Putting a Price on Mobile Multimedia
By David Boettger
May 01, 2001
Cellular operators and infrastructure vendors continue to drone on about the impending mobile Internet revolution. We are told that in the near future we will wonder how life was possible prior to mobile multimedia (MMM) - mobile video phone calls in particular.
Meanwhile, in reaction to the heart-stopping expenditures by the operators on 3G network infrastructure and radio spectrum, and by the vendors on 3G R&D and financing offers to the operators, telecom share prices and shareholders have been pummeled in the market.
Never mind, we are told; the "data hockey stick", in which mobile voice traffic levels (and revenues and earnings, by implication) are surpassed by mobile data traffic, is just around the corner. Shareholders' rewards are immanent.
Wireless Multimedia: A Cost Estimate
Thus far, however, neither operators nor vendors have been able to muster the courage to put a retail price tag on MMM services. No matter; it's easy to estimate.
Globally, cellular operators seem to need to generate at least US$.05 per minute - averaged over all subscribers and call-minutes - in order to sustain their operations. With the data rate of cellular voice calls averaging about 5 kbps, it is apparent that one kilobit-per-second of cellular bandwidth retails for about one cent. (Though the precise figures for call charges and data rates are debatable, the general conclusions here hold true regardless.)
Video, like voice, is a "real-time" service. This is significant because the cost-saving tricks that the cellular infrastructure applies to packet-oriented services, such as introducing lots of packet delay and reducing radio link reliability, cannot be tolerated with real-time services.
From the perspective of the cellular infrastructure and for the purposes of this price estimation, a video phone call is more like a circuit-oriented voice call than a packet-oriented web browsing session. So it is reasonable to ballpark the retail price of a mobile video call by scaling the price of a voice call by the video data rate.
For example, consider a video call with a gross data rate of 64 kbps. At one cent per kbps, the video call would retail for about US$.64 per minute. A 384 kbps video call would be charged at a whopping $3.84 per minute.
This calculation shows what an operator must charge simply to maintain its operating profit margin. It assumes that 3G infrastructure capacity costs the same on a per-kbps basis as existing infrastructure, which seems rather optimistic. Moreover, it doesn't even begin to address the operator's net profit margin, which would bear the additional burdens of the up-front costs for 3G including radio spectrum and network infrastructure base platforms.
Can It Work
Obviously operators would have a hard time attracting MMM subscribers at these prices. But what happens if they apply discounts to these rates in order to spur MMM usage?
Suppose an operator discounts the retail price of video calls to "only" five times the price of a voice call - US$.25 per minute in this case. Further suppose that this results in 1 percent of its monthly call minutes being converted from 5 kbps voice to 64 kbps video. The result is a 12 percent increase in traffic (kbps) but only a four percent increase in revenues.
And if video usage rises to just 8.5 percent of call minutes, network traffic has doubled but revenues have risen by only one third. The expenditures required to support the MMM traffic go straight to the operator's bottom line. It is clear that, MMM notwithstanding, voice traffic will continue to reign supreme in terms of profitability.
It would not be accurate to imply that a cellular operator's cost structure is solely a function of system throughput. Cellular operating costs are a function of the size of the subscriber base, the radio coverage footprint, the system call volume, and other factors.
However, the kbps metric is a reasonable predictor of operating costs because kbps consume several costly infrastructure resources, namely: radio spectrum, network hardware, and transmission (moving the subscriber traffic from place-to-place within the network) capacity.
Now, some might argue that the value of MMM is not in the revenue generated from MMM services themselves, but in the intangibles such as reduced subscriber "churn" rates and increased voice calling revenues. These arguments might hold true (it remains to be seen), but a reasonable shareholder must ask: Is equity best utilized by purchasing 3G radio spectrum and installing a completely new infrastructure to support MMM, or by improving customer service and system reliability, and providing attractive services, on the existing 2G infrastructure?
Ultimately, this question - indeed this entire pricing exercise - is academic. Cellular operators will deploy 3G cellular networks and will launch MMM services. They will set retail prices that maximize revenues (or minimize losses). But telecom shareholders should hope that voice calls continue to dominate the cellular usage profile -- and that the MMM hockey stick never arrives.
David Boettger has been a mobile cellular telecommunication professional for nine years. He has held a variety of positions with cellular infrastructure vendors in the areas of product development, system engineering, and most recently, sales & marketing. His primary expertise is code division multiple access (CDMA) cellular networks. He is currently CEO of LB Technology, a wireless consultancy.
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