per unit has been dropping, for virtually all communication services and products.

There is a key observation, though. So long as telecom services are bought “by the pound,” profit margin should be a controllable issue, So revenue per megabyte always matters, at a high level.

At a more granular level, sometimes low margins are a precondition for doing business, though.

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