1.Right pricing LTE and mobile broadband in general.(a Technologist Observations).Mind Share @ Informas LTE World Summit,22th May 2012, Barcelona, Spain..Dr. Kim Kyllesbech Larsen,Technology, Deutsche Telekom AG.

2. Some key questions to be passionate about.Do operators capture enough value of mobile broadband? Do we understand data profitability vis--vis demand & cost? How to change the pricing game from quantity to quality ... Is it possible? Last but not least why should a customer pay extra for WiFi? 3. Would you give up internet for a Million Dollars?For the rest of your Life! A million USD correspond to ca. $20,000+per year for the rest ofyour life.Being inter-connected has a lot of perceived value! Source: Full clip can be found at YouTube http://www.youtube.com/watch?v=0FB0EhPM_M4. Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 3 4. Would you give up internet for a year?and for what price? Cash today to give up internet for a year. Never 28% 1 Million Euro 39% 500k11% 100k11% 20k 11%0%10%20% 30% 40%50%The unthinkable? giving up the internet (even for a year!). Source: What amount of cash today would make you give up internet access for a year starting from tomorrow? http://linkd.in/J7fabN Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 4 5. Value of internet1Worth massive lifestyle changes!What would you give up a year for internet access.80 80 7574 6848302722 1 Source: The Boston Consulting Group Report on The Internet Economy in the G-20, March 2012.Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain.5 6. Value of internet1 the customer perspective.Need, Love and then taken for granted? Perceived Value of InternetPerceived Value of Internet(relative to GDP per Capita) (relative to GDP per Capita) 40%40% Internet penetration < 50% Internet penetration > 50%30%30% Taken for granted Japen & South-Korea20%20%10%10%! 0% 0%0%2% 4% 6% 0% 25% 50% 75%100%Price of Internet Internet Penetration(relative to GDP per Capita)The perceived value of internet drops as internet becomes a commodity 1 Source: Analysis based on The Boston Consulting Group Report on The Internet Economy in the G-20, March 2012.Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 6 7. The arms race of price reductions.Current mobile data pricing is Lose Lose Game.MarginChange in market share to maintain margin50%30%MNO A40%20%MNO C 10%30%Decision0%20%interactivity -10% MNO C10% MNO B-20% MNO A 0% -30%0%20% 40% 60%80% 100% -40% -20% 0%20% 40% Subscriber market share Change in price per customer MNO C has most to gain (and in principle MNO C needs to add substantial less market loose) from gaining market share. share in comparison to MNO A (& B) to MNO As margin is less sensitive to swing inmitigate (keep margin) price reductions. market share. Its strategy should be different This leaves MNO C to gain proportionally from MNO C. more market share to not only keep margin Price changes will have impact on (while reducing price) but also gain margin profitability as well as market share by over-compensating on market share. dynamics between operators.Illustration Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain.7 8. The Game of PriceStrategic lock-down on downward pricing direction.Assume MNO A Raise PriceMNO A MNO C should Lower Price Ranked Value of55% market share Data priceStrategy PricePrice Assume MNO A Lower PriceUpDownMNO C should Lower Price (2,3)Assume MNO C Raise Price PriceRegulatory (0,2)MNO A should keep or Raise Price, otherUpno-no MNO Cwise MNO A should Lower Price.. 15% market shareA realistic strategic outcome (in this veryPrice simplified example1) would be to lower price. (3,0) (1,1)DownIt will force both market players to reducetheir prices (i.e., tit-for-tat). Quantitative pricing drives continuous price decline. Illustration 1 This is only serving as illustration. In a 3 player market one would (obviously) have to consider all players and include the option of not changing price in the market dynamics. Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain.8 9. Price setting in mobile.Todays data price philosophies are volume centric.Price ( Volume ( Quality, Product, Time ) , Cost, Competition1, Regulation)Volume Time e.g., MTR, roaming tariffs, FUP based feedback Quality2 Product COSTmainly driven by Quality & Product Illustration 1 Most price levels are not designed in isolation from competition, In fact often competition is the main inspiration for pricing. 2 Quality could be speed but is not exclusively so.ndDr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22 2012, Barcelona, Spain. 9 10. Dimensions of pricingEnough to choose from why then only volume? Mobile Data pricing policiesMost WiFi pricing policies focus on Volume focus on Time orbundled with Volume Timemobile data plans + Fixed Data pricing policies focus on Speed Mobile bundled sometimes combinedproducts mainly with Volume limits.Quality Product Voice, SMS, and Data. Fixed bundles withMedia, BroadbandData, Voice & mobileaccess (if available).Illustration Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 10 11. Mobile data pricing almost exclusively volume driven.Its easy! but not a very meaningful driver! VolumeTime+ Speed ProductIllustration1 . Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 11 12. Fundamentals.How to price?Price CeilingPricePriceStrategic priceRangePrice FloorPrice leakage Maximize Revenues MinimumProfitRevenues =Price Missing Quantity volumes CostQuantity Subject to CostIllustration1 . Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 12 13. Fundamentals.How to price or not to price. Benefits internet1? Value of internet1 > 10 Benefits = Value / Price Value Ca. 300+ pmBenefitsto Ca. 8% of GDPpc Customer PriceValue Ceiling Ceded TotalCost Price Value = Price Value Added f(Benefits) Floor Extracted Price of internet1 Cost of internet2 Profit of internet> 18 pm> B (i.e., customers payvery high right-to use fee unrelated to usage), d would beapproaching 1. 10.00 DE 1.00USA NL BE PL 0.10HU FR IT Giga Byte 0.01per 0.010.1 1 10 100price plan Source: Analysis based on Teligen, Strategy Analytics pricing data. Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 16 17. Big variation in what consumers pay for mobile data pricing seems to have little to do with cost or value.US$ per100 P(B) =+ B, It would expected that would be close to zero (ideally zero), i.e., zero volume is price planpriced at zero dollars. Data strongly indicates that data pricing is NOT linear in nature. 80DE 60USANLBEPL 40HUFR 20Giga Byte0 per0102030 40 5060 price planSource: Analysis based on Teligen Strategy Analytics pricing data.Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 17 18. not all customers eat what they pay for!MByte 1,200Policy Limit LIMIT & AV USAGE Average Used1,000800Unlimited average600 usage is 60% +60% higher than 1GBcapped usage (in400 this example). 31%200 46%32%58%0 250MB500MB800MB1GB UNLIM Smartphone volume limit per price planIllustrationDr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 18 19. Relative cost and pricing where did my margin go? Technology Cost of mobile data 2.00 In -cent per MB1.50 Todays typical Mobile data prices1.00 ca. 0.5 10 -cent per MB0.50Min 0.100.05 -cent per MBLong-term incremental cost:0.0025 per incremental MB Network BH Mbps Illustration Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 19 20. What you really should care about! Absolute cost! Relative 2014 2018 (pending on country and MNO)Mobile Data8 TCOLimited resources6A Gap too far to bridge?4Unlimited resources2Todays TotalTechnology Cost Level0Network BH Mbps(or equivalent time scale) IllustrationDr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 20 21. The land of plenty ..a fairy tale?What really matters is the absolute NOT the relative. Data volume vs Revenue so what? Unlimited capacity provided hmm! CAGR +40% (*)Data Revenues / MBCAGR +9% (**)Data Revenues Margin%Data Volume Margin / MBTime Time(*) LTE data growth is 89%.(**) at end point Msg & CS-Voice amounts to less than 10%.Source: based on real market projections (from Pyramid Research) applying technology diffusion models to mobile data growth. Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 21 22. Economical disconnect with most pricing strategies.Volume is not an economical driver and thus problematic for pricing. Same volumetric demand can cause vastly different networkThroughputcost and invest levels. TRAFFIC PROFILE4 HOURS 9 HOURS2 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Hour of DayTraffic profile 2To keep same user same volume as 1experience in busyHigher CAPEX levelbut 40% higher hour more network and network OPEX busy hourcapacity needed.required.throughput.1 . Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 22 23. Not all services are born equal.Different use cases will have a very different Network and thus Cost!Same volumetric demand canVolume in MBcause vastly different network @Home surfing 100.0%cost and invest levels. Peer-2-peergenerating58.2%53.2% volume but having little42.4%throughput impact19.1%BH Throughput in MbpsMobile TV8.1% 6.6% high BW 0.4% 0.2% 0.2% impact but2.6% 2.1% 1.8% 1.2% 1.1% 0.5% 0.5% 0.5% 0.5%relative littlevolume. ityesEm e s e ngit y tyng erEm ade IM ty ng ne lg h l ul ul ic icinus iviPetivivi t ivonon oi r fi lo MlP rfi hirv lP rvm ct lP ct ectg Su acwn ecSuSe gt gtSe aico 2 neai neounn in inaiM nn do er ine em onc onRR Em m Co S2 Pe m CosiiuS ic al al C M Holl CBaHo ns. M emushiReRes. ed MedllBuM FuFu Bu ac At MTVAt Prin in M nfnfs.s.TV ileCoCoBuBu obile s.Mob BuM IllustrationSource: 2006 study, serves as an illustration on service impact on Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 23 24. Every new generation of smartphone increases dataload above & beyond the old ... and thus Cost! Data volume per Smartphone Improvements inintrinsic smartphone speedDramatically increases the data usage 4 @ UL=5.8Mbps Data volume @ UL=384kbps per SmartphoneGPRS6 iPhone01020 305Max. DL Speed in Mbps 2.7 Improved air-interface speedlikewise increases data usage400 6008001000 1200 1400 1600Smartphone CPU clock frequency Source: Network data.Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 24 25. The end-to-profit and excess spectral capacity The writing on the wall why mobile data philosophy should be changingSpectral efficiency cannot make up forMounting cash pressure resulting inincreased mobile data demand1End-to-profit exposure for MNOs.The real scissor effect:CAGR 33% 2014 - 2016 CAGR 26% Mounting cash pressureBusiness Spectral supplymodelbreakdownSpectral demandTimeWestern Europe assessmentIllustration 1 Analysis based on realWireless report for Ofcom,: 4G Capacity Gains, Final Report, January 2011. Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 25 26. So speed differentiated pricing is the solution?QoS or Speed guaranty in a radio environment is very difficult1!Price X for Price Y forPrice Y for up-to 3.6Mbps up-to 7.2Mbps up-to 14.4Mbps& Speed differentiated pricing might not be the magic bullet as higher than 7.2Mbps Priceuse cases might not be consistentStdev less than 14.4 - with sustainable high speed 2 Range between 3.6 7.2 MbpsPriceMinimumStdev less than 7.2 - Range ProfitPriceMinimumRange < 3.6MinimumProfitStdev less than Profit 3.6 - Cost CostCost Illustration1 Somemay even argue that it is impossible to provide a guarantied cellular service. Though one may not need to be exactly right but only statistically right to thelevel where the customer perceive his service to be in line with the price paid. 2 A customer may have paid for high speed price plan but dominantly using lowerbandwidth applications. Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain.26 27. Mobile data pricing overview.FUP as a topline boost remedy may have its merits.Policies at overage usageUnhappycustomerspeed reductionSample of 45% Topline 1,869service stops53% price planspotential overage chargeVery unhappy Illustration1% customerSource: Analysis based on Teligen Strategy Analytics pricing data; December 2011. Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 27 28. FUP implementation.There are fairly minor network benefits to be gained by FUP. Daily Tail Volume Profile Daily Active Customer Profile >2 GB usage > 2 GB usage Max. 0.25% of total 55% of total traffic Active Base -15% Drop Max -0.05% DropPre-FUPMax -10% DropPre-FUP Post-FUP Post-FUP00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 2300 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 As a top-line & educational remedy FUP might be more meaningful IllustrationDr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 28 29. FUP or FAD?Volume-driven FUP (of today) has little structural impact. Time to80% 98% < 0.5% FUP AddressableFUP limit < 2% >2,500 YearsExample:>250 Years 2,000 FUP relevant users >25 Years 20,000 Cells in Network>2.5 Year50% of FUP in 20% of Cells 1,000 FUP served by 4,000 Cells100 Days30 Days = Reset 10 Days BH mean value of users per cellDays to reach 500MBis 185 (approx. log-norm distributed) 1 DayDays to reach 2GBin the Top 20% Cells. 2.5 Hour1 FUP relevant customer would compete for resources with at least 185 others in the BH (in max of the Top-20% cells).Illustration Daily usage per active userDr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 29 30. Mobile data pricing sample as of April 2012.Non-linear data pricing at playUS$-cent $c 18 VRZ 3G VRZ LTE per MB$c 16 ATT 3G ATT LTE TMUS 3G (market as 4G) $c 14 CSL HK LTE VF LTE Zuhause (1) VF LTE MI (1) $c 12 TMUK Sticks TMUK smartphones $c 10 TS SE 3G & LTE (1) Orange FR (2) Bouygues FR $c 8 $c 6 $c 4 $c 2 $c 00 51015 202530 35Volume limit in GB per price policy Source: Tariff web pages of respective companies dated as of April 2012. (1) Speed dependent pricing with Volume limits, (2) De-coupled from TV bundles (i.e., 0, 30 and 70 TV channels).Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 30 31. The higher the usage the lower the cost per usage.On a log-log scale pricing do become clearer. US$-centper MB $c 10.00$c 1.00VRZ 3GVRZ LTEATT 3GATT LTETMUS 3G (market as 4G)CSL HK LTEVF LTE Zuhause (1)$c 0.10VF LTE MI (1)TMUK SticksTMUK smartphonesTS SE 3G & LTE (1)Orange FR (2)Bouygues FR$c 0.010.01 0.1 1 10100Volume limit per price policySource: Tariff web pages of respective companies dated as of April 2012. (1) Speed dependent pricing with Volume limits, (2) De-coupled fromTV bundles (i.e., 0, 30 and 70 TV channels). Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 31 32. 3G vs LTE pricing.Mobile data pricing fairly independent of technology. LTE pricing3G pricing.A bridge to very high consumption. US$-cent per MBUS$-cent per MB$c 10.00 $c 10.00 $c 1.00 $c 1.00 VRZ ATT TMUS VRZ $c 0.10 $c 0.10 TMUK (1) ATT TMUK (2) TeliaSonera (1) Orange FRCSL HK Bouygues FRVF DE (1) $c 0.01 $c 0.01 0.11 101000.11 10 100 Data Volume in GB per price policyData Volume in GB per price policy (1) Data Sticks, (2) Smartphones. (1) Speed-Volume combined pricing. Source: Tariff web pages of respective companies dated as of April 2012. Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain.32 33. LTE pricing strategies.What we know and what we do today. Stimulate LTE migration LTE premium fixed substitution. US smartphone focused.Europe PC/Laptop focused. US$-cent per MB US-$ per monthLTE3Gca. 15% less for LTE3G LTE0 1020 30 0 50 100150 Data Volume in GB per price policy Up-to speed limit in Mbps per price policySource: Tariff web pages of respective companies dated as of April 2012.Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain. 33 34. Quality versus Quantity Quality combined with Volume.Power-law of Data Pricing $-cent per MB $c 100.0VRZ (1) $-cent/MB VRZ LTE Price ATT 3G ATT LTE TMUS 3G (2)$c 10.0TMUS 3G (3) -60% 2.5Price$Cent per MB = 2.7732 Vol(in GB) -0.596 R = 0.9735$c 1.018 in Quality0204060 $c 0.1 0.01 0.1 110100 Data Speed in Mbps per price policy Data Volume in GB per price policySource: Tariff web pages of respective companies dated as of April 2012. (1) 3G Smartphone tariffs, (2) Monthly payment, (3)Mobile Broadband tariffs. ndDr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22 2012, Barcelona, Spain.34 35. WiFi is free! ?Think again!Re-defining the meaning of Free1. WiFi MB higher priced than Mobile. Mobile Data price in -cent per MB100.00 Mobile Data Price per MB 10.001GB 2GB 0.5GB0.25 c/MB1GB1.00 Cost of Mobile data No WiFi Incl. WiFi0.30 0.40 0.50c/MB c/MB c/MB0.100.01 0.101.0010.00100.00 Cost ofWiFi Price per MB Mobile Data allowed volume limit WiFi 1:10 1:20 WiFi premium between 34% and 3 of mobile data. that of mobile data onlySource: Tariff web pages of respective companies dated as of April 2012. 1 Caution: Some care should be taken as the data interpretation is not completely un-ambiguous due to the great variety in price plan structures even for same MNO (i.e., different bundling strategies).Dr. Kim Kyllesbech Larsen, Mind Share, LTE World Summit, May 22nd 2012, Barcelona, Spain.35 36. What we need to be (insanely) passionate about.Understand data profitability vis--vis demand & pricing. Price innovation! changing from quantity to quality based pricing.Understand mobile data is fundamentally different from mobile voice.Narrow the gap between customer perceived value and actual price. 37. Acknowledgement: I am indebted to Nicole Niedermeier, Bin Xi, Veli-Pekka Contact: kim.larsen@telekom.deKroger and Dejan Radosavljevik for greatly supporting and enhancing thiswork. Last but not least I acknowledge my wife Eva Varadi for her great Mobile: +31 6 2409 5202support and understanding during the creation of this presentation.http://nl.linkedin.com/in/kimklarsen http://www.slideshare.net/KimKyllesbechLarsen