|Issue No. #8||30 May 2001||ISSN: 1532-1886|
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Charging for the Wireless Internet by Carl Wright
The wireless Internet is coming. It is called DoCoMo i-mode, WAP, EDGE, 3G, UMTS, etc. These names refer to the ways that the information is delivered and the amount of bandwidth available. The network engineers are working on those problems. I'm looking forward to the results because I'm an avid Internet user.
The wireless business managers have already forecast the revenues they expect from the services when they are deployed. We can't see their projections, but they have to be very big to pay for the billions spent on the radio bandwidth licenses issued.
What interests me is what I'll have to pay for it and how the charges will be calculated. I wanted to just boldly predict the amounts that services will cost and then back up from there to the impact on rating and billing applications. When I dug in to do that, I found out it was much more complicated. Charging for wireless Internet is about figuring out what people are willing to pay.
The big question is how much are customers willing to be charged for it. This logic is fundamental. If customers can't justify the prices to themselves, then the sales won't be made. Pricing is funny this way.
The fees charged for these services are going to be based on one of three familiar buyer's models of charging. These are cost plus profit pricing, competitive value based pricing, and willingness to pay pricing. The buyer models of charging that I see are reflected in the following rejections for the price of a product/service. For a pricing method to succeed, it must be able to overcome all three kinds of rejections.
Figure 1. The ways that I, the buyer, can make sense of your pricing.
"That's too much! It only costs twenty three cents to make that."
This rejection of your pricing plan reflects my perception of the costs of your product to you and my valuation of your added value and profits. If I think your costs are lower than the truth or my impression of your value added is not big enough, I'll feel you're gouging me. I might still buy from you, but I'll resent purchasing from you.
This rejection shows that I value some products based on my understanding of the vendor's costs. I don't think that this comparison will be common for wireless Internet services.
"Why would I buy your product when I can get the same thing for less at the other store?"
This rejection shows my application of market competitive pricing. When I know that I can get a comparable product for a lower price, I'll be unhappy with your offer.
In this rejection you see how I also apply comparable pricing when I can. When pricing the wireless Internet, I'll compare it to wireless phone calling and I'll compare it to wireline Internet services. Neither one is the same, but they are my comparables. They can be very close to the same when the information/service I'm seeking can be gotten with a voice call to a live or automated voice service.
I expect this rejection of pricing to be a frequent issue. Wireless services have become a cost competing market where most service providers are interchangeable.
"It is not worth that much to me!"
This rejection shows me independently valuing the results of the service/product. I value it based on a personal reference of pleasure received, savings gotten, pain avoided, and/or other expected gain.
This negative response seems to prevent the sale to me because I just don't think the service is worth what may otherwise be a competitive price. There is a gold nugget hidden within this rejection because I might value the product/service more highly than you charge for it. In this negative response you find the source of the many market segments that exist and the ability to serve a market niche with a service/product where the profits are lordly because the benefit to the buyers is much greater than the costs. When I value a product/service according to my own non-competitive, non-cost oriented view, you have the opportunity to charge for value.
An Answer on Pricing for 3G Services
I called a billing director at a major wireless carrier and asked how pricing for 3G services is likely to be structured. The answer was that 3G pricing will relate to several variables/dimensions of measurement. I agree with the description I got. The variables that affect the price are:
Figure 2. A graphic representation of the variables for charging for Wireless Internet
The chart above shows graphically the variables that relate to the costs of the service provider. These link to the buyer's logic of cost plus profit pricing and competitive value based pricing. As a buyer, I'll consider these issues when I decide about spending my money with the provider.
The three dimensions shown on the chart are likely to govern the charge for web browsing, e-mail delivery, and non-branded Internet usage. The three variables are similar to the distance, duration, and kind of service (direct-dial, person-to-person, etc.) from telephony.
The floating boxes labeled Product A and Product B are examples of products that are charged based on their value to the customer. For example, if the product is a real-time feed of stock trading information, the customer is getting a product that can be measured by type of content, bandwidth/priority, and measured amount of content. The three-dimensional box represents the region of usage, bandwidth, and content that the "product" occupies. Despite the fact that it could be sold based on these variables, I predict the price will be measured according to different variables.
For instance, you can get a 20 minute delayed feed of stock prices probably for a low price. This is just web browsing. You can pay more to get an instantaneous fee with limit monitoring and alarming for your specific investment concerns. You might also get an investment advisor feed where a trading advisor gives immediate advice on trading (a kind of instant investment newsletter).
Perhaps the price will be per stock symbol per day, per price report, or per month for an unlimited number of stocks. The specific choices will vary by provider, but recognize that the service is measured by variables different than the cost of the communications service.
variables above relate in a hierarchical fashion. Bandwidth, type of content,
then specific content can subdivide specific services pricing. Of course, these
may ignored when stating the price for a specific content.
Services not related to the carrier's portal or for services resold by the carrier are charged by the QoS and the amount of consumption (bytes). When the services are resold by the service provider, then the charging can be bundled or measured according to "value" units of measure.
Bundling of these services can make these charges disappear as a customer buys specific amounts of different services.
A View From Europe
Another view of charging from Europe suggests that customers will be charged on two variables, time and packet. The author suggests that service providers charge a nominal per packet charge during peak hours plus a flat rate for time and no per packet charged during non-peak hours.
One concern with this model is the amount of data that might be produced to describe the packet traffic. This concern comes up often when discussing charging for Internet services based on content. You can read more of this article by Simon Buckingham at http://www.gsmworld.com.
The revenue may be from the publisher of the information rather from the recipient. If I can push information to receivers to encourage them to visit my business, I'll pay. I'm sure of it. The receiver won't pay.
This "push" of information is attractive to the information supplier and receiver if you have location and/or presence information.
Location and Presence
Location information permits the delivery of services and information that is customized to the location of the receiver. There are huge opportunities for both the receiver of information and the providers of information. It permits the "world" Internet to become the "local" Internet. This narrows the funnel of information that pours into my life.
Presence is the knowledge that you are present in the network. This is much the same as your "instant messaging" presence or your appearance in a chat room. This provides for person-to-person communication without the "busy signal" or the "ring - no answer" of telephony.
Both of these new attributes of electronic communications provide for wonderful new services and revenue opportunities, but I'll cover them in another issue.
Wireless providers have a limited bandwidth to offer their customers. Their network is like a group of local area networks where each cell region represents a local area network. The bandwidth in each cell region has a fixed limit that must be shared among all the users in the cell region. This limitation and the carrier's tradition of charging for usage convince me that the wireless Internet will be usage charged.
Please realize that this doesn't mean that there won't be bundles of service that sound like "All the Internet you want for $56.00 per month". The same is true of wireless voice calls, but it ends up being usage-based charging. The average customer spends more per minute than they realize when they buy the bundle, but they don't see their cost go up and down as their usage varies.
Rating and billing of the wireless Internet uses new units of measurement for usage-based charging. They will also use new kinds of bundling of services where usage isn't charged, but it is measured. There will also be more people involved in the charging when content charging requires payment for royalties, etc.
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