Problem: Data Traffic Growing Faster Than RevenuesFebruary 26, 2009 at 4:00 am | Posted in Uncategorized | 9 Comments
Tags: Femtocell, Mobile Internet profitability
Without a doubt, there is a growing problem of mobile data consumption vs. revenue: perhaps 100X growth of aggregate data vs. 2X growth of revenue (in the next 5 years). This growth in data consumption is reflected in operators’ measurements as well as analysts’ forecasts, and this trend is based on clear drivers that we can observe today. Operators recognize this threat to future Mobile Internet service profitability, and therefore Mobile Network Operator (MNO) profitability (as revenues shift inexorably from voice to data revenues).
Growth is Real, and Exploding
The rapid growth of data consumption is real, has been observed by many operators. Vodafone, for example, exemplifies the rapid growth in the last, two years, from a trickle to a volume that exceeds their voice traffic in European markets that they serve (see figure). This growth has been driven by many factors, including flat-rate and modestly-priced data plans.
Over time, this becomes problematic, as forecasts anticipate 100X traffic levels that threaten to overwhelm current networks. Current forecasts-based on observed MNO data traffic growth-anticipate at least a 2X growth per year over the next 5 years [Cisco, 2008], and perhaps growth of 300X to 500X over 10 years (from 2007-2017) [3Gamericas, 2008]. A recent Cisco study combined actual MNO traffic with analysts’ forecasts for mobile internet growth, and concluded that this trend would continue for at least the 5-year planning horizon, with data traffic more than doubling each year (see figure).
An independent assessment came to the same conclusion (data traffic doubling each year), while tracking the growth over a longer time frame (10 years, 2007-2018). The 3GAmericas study expects this trend to continue through 2018 (based on observed traffic and trends in service usage), as illustrated below.
Recent traffic increases have exceeded this estimate: “six to fourteen times more data is being used on mobile broadband networks today than in the previous year.” Frost & Sullivan recently reported [April 2009] – with “average users downloading more than 5GB per month.”
Isn’t Increasing Data Use “A Good Problem to Have”?
Yes, increasing consumption of data services is a good problem to have … up to a point. Operators have been trying for a decade to entice subscribers with data services, recognizing that this is their future, as voice usage eventually reaches a peak and pricing becomes commoditized. However, there is a dark side that is emerging: the rapid growth of data consumption is increasingly a concern to the degree that is expands faster than revenues; if costs increase without a similar increase in revenues, then the business is at risk, and something must be done to reduce overall costs to maintain profitability. Essentially, “data traffic is growing much faster than data revenues,” [Mike Roberts, Informa, 6/2008]
Why Is Data Consumption Rapidly Increasing?
Data growth is expanding due to (a) broad adoption of data services by subs (espec. on flat data plans that encourage use), (b) better devices (such as the iPhone and imitators), and (c) more, attractive data services (such as YouTube, Location-Based Services, Social networking, IM, Mobile TV, and thousands of downloadable Apps).
A) More Subscribers on Mobile Internet Data Plans
Developed markets will easily see 40% of subscribers on a data plan by 2012, most on a “Flat Rate” plan that encourages use (without a penalty of incremental cost for incremental use) [Forrester, 2008]. This trend is so strong that mobile Internet subscribers are expected to outnumber fixed Internet subscribers in 2011 (see figure).
B) More Capable Internet Devices
“The iPhone.” Need I say more? OK, the IPhone has redefined how subscribers can use the mobile Internet, and established that the masses can and will browse, use Location-Based Services, watch YouTube video, download and install applications, and more. iPhone users consume many times more data than average consumers, even those with media capabilities (see figure). Consequently, everyone is rushing to achieve similar success, and more. The network effect is a radical leap in data consumption by End Users-exactly what the MNOs desired, as this establishes that consumers will use data services, if they are simple, fun, and useful. Smartphone users consume car more data than the average subscriber. And smartphones are becoming a common purchase of consumers (although business users led the adoption). By 2011, 30% of the handsets sold in developed markets will be smartphones [Gartner, 2008].
C) More Services Used
End Users are consuming more services as a result of better devices and a wider variety of applications. Apple’s App Store, for example, has defined a model of data services on demand that is widely appealing, with 500 M downloads in less than a year of operation [Apple, 2008], establishing that there is a large market for data services [Piper Jaffray, 2008].
Summary: Data Growth Based on Strong Fundamentals
MNOs have a serious problem on their hand-data consumption growing out of control and out of synch with revenues-that is based on strong fundamentals. We see it already in current use, and the future certainly holds far greater growth due to all of the drivers: more data subscribers, flat rate plans, more capable devices, and more attractive services. We will discuss this business problem in greater depth in the next section, “100X Data Growth vs. 2X Revenue Growth.”