Traditional carrier revenues are declining and billing models introduced relatively recently to stimulate data uptake are proving to be unworkable. Telecoms.com talks to a range of billing specialists about the different strategies operators can employ to create new revenue streams.

It has long been clear that the traditional mobile model which has seen carriers sell services to end users with little or no involvement from anyone else would be forced to evolve. And in assessing its defences ahead of the internet services onslaught, the operator community always sought to reassure itself with the fact that it owned three key assets; the delivery mechanism, the billing relationship with the end user and a wealth of unique and varied information on those end users. These were the fortress walls of the operator business model; its certificates of relevance in the face of change. In the event, though—as is the case more often than not in this industry—it’s proving a little more complicated than that.

Owning the network is all well and good but that simply means that the operator also owns the responsibility of providing service to an increasingly bandwidth-hungry user base. Recently, we looked at the explosion in data usage triggered by the introduction of flat-rate charging policies and the availability of the iPhone3GS and the wave of smart devices it has influenced. That boom may well have answered operators’ prayers for data uptake, but it hasn’t brought with it sufficient revenue to cover the cost of service provision. Flat-rate billing for data, it is widely agreed, has had its time in the sun.

And all of those iPhone users, to take the most high profile example, are just exploiting cheap access to the operators’ networks so they can spend money with somebody else. The operators’ impregnable billing relationship was breached by the iTunes credit card model. Now users are spending their money on applications and the revenue is going to the developer and the application store owner. Meanwhile the operators are footing the bill for the transport and—in the case of Apple, if industry lore is to be believed—kicking back a levy for the privilege.

It’s perhaps no wonder that carriers have therefore guarded their highly prized customer data with such jealousy. An asset is no good unless it is made to work, however, and this last prong in the operators’ defensive trident has been under used, according to some. Dan Ford, VP of product marketing at Oracle Communications is one of those people: “Unfortunately the operators have squandered that information,” says Ford. “They really haven’t taken advantage of it as well as they could have and they have not done a good job of making it easy for third party software developers or content owners to get access to it.”

So how potent is the threat? At Mobile World Congress in February, Google CEO Eric Schmidt’s keynote was possibly the most hotly anticipated, eagerly attended and thoroughly dissected event of the show. He spoke warmly of operators’ strengths in billing and customer awareness, describing them as, “the most efficient billers by far. From the standpoint of selling applications and services, operators should be by far the best, and we’re happy to help.”

Another model is also under discussion. Perhaps more controversially, this would see operators charging originators of traffic for its delivery…

Schmidt was certainly a polite guest but, even as he paid his hosts these compliments he was hinting at change. In five years’ time, he said, Google will know a lot more about the customer, because it will benefit the customer to volunteer the information. Operator exclusivity on this data will not be around forever and, shortly after his speech, Google announced that it had hired Stephanie Tilenius, the driving force behind the growth of eBay and PayPal. As Garrett Johnston, group strategic marketing director at Russian carrier MTS points out in our interview on page 20, this hire is probably not designed to help Google interface better with operator billing systems.

The Google CEO was hardly throwing down the gauntlet, but his prediction added to the pressure on operators to start finding new revenue streams, through new ways to bill and new things to bill for.

That pressure is certainly justified, but operators need not man the panic stations just yet, at least according to Patrick Mork, vice president for marketing at application store Getjar. The credit card sales model that has seen Apple cut operators out of the application revenue loop is not without drawbacks of its own, Mork says, suggesting that the entire issue might be “overblown”.

He has reassuring words for operators: “The carrier billing relationship with the customer is not going away any time soon,” he says. “The Apple billing relationship is a legacy of the iTunes era and the iTunes database. That’s a massive database and you can’t deny Apple’s success in building a direct consumer relationship on billing but it does have severe limitations. You have a lot of people in emerging markets who do not and will never use credit cards. For Getjar the best case scenario is still for the content to be reflected on users’ phone bills,” he says.

Application store providers remain divided on this issue. Nokia’s Ovi store, for example, seeks to provide billing to the operator bill where available, while Google’s Checkout service bills to a credit card. Samsung has announced that it is to launch an application store around its Bada platform in 50 countries over the course of this year and that it will offer both credit card and operator bill charging options.

It’s a theme picked up by Alastair Hanlon, director of industry solutions at Convergys. “The tier one application stores will have to have their own billing relationships,” Hanlon says. “But there is a vast array of lower tier and regional application store providers that are potentially more specialist, and they won’t have the same level of profile or trust that, say, Apple would. For those players the operator would be a far more trusted provider of billing and customer care services because of their existing relationship with the customer.”

Clearly different application stores will bring with them different billing scenarios. Indeed, according to Cato Rasmussen, head of business development and solutions strategy at Martin Dawes Systems, seeking to make end user billing relationships an exclusive asset is a futile exercise for operators. “I’m a customer of Barclays Bank but I still have a Mastercard with Lloyds,” he says. “And you can bet that Lloyds have just as much information about me as Barclays.”

Nonetheless, operators are certainly going to have to derive new revenue streams to ensure that they are able to capitalise on the increased consumer enthusiasm for mobile data consumption and the application download model. Top of the list and much under discussion within the industry at the moment is the tiered pricing strategy that will see operators charge users a premium for guarantees of faster network speeds, or greater data allowances. Some proposed solutions are based simply on usage limits and speed while others are more sophisticated and relate to a combination of factors such as usage patterns, particular applications and time of day. So an operator might de-prioritise peer to peer traffic coming from one subscriber in favour of any service for a VIP subscriber who is paying a premium for their status.

The operators’ control over the network— the only core asset that cannot be challenged by other players—gives them a distinct advantage here, says Rafi Ketchner, product marketing manager for revenue management at Amdocs. “In this way carriers can get additional dollars for the traffic that is already going over their network,” he says. “They’re the only ones that can guarantee end to end quality of service for anything being consumed over their network.”

It’s generally accepted that tiered pricing of one form or another for the consumer is inevitable in markets where data consumption is at its most advanced. But another, related model is also under discussion. Perhaps more controversially, this would see operators charging originators of traffic for its delivery. Subscribers, after all, are paying for access but the organisations that provide the content the subscriber wants (and often is paying for) are incurring no cost for its delivery. Both Telefónica chairman Cesar Alierta and Vodafone CEO Vittorio Colao have, in recent months, suggested that the likes of Google ought to be charged just such a fee, either on a wholesale model or as part of a revenue share.

“It would work in the same way that the voice interconnect model works,” says Convergys’ Alastair Hanlon. “To begin with this was a free for all but it soon became clear that operators were going to calculate the settlement between all the parties that carry the transaction, including the party who originated the transaction. Back down the chain of data delivery you end up at Google’s door, for example, and you say that in order to delivery that vast array of content that they’re generating, they’re going to have to pay a wholesale rate. That’s the way it had to go to make voice interconnect work.”

The suggestion is that content originators could be charged according to the level of priority their traffic is given. “Because they can guarantee end to end QoS, services providers » will engage not just with subscribers but also with the likes of Google in what’s known now as a two-sided business model,” says Amdocs’ Ketchner. Google, of course, while the obvious example, is not the only company that might find itself facing this kind of demand from the carrier. Nonetheless, during his MWC keynote, Eric Schmidt addressed this proposition, as part of the notion that operators could prioritise one piece of traffic over another by indicating that Google would require operators to apply the same processes to their own traffic, something which would involve regulatory involvement.

It will be a tricky model to work and, for some, smacks more of carrier desperation at shifting revenue models than it does of a genuinely workable strategic model. “Operators recoup their network investments by charging end-users to access their networks to use these services and others like them. That’s the business they’re in,” says Paul Lambert, senior analyst at Informa Telecoms & Media. “Asking Google to pay to access the Vodafone network is like a TV broadcaster charging a film company to show its films over its network. At the moment, Vodafone and Telefónica need the big search engines more than these companies need them. People expect to use Google and other popular Web sites on their mobile phones. Unless Vodafone and Telefónica actually block Google and other websites from their networks, the majority of their customers will find a way to use them, because that’s exactly why they signed up to data plans in the first place—to use these sites while on the go.”

The accusation that carriers have not historically been the easiest to work with is one that recurs in discussions on these topics…

The suggestion that carriers should charge content originators a fee for the delivery of their content positions them as shopping malls. The carrier has the footfall, the captive subscriber base, and it leases retail space to the people with products they want to sell. Shopping malls don’t have direct customer relationships, however, and leasing is their primary revenue stream not a supplementary one designed to react to new realities. For Cato Rasmussen operators should become more like supermarkets, factoring the cost of delivering the product (as a supermarket does with its overheads) into the price of accessing that product. But, there is a problem with this approach, he says, which is that operators “don’t have a clue” about pricing.

“The telcos can only do their margin based on quarterly or half-yearly figures,” he says. “They can’t do it per unit. They don’t know what the margin is, on a unit basis, for a telephone call or for an SMS message. Revenues are going down now but they don’t know at which point the margin goes into negative numbers. Now, as well, the revenue is moving out of traffic and into applications so they have to move from a traffic model to a licence model and that’s a very different business.”

Billing systems are not geared towards priced items, he says, but if operators can “get their heads around it” they will be able to “treat applications and over the top services on a normal retail pricing basis and set the cost of transportation as an overhead.” Another, more imminently achievable revenue stream for carriers—but one that also involves charging for network usage— centres on the exposure of their network assets. While carriers are now coming to terms with the fact that making location APIs available, for example, enables the development of more attractive services, it is suggested that they could charge for ongoing usage of those network elements. Ty Wang, senior director of product marketing for Oracle Communications, explains:

“There’s another type of billing relationship that probably hasn’t been exploited yet, which is the B2B2C model. Let’s take Telecom Italia Mobile as an example. They expose location information to organisations who provide location services for fleet management and field service, to enterprise customers. Every time that enterprise uses a ‘dip’ into the location information it gets charged, and there’s the revenue relationship.”

One of Oracle’s US carrier customers is currently building applications for retailers like Walmart, Wang says. These retailers will frequently want information on the types of device that consumers have, or their location or profile information. “These organisations will pay for that information,” says Wang, “and the carrier can be the one stop shop for that.”

It’s a model that may well be more suited to enterprise applications than consumer ones, despite the increasing frequency with which consumer applications are relying on information from operators’ location servers. Many consumer applications are built by very small organisations, for example, whose revenue streams will not allow for substantial ongoing payouts for dips into carrier data. In these situations, says Wang, the operator will have to make the information available in as cost effective a manner as possible.

But, he says, it opens up further possibilities. “Maybe as the telco I can expose some of this rich profile information from the users so these third party developers can build applications that are very targeted. They can use me not only for location and profile information but potentially to deliver applications that will generate advertising revenue streams. Now the carrier can be the settlement engine, if you will, between the advertisers and third parties. It’s early days, but this is where we see some of the growth,” he says.

Getjar’s Patrick Mork, who previously worked at games developer Glu, confirms that consumer application developers will be less amenable to an ongoing payment model. “The carriers need to make the decision as to whether they charge for that but what they can’t do is what they do to consumers, which is to nickel and dime them for everything,” he says. “Content owners need a decent margin to have a sustainable business and, if they have that, they can reinvest in better content, which in the end benefits everyone. Developers have been frustrated by carriers, which is why so many of them moved to iPhone. It’s not that they weren’t making money on carrier portals, it’s the way the carriers worked. The way they charge and what they charge for is critical in establishing good relationships,” he says.

The accusation that carriers have not historically been the easiest to work with is one that recurs in discussions on these topics. Either they’ve been slow to pay content owners, too jealous of their own network assets to expose the APIs or just too uncooperative in general. And this perhaps hints at the least confrontational approach available to operators as they look to leverage their billing expertise to generate new revenue streams for a new operating environment. Rather than bumping up against other players and demanding they cough up for something they’ve already been getting for free, say advocates of this approach, operators should concentrate on providing billing and customer care as a service to organisations with products to market across their channel.

The kind of real-time charging capabilities that operators have had to establish in order to make prepaid billing a workable model can easily be applied to this new world of applications and services. The information operators have, says Convergys’ Alastair Hanlon, is going to be similar to the information supplied by Google in the advertising world. Timeliness puts a big premium on this kind of data, he says, and operators should be working to increase awareness of what they can offer to third parties as a partner for billing as well as trying to treat them as a revenue stream. That awareness, he says, is not there yet.