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HOW TELECOMS CAN
MANAGE THE MOBILE
DATA EXPLOSION
By Rüdiger Schicht, Maikel Wilms, Derek Locke, and Henri Salha
C insa-tiable thirst for mobile data. New
devices—powered by better, faster so -
ware—and an ever-expanding selection of
apps continue to enhance the user experi-
ence. Telecommunications companies with
spare network capacity have done their
part to boost demand with device subsi-
dies, faster networks, and all-you-can-eat
pricing plans. But coming capacity con-
straints in many markets complicate
prospects for continued profi table growth.
Smart companies will get ahead of the
curve by shi ing their strategies from
promoting data use to maximizing the
economic value they can extract from the
massive demand already on the horizon.
Managing capacity and value, rather than
cost, will be the deciding challenge of the
future.
Soaring Demand for Mobile
Data
For years, telecom companies—especially
mobile carriers—have pushed data servic-
es and have subsidized devices to off set
revenue pressure on their legacy voice
businesses. They have collectively pursued
an “if you build it, they will come” ap-
proach, and now, with the stunning popu-
larity of smartphones and tablets as well
as the emergence of 4G networks, the
users are indeed coming—en masse.
Mobile data traffi c grew to almost 600
petabytes a month worldwide in 2011,
according to networking-equipment giant
Cisco—more than doubling for the fourth
year in a row. On an annual basis, this is
eight times more data than the entire
Internet generated in 2000. Monthly global
mobile data traffi c will exceed 10 exabytes
(ten times the total amount of printed
material in the world) in 2016. While usage
patterns vary by geography, video now
represents up to half of mobile data traffi c
in many markets, and this will increase to
two-thirds by 2015. Data usage per smart-
phone is expected to grow by a factor of 16
by 2015, when market research company
IDC projects almost a billion such devices
will be shipped. Tablet sales nearly tripled
in 2011, and Cisco projects tablet-generat-
| H T C M M D E
ed mobile data in 2016 will match today’s
total mobile data traffi c. And traffi c is still
increasing on laptops—as it is every-
where—despite the proliferation of
diff erent types of devices.
The days of carriers’ ability to transport
this uncapped data growth are numbered.
If the current growth continues, the level
of capital expenditure in new network
infrastructure will become unsustainable.
(See Exhibit 1.) Moreover, particularly in
some developed markets, the profi tability
of many carriers will be threatened as data
revenue per gigabyte declines faster than
network cost per gigabyte.
The urgency with which companies need
to shi to managing capacity from promot-
ing growth depends on when real con-
straints kick in—the moment when
additional capacity becomes either prohib-
itively expensive for them or physically
impractical to add (because of restrictions
on new base stations, for example). The
prospect of a capacity crunch that under-
mines quality of service and user experi-
ence is quite imminent in some markets
and much less so in others. Whatever the
timing, though, the transition from a world
of abundance to one of scarcity in many
places has profound implications:
Usage once again will have a real cost •
associated with it, and pricing models
will have to take such costs into account.
Capacity availability and quality of •
service will supersede low cost struc-
ture as principal competitive advan-
tages. This shi will be especially
pronounced in densely populated cities
and will also carry implications for
network expansion decisions.
If they play their cards right, telecom •
carriers could tip the playing fi eld back
toward network providers a er years of
favoring content developers and device
makers. In some markets, perhaps, the
“dumb pipe” might become the biggest
value-creating link in the value chain.
Successfully navigating an increasingly
complex competitive landscape will
require greater sophistication in pricing
and consumer segmentation, and more
emphasis on innovation—especially in
managing network tonnage and the costs
of equipment, backhaul, and spectrum.
2015 2014 2013 2012 2011 2010
High
Medium
Low
800
0
2025 2024 2023 2022
600
400
200
2019 2018 2021 2020 2017 2016
~40 ~15 ~80
~50 ~20 ~80
~60 ~35 ~80
x4 x3 1
x6 x8 1
x9 x27 1
Sustainable
1 1 1
Medium
Low
High
~20 ~10 ~80 Sustainable
2011–2015 2016–2020
Mobile traffic
CAGR (%)
2021–2025
Medium
Low
High
Sustainable
Mobile traffic
(indexed,
2010 = 1)
Network
capex
Source: BCG analysis.
E | Massive Network-Infrastructure Investment Will Be Needed to Support Current Data
Growth
| H T C M M D E
Increased Pricing Sophistication
and Segmentation
Mobile data pricing has historically relied
on fairly blunt instruments. Customers in
most markets pay monthly fees for a
specifi ed amount of data usage; if they
exceed that, they are charged overage fees
and sometimes blocked or throttled until
the next month starts. If they travel outside
defi ned territories, they risk roaming charg-
es. These models are infl exible and o en
lead to dissatisfi ed subscribers.
One response has been all-you-can-eat
plans such as the one introduced earlier
this year by Free Mobile, which shook the
French—and broader European—markets
with a simple off er of unlimited voice and
data for €20 per month, about half the
then-going rate. Behind the cut-price off er
is a plan to offl oad much of the traffi c onto
the company’s extensive Wi-Fi network.
The Free Mobile plan is notable because it
includes no subsidies for device purchases,
a departure from normal industry practic-
es in most countries. The off er has generat-
ed a predictable surge in new customers,
followed more recently by reports of
signifi cant churn. The ultimate extent of
the plan’s success remains to be seen.
A big drawback of most pricing plans is
that they fail to align data revenue with
either network cost or value delivered—
one major reason that revenue per giga-
byte realized by carriers is declining faster
than the cost to deliver the traffi c. (See
Exhibit 2.) Carriers actually have a wide
array of pricing and usage levers at their
disposal. The trick is pulling them in the
combinations that meet consumer needs,
promote desired behaviors, and align
revenue with cost. There will be increasing
pressure on unlimited plans—where they
continue to exist—to incorporate caps,
overage fees, and blocking or throttling
that is consistent with the more wide-
spread adoption of explicit consumption-
based pricing, which is not only desirable
but inevitable.
We expect companies will increasingly use
some combination of the following pricing
mechanisms in the future. For most,
employing these tools will require more
meticulous customer segmentation than
they pursue today.
Transmission Speed and Throughput.
Similar to the way many wireline compa-
nies operate today, we anticipate carriers
5
2011
(Fourth
quarter)
6
0
10
Value per gigabyte ($)
2015
(Fourth
quarter)
(2)
15
2014
(Fourth
quarter)
(1)
2013
(Fourth
quarter)
1
2012
(Fourth
quarter)
2
Unit cost (current forecast)
20
25
Customer revenue
2010
(Fourth
quarter)
8
Demand economics compared with 3G network costs
Margin
Revenue is declining faster
than costs
4G does not change the picture. It only delays the inevitable .
Source: “The End of Profitability,” Tellabs Insight, 2011.
E | Mobile Data Could Become Unprofi table
| H T C M M D E
will charge more for higher wireless speeds
and off er “value-based,” lower-speed
packages.
Quality and Traffi c Prioritization. Some
customer segments are willing to pay
more for higher quality of service, and
some carriers will look to capture incre-
mental value by off ering quality-of-service
guarantees, thereby “prioritizing” premi-
um traffi c during times of potential
network congestion.
Time-of-Day Pricing. Peak hours have
long been the challenge for carriers. Just as
voice plans o en have diff erent rules for
peak and off -peak periods, we expect
operators to “de-average” data pricing and
charge varying rates depending on the
time of day.
High- Versus Low-Density Geographies.
Network congestion and spectrum scarcity
are far from universal problems; they
typically apply to a small portion of a
carrier’s coverage area—and in many
countries do not yet exist at all. We expect
carriers either to set prices based on
regional realities of data usage (relative to
capacity) or to adopt yield-management
practices to drive more usage in underuti-
lized areas (mobile voice in Africa, for
instance) in order to improve profi tability.
Pricing by Data Type. Unlimited data
plans make no concession to the widely
diff ering densities of e-mail, Internet, and
video traffi c—one reason users, especially
those consuming large quantities of video,
love them. While diff erences in types of
video usage (downloaded versus stream-
ing) give carriers some fl exibility, there is
little question that growing demand for
data-heavy video will be the biggest strain
on most networks. This may lead to plans
that price by type of data, for example—
off ering unlimited e-mail and Internet use
but pricing video traffi c based on some
measure of quantity consumed.
Value-Added Features. Wireless carriers
will follow trends in the wired world and
look to generate added revenue by bun-
dling complimentary features and services
beyond basic connectivity, including
multidevice plans, tethering (allowing one
device to make use of the connectivity of
another device), and deep packet inspec-
tion and other security services.
Managing High-Cost Customers. For
some operators, only 5 percent of users
generate up to 75 percent of traffi c on their
networks. Managing—or even actively
churning—these high-traffi c users can have
a massive benefi t for network cost as well
as the quality of service and user experi-
ence for all the other customers.
Taking account of competitors’ capacity is
a critical factor when implementing new
pricing plans, as some carriers have
painfully discovered. Moving to a usage-
based pricing model might make sense in
the abstract but not when competitors
have excess capacity with which to steal
market share by charging less while
following suit. Such competitive dynamics
will play a big role as telecom operators
evolve their mobile data business models
and coordinate multiple marketplace
initiatives.
Managing Network Volume and
Cost
Even with the expected increases in
network effi ciency that will result from
such technology advancements as LTE,
multimode base stations, and data com-
pression—as well as the addition of more
than 1 million new public Wi-Fi hot spots
in the past year—the cost to carriers of
delivering the data that consumers want to
consume remains high. While carriers
experiment with new ways to charge, they
will also take more aggressive steps to
develop and gain access to cost-eff ective
capacity.
One strategy is offl oading traffi c. For years,
wireless carriers have viewed Wi-Fi as both
a competitive threat and too expensive to
serve as an offl oading solution. In today’s
capacity and pricing environment, they are
starting to embrace Wi-Fi—as well as
microcells (small base stations typically
designed for use in a home or small
| H T C M M D E
business)—as potential complements to
their networks. These alternative means of
data transport can serve as “relief valves”
for overcrowded wireless networks (with
the offl oaded data, ironically, hitching the
same sort of free ride on the wired infra-
structure that much data currently receive
on wireless networks).
Some . carriers, Verizon and AT&T
among them, already include use of Wi-Fi
hot spots in their mobile data pricing, and
they increasingly prompt consumers to
select a Wi-Fi network on their mobile
device if one is available. We expect this
trend to accelerate along with the ongoing
integration—and, from the user’s perspec-
tive, blurring—of mobile and Wi-Fi net-
works. AT&T provides “free” Wi-Fi access
to millions of McDonald’s restaurant
customers using service set identifi er
(SSID) technology. We predict there will be
rapid growth in Wi-Fi deployment and the
development of new business models as
Wi-Fi providers seek revenues not only
from end-users but also from carriers
looking for less expensive networks.
Spectrum and network strategies will
increase in importance. Wireless spectrum
and new base stations are becoming scarce
in many markets, and lack of access is a
growing constraint. Some companies have
sought to purchase more spectrum from
governments and in private-sector transac-
tions. Verizon’s plan to buy AWS spectrum
from several . cable companies; AT&T’s
failed eff ort to acquire T-Mobile; and a
three-way deal among Hutchinson 3G
Austria, Orange, and Telekom Austria are
recent examples of the latter. Various
governments, including the ., Canada,
the Netherlands, the ., Ireland, the
Czech Republic, and Austria have facilitat-
ed, or are considering, the former.
While market leaders with access to the
best assets may be well positioned, smaller
competitors will need creativity to stay in
the game, manage capital expenditures,
and remain profi table. Tactics will likely
include new partnerships for sharing
spectrum holdings and subscale network
assets, hybrid networks that embrace
offl oading and microcells, and closely
orchestrating network and go-to-market
rollouts (which to date have o en operated
independently).
Many of these activities are complex and
diffi cult to execute. Simply aligning the
short- and longer-term incentives of parties
in sharing arrangements can be daunting.
But the economic realities of increasingly
constrained capacity will motivate carriers
to take them on.
Other Revenue Sources
As over-the-top services from Facebook,
Skype, and others capture a growing share
of the value generated in the mobile data
ecosystem, telecom companies face the
challenge of fi nding ways to participate in
them more fully. Some are experimenting
with dedicated units for digital services,
recognizing that the need to pursue
speedy, collaborative, test-and-learn
methods is a signifi cant departure from the
structured approaches that have character-
ized the industry.
London-based Telefónica Digital, for
example, formed last fall, has a broad
remit that includes cloud computing,
mobile advertising, machine-to-machine
communications, and e-health services. In
Norway, Telenor created a digital-services
unit, one major piece of which is ComoYo,
the developer and aggregator of Internet
services Telenor launched last year.
Apps, services, and mobile commerce are
where new value is being created (in
addition to devices, of course)—and
carriers are largely losing out to players
such as Apple, Google, Amazon, and a
myriad of so ware developers and content
providers. ISIS—the mobile payment joint
venture involving AT&T, Verizon, and
T-Mobile—is one example of carriers trying
to reinsert themselves, and we expect there
will be many more in the future.
T telecommuni-cations from a world of abundance to
a world of scarcity will aff ect carriers and
| H T C M M D E
consumers alike. Carriers must drive the
evolution of new pricing schemes that
enable them to align revenue with cost
more effi ciently and realize a profi table
level of return on the massive investments
required to satisfy exploding user demand.
These moves, along with others imple-
mented to address growing capacity
constraints, will be made in an increasingly
complex competitive environment, which
makes the task facing telecoms more
diffi cult. We believe those companies that
can move with agility, innovate, and fi nd
the answers fi rst will capture substantial
value in this rapidly evolving market.
About the Authors
Rüdiger Schicht is a partner and managing
director in the Zurich offi ce of The Boston Consult-
ing Group. You may contact him by e-mail at
@.
Maikel Wilms is a principal in the fi rm’s Amster-
dam offi ce. You may contact him by e-mail at
@.
Derek Locke is a partner and managing director
in BCG’s Dallas offi ce. You may contact him by
e-mail at @.
Henri Salha is a partner and managing director
in the fi rm’s Paris offi ce. You may contact him by
e-mail at @.
Acknowledgments
The authors are grateful to Ernesto Wandeler and
Beth Kaufman for their signifi cant insights into
traffi c evolution, capital expenditure, and business
model implications. They would also like to thank
Katherine Andrews, Gary Callahan, Sarah Davis,
Angela DiBattista, and David Duff y for their edito-
rial and production support.
The Boston Consulting Group (BCG) is a global
management consulting fi rm and the world’s lead-
ing advisor on business strategy. We partner with
clients from the private, public, and not-for-profi t
sectors in all regions to identify their highest-value
opportunities, address their most critical challeng-
es, and transform their enterprises. Our custom-
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collaboration at all levels of the client organization.
This ensures that our clients achieve sustainable
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42 countries. For more information, please visit
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© The Boston Consulting Group, Inc. 2012.
All rights reserved.
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