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How much should a gigabyte of mobile data really cost?
After all the recent press in South Africa on #DataMustFall, claiming data prices should be halved, is there any way this can be achieved ?
Assuming we are only discussing 4G networks, as in reality most networks will be 4G within 2 years and the idea of using gigabits of data on a 3G network is somewhat problematic. If you look at all the different pricing structures across the developed and developing world, it is very difficult to reach any sort of conclusion, even within a single country or operator, variations in prices for gigabits of data are extreme. As a reference we should start by express data pricing in a per GB calculation, all in US dollars at roughly the current exchange rate. What is worth noting is that all operators have already fallen into the trap of having multiple ways in which to purchase data either within a voice, message combo plan, as part of a device purchase, simple data bundles or as a Sim only data plan, already we are seeing the old approach of claiming value as being represented with different offers, while confusing the customer as much as possible to create maximum revenue. A major issue is that size seems to matter for most operators, so the more data you buy the cheaper the gigabytes get, comparisons are therefore quite challenging, but reviewing the pricing indicates that between 10 and 20 GB, with one month validity as a bundle, is the sweet spot for most operators, at this point offering the cheapest $/GB rate.
To give a comparison, prices from the US, UK, South Africa and Nigeria have been used. In the US at the sweet spot, it seems that the rate ($/GB) is around $5. In the UK it is $2, in SA it is $3.5 and Nigeria $1.5. To add to the confusion, in each of the countries, buying just a single GB will see the price in most cases almost treble…volume discounting gone mad. Looking at this massive variation in prices, it would be sensible to conclude that the cost of producing a GB varies greatly between operators and countries, and that the more GB you generate the cheaper it gets to produce…sadly both of these things are untrue.
An MNO’s business is generally split into three cost based components. The physical network plus the back haul, the operational costs and finally the margin. Very much an over simplification, but for the purposes of comparing data pricing, broadly OK.
The physical 4G network is primarily supplied by one of 4 global players and is denominated largely in USD. So wherever you are in the world you will pay a similar price for the equipment in your network. Backhaul costs will vary, depending on the availability of fiber etc. but you could expect the price in the developed world for backhaul to be cheaper, but still in USD. Operational costs can vary, simply because of the cost of labor within a country, but again for the US, UK and SA, you would expect broadly similar costs. As for margins, they simply depend on what any MNO feels it can charge and therein lies an issue. When it comes to volume discounts, is it cheaper to produce and deliver 20GB than it is to produce 1GB…..it is, but VERY marginally. The network pumps out the capacity 24/7 so there is no saving in the physical infrastructure, the backhaul is very a small part of most MNOs costs so not much there, operationally there are some saving as there is a lower transaction cost to provision one 20GB bundle to supplying 20 off 1GB bundles, but again it is tiny. Taking some broad assumptions at what a GB actually costs an operator to deliver to customer’s devices, it ranges between $0.5 and $1.5, everything else is margin and probably Net-Margin.
So why the massive difference between cost price and sale price. The answer is simply about the value that is perceived by the customer and what they will pay, while in the developing world, what the customer is able to pay is a major factor. In the US in particular where most heavy lifting for data usage is done via WiFi in the home, mobile data is primarily an “add-on, or convenience”, the services are priced as a premium product, but it can’t last. In the UK the larger volume prices are closer to the production costs, but the small GB prices are still very high. In SA prices are generally very high, and in this case the premium nature is different as there is very little fixed networks with high speed WiFi in the home to deliver data, wireless is the best game in town which may mean data prices can be held at a high rate to maximise margins. In Nigeria, there is a much lower variance between small and large size bundles and prices are the cheapest of all. Some of this is due to lower operational costs, but in reality, other operational costs such as electricity from generators counter balance this. The reality is that Nigeria’s data prices might well be unsustainably low with wireless really being the only game in town to deliver data, such low prices will not rescue the falling revenue from voice.
So what is the right price for a GB ? The eventual answer is probably a flat rate for whatever you use and in per GB terms this is probably around $1.5 – $2.5. This does not include a device, which is a reasonable position as most tablets and smartphones will be able to operate their own hotspot for linking other WiFi devices, but more likely they will be the primary device customers consume their mobile data on. The argument for #DataMustFall should be to first to remove the volume based pricing structures and get a flat rate, this will more than halve data costs for the smaller 500MB and 1GB bundles.
Will any of the operators be brave enough to launch a very simple flat price per GB, regardless of the amount of data consumed…not any time soon. Will the operators continue with the promotions, extra data on top-up, roll-over, yearly contracts, sharing bundles etc. Yes very likely, simply to disguise the price from customers. The underlying issue is that traditional voice and SMS revenues are plummeting, particularly in the international space, data is the white knight for everyone’s revenues. Operators need to think hard about how they price data and how they integrate home/office WiFi usage with mobile usage, the cost and price bases are massively different, but mobile data use cannot continue as a premium priced service in any market. For the developing world where wireless is the only way to consume data, pricing will be critical to spreading the access to data services. The issue in the end might not be the spread of data networks to rural areas, but the price of the data when it arrives.