The unknown world of 3G tariffs

date: 25th February 2001, source by: telecoms-mag.com

As operators invest huge sums in 3G licence fees and infrastructure, getting the tariffing right will be critical. The problem is, nobody knows how much end users will be prepared to pay for packet-based mobile data.

Operators have so far justified 3G licence fees and infrastructure costs by citing three distinct revenue streams. These are air-time charges -- similar to existing charges on 2G networks, content -- in the form of information services, games, media and advertising, and e-commerce revenues -- arising from commissions on handling transactions and the sale of third party goods and services.

All rely on the data pipes provided by the networks, and the profitability of the operators will rely on setting the right tariffs for these underlying 'bit stream' services.

Data services on 3G networks will differ from those offered by current 2G networks in two important ways. Firstly, they offer packet-mode services, and secondly the data rates are higher -- both of these factors need to be taken into account when considering future tariffs.

Packet-mode services are starting to appear in the form of 2.5G technologies currently being implemented on GSM networks. In particular, GPRS will provide customers with their first experience of 'always on' connectivity.

Data rates are also gradually increasing on existing networks, but there will be a leap in performance made possible with the more efficient air interface of 3G. Data rates of 64kbps will be common, and 256kbps to 384kbps will be possible under most circumstances. Even higher rates are being talked about, up to 2Mbps, but only for very small numbers of users under perfect conditions, which means that this should not be expected for the mass market. Still, 384kbps is not to be sneezed at, being six times faster than a normal ISDN call, eight times faster than a typical dial-up modem, or 40 times faster than existing GSM data calls.

Tariffing opportunities

Unlike existing circuit-switched data services, an 'always on' packet service does not involve the need to set up a call each time there is data to transfer. Instead, the user's device is always connected, like a desk-top PC connected to a LAN, and is able to transmit or receive data at any time. While idle, the device consumes very little by way of radio spectrum or other network resources.

In this environment, it makes little sense to tariff by duration of call. Instead, the quantity of data transferred becomes the more relevant measure. In addition, there will be opportunities to tariff by service quality, of which the most interesting measure is delay or latency. It may be appropriate to charge more for real-time services (such as videoconferencing), less for services that can cope with a second or so of delay (such as web browsing) and even less for delay tolerant services (such as e-mail transfer).

Differential charging based on factors such as delay will require the network to be able to police these quality of service parameters on an end-to-end basis. It is not yet clear when the vendors will have core networks able to support these requirements.

Some services, such as intranet access or e-mail, will likely see bundled tariffs for an agreed volume of data each month. Other services might be more suited to a one-off transaction or session charge, similar to the £0.05 (E0.08) to £0.10 (E0.16) currently charged for sending an SMS. For example, a one-off charge of £0.20 (E0.32) may be an appropriate tariff for sending a 'video postcard' consisting of a photograph, a short text message and a signature.

3G licences -- worth it?

All of the participants in the high-bidding UK auction would have constructed complex business models to assess the maximum value of the licence that they where bidding for, and because of the nature of an auction, all five that did not drop out must have paid less than they were prepared to. The difficulty is in assessing whether or not their business models are robust or simply reckless. The only certainty is uncertainty. 3G is a future technology, and no one knows how the market will really develop.

If the business plans come true, or are bettered, then clearly the licence fees will have been worth the investment. The task facing operators now is to take the 'plausible fiction' of their business plan, and force it to become reality. As the importance of data services grows, so does the importance of getting the data tariffing right. The likelihood is that some will succeed and others will fail, and that each market will behave differently. As to who the winners and losers will be -- only time will tell.

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