Author's Picture
Author's Picture
Issue: EMEA 2008
Article no.: 12
Topic: The great flat-rate debate
Author: Louis Hall and Dominic Smith
Title: CEO , Marketing Director
Organisation: Cerillion Technologies
PDF size: 222KB

About author

Louis Hall is the CEO of Cerillion Technologies. Mr Hall is a co-founder of Cerillion Technologies and led the management buyout of the original business from Logica PLC. Mr Hall has been in the telecoms BSS industry for the last 18 years and has held a variety of positions in management, sales, product management, design, development and business analysis. Prior to joining Cerillion Technologies, Mr Hall was the business unit manager for Logica’s in-house customer care and billing product line. Dominic Smith is the Marketing Director of Cerillion Technologies, a provider of carrier grade CRM & Billing, Interconnect and Mediation solutions for fixed, mobile, IP and convergent operators worldwide. He has twelve years’ experience in the customer care and billing industries, previously as Marketing Director at LHS and in a variety of roles in Schlumberger and Sema. Mr Smith has spoken on billing topics at various industry conferences. Dominic Smith holds a BSc (Hons) in Industrial Mathematics from Loughborough University, UK.

Article abstract

Competition has forced operators to offer flat-rate broadband service bundles. This has turned many services into commodities and squeezed profit margins at a time when the operators need cash to spend on beefing up their networks to handle the surge in broadband traffic. The services are complex and costly to offer, but all the customer sees is a price – the lower the better. Complex plans that include usage-based billing will help operator profitability, but make it harder to retain customers.

Full Article

The provision of a simple but effective service offering to end customers should be a key objective for any telecoms operator. Clear and easy to use services with transparent pricing can only be a good thing for consumers. Essentially, customers need to know what a service will cost and must not be surprised when the bill arrives; they are more likely to be satisfied and loyal as a result. In today’s converged telecoms environment, however, delivering simple customer services can be a challenge. Not only do operators have to oversee complex infrastructures capable of offering triple-play or even quadruple-play service portfolios, they inevitably need to manage a vast array of packages and price schemes, together with a myriad of extra value-added services, content and applications. Yet, if they want to keep retention rates high, it is imperative that they are able to translate this technical complexity into simplicity for the end customer. In this context, the development of flat-rate service bundles appears to have much to recommend it. Flat-rate bundles are arguably the most straightforward approach possible, and over the last ten years, companies such as BSkyB (Sky TV) have prospered with their simple subscription-based models. However, the problems for the network operators remains the same – where is the value in flat-rate services? Do flat rates push operators down the slippery slope toward only being a provider of access network connectivity and transport? If they do adopt flat rates, operators risk not being able to differentiate themselves from the competition and seeing margins come under increasing pressure as a result. The commoditisation of services that flat rates bring come with a price; cost-based markets offer limited opportunities for growth – and this is a prospect that sends a shiver down the spine of most operator shareholders. The winner in a flat-rate market, necessarily focused upon economies-of-scale, will inevitably be the largest provider – whoever is effectively the biggest shark in the pond. With this in mind, it is surprising that the dreaded ‘dumb-pipe’ telecommunications transport model that flat rates promote has been mentioned several times this year by key telco spokespeople. Perhaps this will provide the kick-up the backside that some operators need in order to re-focus on building value in the services they offer. Multi-play bundles Over the last few years, IPTV has often been spoken of as a new service that offers a wealth of premium content and interactivity, and that operators can justifiably charge the consumer for the added value it brings. However, a recent news report from analyst Screen Digest indicates that as many as 40 per cent of European IPTV subscribers receive their IPTV service free, when provided with a broadband or telephony service. This is a classic multi-play bundle, but although you might expect the offer of free broadband access as part of a bid to encourage use of chargeable IPTV services, it would seem the complete opposite is happening. At least, IPTV is bundled in a way that the customers perceive it to be free. The other side of this equation would be huge growth in bandwidth intensive services, such as that resulting from BBC iPlayer service officially launched in December 2007. iPlayer’s popularity has grown at a phenomenal rate, and the broadband networks are straining under the increased load that this and other video-based services bring. Ofcom, the UK regulator, is demanding that broadband providers publish actual bit-rates achieved, rather than theoretical maximum rates. This business model has now been questioned to the extent that some UK broadband providers have suggested that the content provider, in this case the BBC, should contribute to the costs required to upgrade the broadband networks to support the increased load. Interestingly, we also now have a situation where BT have announced they will be starting to charge for iPlayer content provided as part of their BT Vision IPTV service. This is a bold move considering the iPlayer content will remain free when accessed via the ‘normal’ Web interface. The only apparent difference is that BT Vision customers will be paying for the convenience of accessing the iPlayer content via their set-top-box and television. Usage-based billing The flat-rate broadband packages are where the trouble lies. Fierce competition for broadband customers has resulted in very low prices for essentially unlimited services. Having shied away from usage-based billing in the past, some providers are now starting to re-explore this area to find a sustainable model. It was recently revealed that Time Warner Cable was running a regional trial in the USA to see if its subscribers would now accept usage-based billing models. The results of this pilot are not yet known, but the company has been criticised by some analysts for potentially alienating their customers and as a result losing out to competitors who stick with the ‘all-you-can-eat’ model. There are of course other tools and methods available to control the use of bandwidth-intensive services. These include the so called ‘throttling’ of heavy users, so the speed of their broadband connection is restricted, and the placing of upper limits on ‘free’ service, above which usage-based tariffs apply. Unprofitable customers We can look to other industrial sectors for a comparison to the situation faced by today’s telecoms operators and service providers. The leisure industry provides some similar examples of businesses trying out different strategies in order to achieve competitive advantage. There used to be a nightclub in London that offered free drinks all night for a fixed price as part of the entry – a classic ‘all-you-can-eat’, or better, ‘all-you-can-drink’ scheme. The trick here was, of course, to set the entry price at a point where the majority of the customers would not consume as much alcohol as the entry was worth. Inevitably, a few people would drink more than their fair share, but the business would still be profitable. The problem comes when the average customer is affected by the behaviour of the minority who consume more than their money’s worth – to the detriment of the majority. The result is that the profitable customers drift away, only to be replaced by less desirable customers who consume heavily and are not profitable. Does this sound familiar? Broadband providers take note. The right service offering As the ‘credit crunch’ continues to affect all areas of business, operators will have to do more than just offer ‘all-you-can-eat’ bundles, for fear of only attracting the sort of customers that will not be profitable. Usage and event-based pricing will need to be deployed intelligently and take advantage of the real-time interaction with the customer to provide a high quality customer experience. We recently conducted our own online survey about flat-rate pricing. The results show that 26 per cent identify voice as the service most suited to flat rate pricing, 24 per cent opt for messaging (SMS, MMS, and IM) as the most suitable service. A further 22 per cent choose content, with the remaining 28 per cent selecting the data bearer – broadband access, GPRS, 3G and the like. The even spread of these results shows that there is a place for flat rate pricing throughout the entire sector, but clearly, flat rates cannot apply to the whole of a service bundle. Operators need to offer incentives in one area, but charge in another. In other words, the packaging of bundles needs to done in such a way that customers still perceive the value of the services offered. Transparent pricing, where the customer knows what the service will cost before it is used, or what it is costing as the service is consumed, is another critical factor in building customer confidence in the services they are using, and with this comes a loyal and profitable customer base. Recent months have seen several well-publicised examples of service where the pricing has clearly not been transparent. Vodafone subscriber James Abdale from Norwich recently received a demand for £588,198 for a month’s mobile phone usage and has subsequently laid claim to be the recipient of the biggest ever personal phone bill for a UK mobile. Other incidents have seen a Canadian man inadvertently run up a £41,000 bill by using his mobile as a modem and a Darlington-based businessman shocked to receive a £35,000 mobile phone bill from Orange without ever having been a customer. In the future, flat-rate services will have their place, but they will need to be deployed with intelligence, discrimination and transparency. Given the investment needed to build up the network access, and transport layers to meet increasing broadband demand, operators need to find new ways to make a flat-rate only business model pay.