ANALYSIS
What's Lighting the Fire Under Mobile Broadband?

Growth of the mobile broadband market happens along two major dimensions: subscribers (adoption rate) and traffic (use rate). Specific growth drivers for both of these categories vary by geographic region, but in general, drivers can be divided into three major categories that are applicable to all the regions:

• Evolution of useful mobile applications
• Carrier pricing and bundling strategies
• Replacement use cases for fixed-line broadband

Evolution of useful mobile applications encourages the increased adoption of mobile broadband and higher use. Consumers turn to mobile broadband with specific needs, such as entertainment or information on the go. As more applications emerge to fulfill those needs, more consumers will sign on and use them, resulting in subscription and traffic growth.

Consumers frequently start with a carrier's mobile portal as their home page; from there, they link to outside Web sites. Primary consumer applications, representing approximately 80 to 90 percent of consumer mobile broadband activity today, include e-mail , rich messaging, and lightweight Web surfing. Starting in 2007, some consumers began accessing more advanced applications, including streaming Internet video, music, and games.

Growing penetration of smartphones, such as the iPhone and G1 (T-Mobile's Android phone), catalyzes media consumption on handheld devices. These devices simplify user interface and media purchase processes, offer larger screen for media viewing, and bring innovative applications through application stores open to third-party developers. In addition to the growth in media consumption, in Eastern Europe and, to a lesser extent, in parts of Western Europe, some consumers have begun using peer-to-peer (P2P) applications over the wireless networks.

Tiered Pricing

Carriers' tiered pricing and bundling strategies are also powerful growth drivers for the adoption and use of mobile broadband. Less expensive, phone-based mobile broadband plans encourage more consumers to try the service with the prospect of future upsell. As a result of carrier pricing strategies, roughly four out of five mobile broadband users access services via a mobile or a smartphone. The rest use a PC air card or a USB modem. PC users tend to consume more traffic and subscribe to higher service tiers. They generate on average over a gigabyte of traffic per month, whereas phone users generate less than 500 megabytes.

Carriers like higher-tier subscribers. They pay higher rates but for the most part do not consume enough data yet to overwhelm the network. Thus, especially in Western Europe, carrier bundles encourage heavier use and drive traffic by giving consumers high-capability devices, such as netbooks and mobile Internet devices (MIDs), in exchange for an extended commitment to a higher service tier.

Finally, a major driver for growth of the mobile broadband market in certain parts of the world is the lack of fixed broadband networks. In the U.S., Canada and Western Europe, where fixed broadband penetration is high, the same carriers often control both the fixed and mobile broadband networks, so consumer mobile broadband services are positioned as complementary to fixed broadband use, resulting in slower traffic growth. In general, consumers in these regions access mobile broadband from mobile phones, which represent the dominant installed base, or from smartphones, which are experiencing rapid growth. In Eastern Europe, fixed broadband penetration is still low. As carriers build out their 3G networks, consumers will start to use mobile broadband as a replacement for or in lieu of fixed broadband, promising significantly higher traffic levels compared to Western Europe, the U.S., and Canada.

Western Europe

Pricing and bundling are the main mobile broadband growth drivers in Western Europe. Countries in Western Europe can be classified into two camps, one with relatively low-cost mobile broadband and the other with expensive mobile broadband. In the markets where cheap mobile broadband is readily available, such as the UK, Austria and Finland, customer growth rates are impressive, exceeding 100 percent per annum. Overall data traffic has climbed 400 to 800 percent per annum since 2006. Thus far, carriers control traffic loads by steering consumers toward lighter-bandwidth applications such as on-deck applications, e-mail and surfing the Web on their mobile or smartphones.

The market, however, is bifurcated. Although carriers focus on encouraging light use on mobile phones, they also seek to capture heavy data users, who generate up to 100 percent more ARPU (average revenue per user) than light users. The assumption is that although high-consumption users will consume more, they would not consume enough to congest the network, and the higher ARPU would yield appropriate compensation for heavier use. This assumption will not hold for the next three to five years based on current market trends for three reasons: popularity of USB dongle modems, carrier netbook bundles and the growing penetration of smartphones among mass-market consumers.

3G modems that attach to a computer through a USB dongle are relatively cheap and easy to use. As a result, they are growing in popularity, encouraging more users to consume mobile broadband on their PCs. Carriers also encourage users to buy more expensive (30 euros to 40 euros, or US$42 to $56, and higher) PC-based broadband packages by offering Acer, Asus and other netbooks virtually for free when they subscribe to a long-term (usually a two-year) mobile broadband contract.

Finally, the exploding growth of smartphones among mass-market consumers and their changing consumption patterns, which increasingly resemble consumption patterns on laptops and netbooks, will also render the differentiated price tiers obsolete. As a result of these trends, in the next three to five years, consumers will adopt more high-bandwidth applications, and network congestion will become a problem for these carriers.

In contrast, Western European countries with expensive broadband, such as Germany and the Netherlands, have experienced much slower adoption of mobile broadband and more tempered traffic growth, with most consumers using the service for business purposes. Traffic growth in those countries averaged 200 to 400 percent per year, although several carriers that offer more competitive pricing, like E-Plus, experienced 1,000 percent growth in traffic between 2006 and 2007.

Eastern Europe

Overall, in Eastern Europe, current demand for mobile broadband is much lower than in Western Europe because of low availability and high service rates. Many carriers are still building their 3G networks, but once the service becomes available and affordable to mainstream consumers, mobile broadband traffic in Eastern Europe will grow significantly.

The use case in these countries is radically different from Western Europe, the U.S. and Canada. Because fixed broadband penetration is low, many consumers will adopt mobile broadband as their primary service or as a replacement for fixed broadband, resulting in significantly heavier use than in other regions. Unlike other regions with a high proportion of post-paid subscribers, Eastern European carriers do not subsidize devices and do not encourage lighter consumer use cases. Instead, they use high tariffs and rate structures to monetize all traffic on their networks.

There are exceptions to these general rules, however. Smaller Eastern European countries, such as Poland and Hungary, offer cheaper mobile broadband and are experiencing higher traffic growth rates than the rest of Eastern Europe (although still not as high as Western Europe). The economies in these countries have recovered faster, and mobile broadband network build-outs are more extensive because of smaller geographies and (in some cases) government subsidies. These factors, combined with smaller populations (translating into less total use), allow cheaper pricing and faster adoption for mobile broadband. These models would not be sustainable for larger countries like Russia.

United States and Canada

Adoption drivers and traffic patterns in the United States are similar to those in Western Europe. In general, U.S. carriers' business models are similar to those of Western European carriers as well. U.S. carriers subsidize devices and steer consumers toward lighter, complementary mobile broadband use cases. In addition, carriers price mobile broadband plans for phones at lower rates than the plans for PCs connecting to the mobile broadband network through embedded modules or aircards. As a result, U.S. carriers see strong 3G subscriber growth, 80 percent in 2008, according to ComScore, and moderate traffic growth, 200 to 400 percent per annum.

Sprint's (NYSE: S) Xohm mobile WiMax solution and T-Mobile's 3G initiatives may alter the market dynamics in the next three to five years. If successful, Sprint's solution will steer consumers toward heavier, PC-based use and condition them to expect higher speeds, which will push incumbent carriers to offer the same. Meanwhile, as a market latecomer, T-Mobile is likely to offer lower-priced data plans to grab market share from incumbent players. If either of these carriers is successful, their offerings will condition consumers to demand faster, more reliable service at a lower price. It is likely, however, that both carriers will stop short of encouraging consumer uses aimed at replacing fixed for mobile broadband. For Sprint, replacement would jeopardize its relationship with its cable partners offering fixed-line broadband. For T-Mobile, a replacement strategy for mobile broadband will overwhelm its networks.

In Canada, although market dynamics are similar to those of Western Europe and the United States, the carriers' approach to mobile broadband aligns more closely with the Eastern European models. They price mobile broadband at an extreme premium. Usage caps are low, sometimes under 10 MB per month, and overage charges can be as high as CAN$10 ($8.23) per MB. As a result, mobile broadband usage has been light, with traffic only growing at about 100 percent per year, the slowest among all of the regions featured in this article.

In Conclusion

Mobile broadband carriers face a difficult challenge. They need to redesign their mobile broadband business models to accommodate the evolving demands of the marketplace. Existing business models may suffice for the moment, but as the popularity of mobile broadband grows, the revenues that these models generate will not cover the costs of delivering the additional traffic.

New business models will help carriers to manage network congestion, monetize traffic more effectively and drive market growth. These models will also generate new revenue streams for carriers by encouraging consumers to bring secondary devices onto the network, such as connected cameras and mobile internet devices. Parks Associates believes that the cornerstones of these new models must be some or all of the following characteristics:

• Be service-centric instead of connectivity-centric. Carriers can sell services instead of stand-alone connectivity. For example, a carrier may sell a "Video" subscription package and bundle the connectivity with the service. Alternatively, customers can buy media (i.e., ebooks) and have the access charge bundled into the price of the media. This approach, while palatable, will work only for low-bandwidth media such as e-books or digital music.
• Avoid blanket punitive pricing. Today, carriers penalize mobile broadband users based on the capabilities of the device through which they access the service. For example, a user pays 30 to 50 percent more to surf the Web on a laptop using an air card or a USB modem than if she uses a mobile phone. New business models need to resolve these usage inequities by charging a user for usage that actually taxes the network rather than for using a device that may tax the network. This change will encourage adoption of connected devices other than mobile phones or PC cards, which will create additional revenue opportunities for carriers.