Vodafone Ponders Outcomes-Based Pricing

Vodafone is at least considering “outcome-based” pricing for IoT services, where customers are billed according to the outcome of the messages sent over the MNO’s network, rather than billed on a monthly cycle based around a usage limit.

A related idea is “output-based pricing,” essentially a cost per transaction, such as test scripts executed or tickets resolved. Many would argue that is related to, but different from, outcome-based pricing. Still, the logic is similar: tie pricing to business process results.

That would be particularly important when Vodafone operates as a non-facilities-based service provider in markets such as the United States, where it will not have inherent cost advantages over many of its competitors.

“Outcomes-based” charging is an idea that has become more common as products increasingly embody services as a key part of the value proposition.  

As understood in the pharmaceuticals business, outcomes-based pricing is about the notion that retail prices should be set in relationship to outcomes (perceived value).  

There are lots of challenges, not the least of which Vodafone and other service providers would have to argue there is a direct causal link between a service provider’s efforts and the outcome.

Actual outcomes-based pricing also is complex. It requires end-to-end control of any number of processes, each of which contributes to a completed outcome. It always is hard to attribute results in such instances.

What is the supplier responsible for, and in control of? How does one distinguish between outcomes enabled by the service provider and instances where the client did or did not do something essential for the service provider to fulfill on an outcomes result?

Also, cost predictability tends to be lost when real outcomes-based pricing is used. That is the same problem consumers encounter for any usage-based billing system, where there are no caps on total cost.

Full outcomes-based pricing is an interesting idea. But probably few observers think it will be too common, as the sole method for charging. More likely is the incorporation of some outcomes-based or activity-based charging on a more-standard contract based on usage.

Netflix, YouTube Accounts for About 71% of Daily Viewing by U.S. Teens

U.S. teenagers video consumption includes 38 percent of time spent on Netflix, about 33 percent of viewing happens on YouTube and linear video services represent about 16 percent on a daily basis, according to Piper Jaffray.

source: Piper Jaffray

Global Video Entertainment Subscription Revenue Will Hit $265 Billion in 2018

Global revenues from traditional pay TV and OTT TV episodes and movies will reach $265 billion in 2018; up from $254 billion in 2017 and $234 billion in 2015, says Simon Murray, Digital TV Research principal analyst.

Revenue growth is coming from over the top streaming services, as linear subscription revenue falling $4.4 billion in 2018.

OTT TV episode and movie revenues will climb by $15.4 billion in 2018, the company says.

OTT’s share of the total will double from 13 percent in 2015 to 26 percent in 2018.

The total number of TV subscriptions will reach 1.51 billion by end-2018; up by 38 percent from 1.09 billion in 2015. SVOD subscriptions will climb by 304 million over the same period to reach 474 million. Therefore, SVOD’s share of the total will double from 16 percent in 2015 to 31 percent in 2018, Digital TV Research predicts.  

source: Digital TV Research

U.S. Broadband Investment Climbs in 2017

Broadband investment by service providers grew in 2017, according to new research by USTelecom.

USTelecom’s annual broadband capital expenditure report (1996-2017) shows broadband provider capital expenditures grew to $76.3 billion in 2017, compared to $74.8 billion in 2016, an increase of $1.5 billion.

What might strike many observers is the relative constancy of such investments since 2007, though, after the dip associated with the Great Recession of 2008. Significantly, the data exclude any capitalized investment by service providers to subsidize mobile phones.

The figures do not appear to be indexed for inflation, though inflation has been quite tame in recent years, so the results--not adjusted for inflation--might not differ much from an adjusted view.

source: US Telecom

source: US Telecom

The 2017 increase comes after a two-year decline during which annual broadband capital expenditures fell a total of $3.2 billion, from $78.0 billion in 2014 to $74.8 billion in 2016.

This spending dip began when the Federal Communications Commission (FCC) moved to impose common carrier regulatory classification—commonly known as Title II—on broadband providers in 2015, USTelecom says. Others dispute that notion, of course.

“Growth returned after a series of pro-investment steps taken by the FCC and Congress, including the Restoring Internet Freedom Order, the tech transition order and tax reform,” UST says.  While many factors are at play, the parallel shifts in policy and capex suggest that policy expectations played a role.

Customers as Competitors

I always have found the important nugget in Selling the Invisible, billed as a “field guide to modern marketing, its relatively brief--and vital--notion that services cannot be marketed the same way as physical products, as there is no way for the potential buyer to evaluate quality in advance, before consuming the product.

In many cases, the consumer has no objective way to evaluate quality even after performance. Unlike physical products, intangible products (software, communications services, all sorts of home repair, medical, legal, accounting, financial, advertising) cannot be touched, seen, tasted or  smelled.

On the other hand, among the other points that have stuck with me over the years is that a service provider’s competition is actually not the other firms selling similar or the same services. It is the customer deciding to do nothing, or “do it yourself.”

A survey by the TMForum suggests that might actually be the case. Asked whether service providers “can make it without them,” about half said “no.” But only about half.

A slightly smaller set of respondents agreed that service providers “will continue to be hugely reliant on vendors.” And some 12 percent said they believed “many large operator groups will successfully transition to (becoming) tech companies.”

source: TM Forum

True though that might be, I know of no instance where firms, evaluating market share, actually assume the potential customer is a competitor, and track sales, market share or installed base in the same way that other suppliers are tracked.

The point is that the observation still appears apt: potential customers can do nothing, or sometimes “do it themselves.” So the competition really is “inertia” (do nothing) and “do it yourself” (DIY).

Can ISPs Keep Increasing Internet Access Speed at Moore's Law Rates?

Perhaps improbably, at least some internet service providers--Comcast in particular--have been doubling the top speeds on their networks at rates consistent with Moore’s Law . “Comcast has increased speeds 17 times in 17 years and has doubled the capacity of its broadband network every 18 to 24 months,” Comcast says.

Comcast says gigabit speeds now are available to nearly all of the company’s 58 million homes and businesses passed in 39 states and the District of Columbia.

Of course, not every platform, or every ISP, has been able or willing to boost average speeds that much. The general rule is that a hybrid fiber coax network mostly can boost speeds by swapping out customer premises equipment, where a telco has to replace copper access networks with optical fiber. The former simply costs less than the latter.

source: youreeeka.com

That explains why cable TV operators tend to supply a disproportionate share of the fastest connections in the United States and United Kingdom, for example.

source: FCC

If  want to know why mobile service providers see upside in 5G , the ability to upgrade speeds to gigabit ranges without having to rip up copper access networks explains much of the interest.

Some have argued that fixed and mobile 5G is an existential threat to cable operators for that reason. Some us might argue that danger likely is overblown, but other existential problems arguably exist, among them declining revenue growth rates, profit pressures, lower average revenue per account and shrinking of revenue for virtually every legacy revenue stream.

Mobile substitution for fixed network voice services is one problem. But mobile messaging and voice revenues now are declining in most countries, while internet access prices also are dropping in most countries.

Sometimes, in some markets, actual price declines are disguised. That can happen when posted retail rates are not the prices most consumers pay; when customers actually buy more-costly packages over time; as prices per gigabyte fall or when prices are not indexed for inflation or compared to household income levels. In most developed countries, internet access costs less than one percent of household income, for example.

It also is common for ISPs to increase speeds on given tiers without price increases. That is an effective price cut, even if the nominal or posted retail price remains unchanged.

source: FCC

source: PCmag.com

Today, 75 percent of Xfinity Internet customers choose plans with speeds of 100 Mbps or more, double the speed those customers took just three years ago, Comcast says.

One can see the shift in consumer demand to faster-speed tiers in data from 2011 to 2015. Over that four-year period, speeds more than doubled, for some telcos, and increased by 300 percent to 400 percent for many cable operators.

source: FCC

5G Might Feature New Marketing Platform

Though 5G represents many things, it also is destined to become the key marketing emphasis for major U.S. mobile service providers, in the same way that "gigabit" has become a marketing emphasis for fixed network internet access providers.

That is not unusual. Looking even at the ways people use internet access services, the “headline” offers often do not match the actual consumption or buying patterns especially closely. In other words, the main impact of gigabit speed marketing is to drive uptake of the tiers of service slower than a gigabit, but faster than what consumers were buying before gigabit marketing began.

The big wild card right now is whether 5G will feature the introduction of speed tiers in the mobile business, as is the standard case for fixed network access. If so, headline speeds likely will assume a role similar to what happens in the fixed network business: "speed" will become a key driver of advertising and messaging.

That is the case now, but in a more-restricted sense of "our network is faster" being the attempted claim. It is conceivable that in the 5G era, that might be supplanted by a broader "pick the plan that works for you" focus, if and when it is possible to buy mobile packages based not only on usage allowances, but also access speed and possibly other attributes.

Even so, most consumers are unlikely to choose neither the fastest nor the slowest tier of service, opting instead for one of the tiers in the middle of the speed/price/value range.

Past experience suggests that will be the case.

There is likely a reason service providers do not release statistics about take rates for their headline "fastest" tiers of service. The reason is likely that take rates are not all that high.

AT&T executives have said that, where it is available, about 30 percent of customers buy a gigabit per second service, even when other tiers of service are available. In part, that relatively high take rate reflects the fact that AT&T builds gigabit networks first in neighborhoods where propensity to buy is highest.

In the fixed network internet access business, most consumers do not buy gigabit connections, even if service provider marketing, in markets where gigabit services is available, often focuses on that high-end offer.

Generally, consumers tend to buy services that offer reasonable value for reasonable price, and that is rarely the fastest speed tier or the most-basic level of service.  

Back in the days when cable TV operators first were rolling out consumer Internet access at speeds of 100 Mbps, it was virtually impossible to get subscriber numbers from any of the providers, largely because take rates were low.

In the United Kingdom, then planning on upgrading consumer Internet access speeds to “superfast” 30 Mbps, officials complained about low demand. In fact, demand for 40 Mbps was less than expected.

So “gigabit” internet access remains mostly a marketing platform, not an indicator of what services people actually buy, when they have access to gigabit services. Retail price almost always is an issue for such buying patterns.

The point is that marketing efforts often are focused on elements of experience that arguably are somewhat tangential, even somewhat trivial.

Most consumers in the U.S. and other markets use their mobile devices “mostly” indoors, yet service provider marketing always focuses on the “outdoor” signal coverage.

source: Dell'Oro Group

But the marketing context does shift over time. In the 3G era, Wi-Fi access was valued by consumers because access speeds on Wi-Fi tended to be faster than the mobile network. These days, on most 4G networks, Wi-Fi is slower than staying on the mobile network.

In the 5G era, the mobile network might be the fastest connection by an even greater margin.

source: Dell'Oro Group