Views on the new media market

Economics of unlimited

The internet industry over the last few years has grown accustomed to unlimited data from the consumer's perspective. This has driven growth and innovation on the web.

Yet nothing is truly "unlimited" - there have to be limits somewhere - whether it's cables under the roads of MHz of spectrum in the air. So how does this work? When you look underneath the consumer offerings you find out that data does indeed have a price. The typical full cost for delivering 1 hour of HD video to a consumer over the internet is £2.10. The customer who is paying £15 per month for their broadband connection will be losing the ISP money if they watch over 7 hours of HD video a month. So how come ISP's are still in business? The simple answer is that ISPs rely on selling consumers something they will not use.

This is changing however. In thej UK just before Christmas 2007 the national broadcaster - the BBC - launched "iPlayer" a free, "catch up TV" service available to all consumers in the UK. This had a dramatic impact on internet bandwidth usage in teh UK. In the first 3 months of the service around 45m TV shows were watched by around 1m people. The average viewing length was 25 minutes of video. Suddenly consumers are using the internet capacity they are paying for.

What is this doing to ISP business models? Over the last 3 months profitable, innovative ISP businesses have become loss making - as the cost of buying the data traffic is higher than the revenue from consumers. The traditional telecoms business who invested in capacity during the .com boom now have an opportunity to make a return on the investment that they made 10 years ago.

What are the lessons we can learn from this?

Firstly there is a tendency for people to be over optimistic on the impact of new technologies - we saw this with the early investment in broadband and capacity that remained unused for years.

Secondly there are "tipping points" - these points that create mass adoption come from a very simple service. The service that enables "watch TV later" has been available with different solutions from Betamax, VHS, DVD, Hard Disk recording for many years - innovation is shifting the value from hardware providers, to software and services - a pattern that the IT industry has seen before.

Thirdly - mass adoption requires a simple, engaging experience.

The Dongle revolution

What is a "Dongle"? In the last 12 months it's the thing that's breathed life into most european 3G business propositions.

It turns out that for all the time and money spent on creating innovative mobile data services the data service that was going to make money was there all along. What is it? Internet access from your PC. The offer is simple to explain to consumers pay €20 per month and get access to the internet from your laptop. No wires, or strings attached. There are even bundles that include a PC. What's happening here? The mobile industry has worked out that rather than trying to squeeze more functionality into the form factor of a phone then wonder why people don't use it, why not squeeze mobile on the back of an already successful platform - the PC. The result? People have more than one "mobile" - a voice device and a dedicated data device - the USB dongle. Penetration goes up, with each consumer getting multiple devices.

It's not a silver bullet though. Statistics show that while the average data usage of a 3G mobile with internet access is around 40Mb data per month, the average data usage for a PC device with a dongle is 400Mb per month. There is also the problem of churn - if it's just anonymous internet access the dongle provides how can mobile operators provide value add that avoids consumers changing to whomever is offering the cheapest mobile broadband service that month?

So what strategies are mobile operators taking to compete here? At the moment competition is on speed, price and contract terms. These are the same strategies that have been tried in the fixed line broadband market - the result of which is, in de-regulated markets like the UK I get a choice of at least 50 broadband offers from 11 different companies to my home, and no, I can't tell the difference between any of them.

So what is the conclusion for the european mobile industry? Looking at the pattern that has gone before there is an accelerating route to being an undifferentiated commodity provider - and the value captured on mobile will shift from the network provider, to the innovators on the internet. Where will the value end up? In the hands of those who can innovate services that are of value to consumers.