Improved traffic distribution indicates that operators are managing assets more effectively

There are likely to be a few last-minute adjustments to slides before this year’s Mobile World Congress, given that the industry’s most popular traffic forecasts were downgraded. Last week, Cisco released its latest mobile data forecasts, which show a significant decline from previous estimates. The company has lowered its figures by more than 30 per cent in the period 2012-2016 compared with their figures published this time last year.

February 2013: http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html

February 2012: http://www.puremobile.com/media/infortis/documents/cisco_mobile_forecast.pdf

Some of the main reasons cited for the downgrade include

  • The implementation of tiered mobile data packages.
  • A slowdown in the number of mobile-connected laptop net additions.
  • An increase in the amount of mobile traffic offloaded to the fixed network. Cisco says that about 33 per cent of mobile traffic was offloaded to the fixed network in 2012.
  • Higher-than-expected tablet usage on wifi.

Although it is encouraging to see that Cisco has now brought its forecasts more into line with those of most other commentators, no one should be surprised to see further reductions as many of the points highlighted above bite down on future cellular usage.

Looking beyond the downgrade of its forecasts, another conclusion from the company’s research could bring much more positive news for the industry. Cisco has found that mobile data usage is becoming more evenly distributed among users. In 2010, the top one per cent of users generated 50 per cent of traffic; in 2012, the proportion dropped to 16 per cent, below the fixed-traffic ratio of 1:20 that has been evident for years.

Because of the dynamics of a growing market, this flattening of usage distribution was inevitable as we move to mass-market adoption; but the speed and scale at which it has occurred (according to Cisco) is surprising and just goes to show how fast the industry moves.

We can hypothesize a number of factors that have contributed to this change, including:

  • Targeting of extreme usage by operators through yield-management strategies such as fair-usage policies, data caps and throttling.
  • The increasing availability of free wifi acting as a substitute for cellular usage.
  • The natural limit of consumption of high-bandwidth data on cellular. This is something that we have been saying for a long time at Informa. Essentially, high-bandwidth applications, such as video, are more suited to stationary, indoor consumption, which is not the natural sweet spot for cellular.
  • The huge increase in the number of smartphone users attracted by affordable handsets and data plans

So why is this encouraging? Well, operators need to manage their core asset and scarce resource, namely bandwidth, as efficiently as possible. For years we’ve heard complaints about the “data hogs” that consume disproportionately large amounts of bandwidth for relatively low ARPU, but now it would seem that operators have been able to significantly modify usage to broaden the consumption on their networks. However, this is just part of the equation. Investors don’t care about traffic distribution: They want to see evidence that this traffic management translates into greater value.

The current reporting season has been littered with CEOs confirming that their traditional revenue streams of voice and SMS continue to fall against the relentless onslaught of free internet-communication services. Swisscom’s CEO believes that the company’s voice and SMS revenue will be gone within three years. If we strip away these declining revenue streams, we’re left with the future of an operator’s business, namely internet/data connectivity. To derive incremental value from this source, operators must therefore be able to differentiate the “data” they provide, a topic further explored in a recent Informa white paper, Understanding today’s smartphone user. We are indeed seeing evidence of progress in this area, and if you listen carefully, there are even murmurs that yield-management strategies are beginning to benefit bottom lines. For example, AT&T’s 4Q12 results show that the company now has “two thirds of smartphone subscribers on usage-based plans” (as opposed to all-you-can eat data plans) and cite take-up of these plans as a major contributor to increasing year-on-year wireless EBITDA by seven per cent.

It’s clear that it has never been more critical for operators to demonstrate that they can monetize their bandwidth, and although it’s taken a while, perhaps we’re now just starting to see real evidence of a more sustainable approach to network management and pricing in mobile. Cisco might have recently adjusted its view of the market but, thankfully, it would seem that operators have started to as well.

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