Telecom service providers are very capital intense businesses. Everybody knows that. But in addition, they are mostly fixed-cost businesses. Everybody seems to have forgotten that.

Fifteen years ago, when GSM really kicked off, there were still a lot of PAMR (Public Access Mobile Radio) service providers on the market. For those who don’t know or were too young to know: PAMR were deployed in the late 80s to provide services to corporate customers. Do you remember Dolphin in Europe? Now these operators have all gone, cannibalised as they were by GSM operators. But with PAMR, you did not have to pay per minute. You would pay per user, per month.

Economic theory tells us that in competitive markets, prices adjust (decrease) until they converge to marginal costs. So in business with high variable costs, it makes sense for customers to pay for what they eat.

But when marginal costs have been decreasing by 10%-15% per annum over 20 years, they become very low. Paying on a per minute basis for something that is essentially converging to zero does not make sense any longer.

Fifteen year ago, the fully-allocated cost per minute on GSM networks would still be €0.1 and more, in particular because the costs – fixed and variable – of Base Stations (BTS), backhauling and interconnection were still very high. But these costs have gone down by a factor 5-10 in the last 15 years! And looking forward the cost per bit on UMTS networks will further go down with the introduction of LTE as well as its successors.

With voice traffic also moving to IP, and the cost base and pricing structures in fixed networks being mostly ‘all you can eat’ already, the tariff structure for voice on mobile networks will go through a major reshuffle over the next couple of years.

There are two other problems with pricing telecom service on a minute, SMS or Mbyte basis:

  • when tariffs are cost-based, the cost calculation always remains somewhat arbitrary, in particular because networks are dimensioned to cater for peak-time traffic (busy hour). So why allocate the costs evenly across the 24 hours of the day? Why not allocate all the costs to the peak-hour traffic only (and make all other hours of the day free)? Or if the costs are allocated differently between the peak and off-peak periods, how should costs be apportioned? Even among experts, it is difficult to find 2 people who agree on that.
  • for end-users, the profusion of tariff packages based on per minute pricing, or buckets of minutes,  looks like a complete mess, and make end-user choice a very complicated matter. Is the objective of service providers to confuse end-users?

Take a single mobile service provider, and try to identify the most appropriate package based on various level of consumption (traffic). This used to be hard enough when we had voice only; but now with mobile data as well, you need a university degree to find out what the answer is. Now take 3-5 mobile service providers in a country, and try to find out what the best package is for you, based on your level of consumption (that in most cases you don’t know precisely either) – you need a Ph.D. to answer that question.

So for end-users simplicity is beautiful.

The transition to flat rate pricing for voice in mobile networks has actually started a while ago already. In Germany, E-Plus has been offering its flat rate product BASE since 2005. Its success was tremendous success, with the operator customer base increasing by 100% between 2005-2010 in a saturated market, and its EBITDA margin increasing from 24% to 42% over the same period. What a turn-around for E-Plus who used to be a battling operator with less than 15% market share!

Since January 2012, the new and 4th mobile operator in France, ‘Free Mobile’, has also been showing the way. Its offering includes 2 packages only:

  • For low volume users who need only voice and SMS: the package is at 2 Euro per month for 60 minutes of voice and 60 SMS. The truth is that voice, in comparison to UMTS data, is rather a low cost product, so why ask for more than a couple of bucks for voice when it hardly cost anything to produce?
  • For all other users – those who eat more, and in particular those who eat mobile data – the package is €19.99 for unlimited voice, SMS and Data, including unlimited international calls to 40 countries.

From the end-user perspective, it is hard to make the service offering any simpler! And what a success ‘Free Mobile’ has had so far. The service provider has signed up 3m customers (about 5% of the French population) in less than 6 months.

Summa summarum: we will witness a lot more flat rate packages in mobile networks in the coming years. And if you are a mobile service provider, especially a struggling one, it might be time to review all your product offering and introduce flat rate packages now.