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Voice was the undisputed traffic heavyweight in the early days of mobile broadband, dominating mobile networks worldwide. The launch of the iPhone in 2007 coupled with the public’s blossoming love affair with data services changed all this with unprecedented speed. Video has emerged as the decisive victor. So, what does this mean for operators?
Changing consumer tastes and the rise of apps have culminated in the rapid and sudden demise of voice services. By 2008, non-voice traffic was commanding 25 percent of all traffic. A year later, mobile data traffic had surpassed mobile voice, taking its place on the throne as the new king of traffic. One particular type of data traffic was attracting the gaze of operators: video.
Since then, video has cemented itself as the leading type of traffic on mobile networks. Cisco predicts that it will account for 75 percent of all traffic by 2019. Such a massive upsurge will place very specific and stringent requirements on networks, especially when it comes to bandwidth and latency.
Operators have two options: One, upgrade and streamline their networks to minimize transmission costs per Gigabyte and maximize profitability. Under this basically mandatory option, operators benefit from increased data traffic but don’t profit from content per se. Two, directly profit from content by bundling video with other products. As a supplement to the first option, this strategy derives revenue from video sales, higher ARPU, and lower churn.
A killer app stalked by operators
History shows that operators hunt for a killer app when there’s a shift in wireless tech. After investing millions in a new network, they need to find a marketable application to entice users over to the new standard. Otherwise, there’s no real reason for the average consumer to ditch the old technology if it does the job well enough.
Ubiquitous mobile voice was arguably the killer app in 2G. In the 3G era, it became data connectivity. Although operators were throwing marketing money at video calls, the iPhone and rise of smartphone apps changed the game. Initially a novelty, apps quickly created demand for high-speed connectivity 24/7, soon becoming a necessity for users both at work and play.
From the standpoint of user perception, LTE’s speed and latency advantages are negligible when compared to the most advanced HSPA networks, especially for the basic applications most people use the Internet for: emails, online surfing, social media, streaming music, and VoIP calls.
The UK Regulator Ofcom reports that, “The average time taken to load a standard web page took 0.78 seconds on 4G; 1.06 seconds on 3G.” Such a small increase in speed doesn’t matter much to someone who’s reading a few pages of news on their commute to work, and that’s why LTE hasn’t really changed user behavior.
After surveying consumers on price, network access ability, connection reliability, speed, and overall service, Ofcom found that, “There were no significant differences between satisfaction levels between 4G and non-4G mobile users for any of the aspects of mobile services questioned.” Unsurprisingly, the regulator concluded: “Most users do the same things using 4G that they do on 3G.” For users, then, there’s little incentive to switch to LTE if their usage habits are not changing in a way that require LTE’s advantages.
To encourage the leap to LTE, operators must ensure that users embrace video, the only area where LTE tangibly outshines 3G.
Persuading users to watch more videos means persuading them to use more data. Independent research shows that most applications consume more data on LTE than 3G, because app software optimizes itself to take advantage of higher available bandwidth.
In practice, this means video streaming consumes three to ten times more traffic than a music streaming app like Pandora, which uses just 8.7 MB in six minutes. In contrast, Netflix draws 79.6 MB on LTE in the same time on the default setting of best-quality. This is also far greater than the social behemoth Facebook, with EE Calculator reporting that, “Heavy Facebook usage with 1,000 updates consumes 500 MB per month,” excluding video streaming.
Unsurprisingly, the current go-to market strategy of many operators is to push customers into watching more video, obviously on tiered plans that charge more for higher data use rather than on unlimited data plans.
Two heads are better
When a business wants customers to try new products or services, it usually provides free or heavily discounted samples. Mobile operators have done so in the past with some success. For example, Sweden’s TeliaSonera and Spotify partnered up in late 2009 to offer Spotify Premium for up to three months for free. Ovum analyst Neha Dharia noted that the offer “reduced churn [so] TeliaSonera rolled out the deal across Scandinavia”. Moreover, the International Federation of the Phonographic Industry reported in 2011 that “around 25 percent of its [TeliaSonera’s] paying subscribers came from the partnership”.
Equally, Orange France has realized the benefits of teaming up with streaming music service Deezer, observing that, “Customers with an active Deezer connection are twice less likely to terminate their Origami offer.”
These successes bode well for operators when it comes to future partnerships and offers. There are two main categories of offers based on how operators source content.
The first comprises mobile operators that opt for a loose partnership with a video-content provider – both retain their identities, and it’s clear who’s providing what. Examples include Vodafone UK and Sky Sports Mobile, and Sweden’s Tele2 and HBO Nordic.
In Vodafone’s case, the company’s 4Q 2013 report shows that 4G customers consumed 2.1 times more data even when they hadn’t subscribed to a bundle. For music and video packages offering content from Sky and Spotify, Vodafone’s 4G subscribers generated 2.4 and 2.7 times more data respectively than 3G subscribers on the same bundle.
A closer look at Tele2 Sweden and HBO Nordic
Also operating under the first type of partnership, Tele2 and HBO Nordic’s team effort ran from April 3, 2014 to November 30, 2014.
Kicked-off by a massive marketing campaign that was most likely financed by both companies, the partners equally promoted the offer; specifically, the type of content provided by HBO Nordic and the HBO content which Tele2 customers on higher-data packages could enjoy for free for six months.
The basis of the partnership was sound: In late 2013, market research by Tele2 found that 45 percent of all Swedish 4G subscribers paid for mobile streaming services, considerably higher than the national average of 32 percent. In turn, HBO Nordic was a new entrant in the streaming market with a strong proposition: Its hit TV shows would be shown in Sweden 24 hours after their release in the US.
At the end of the 6-month free offer, Tele2 began billing customers around US$10 per month for unlimited use if they didn’t opt out of their subscription, the same price HBO Nordic’s asks for the package online.
Tele2’s 2014 annual report – the only publicly available statistics on the partnership – gives some insight into the offer’s success. A notable rise in traffic from Q1 2014 to Q3 2014 increased revenue from 1.7 billion Swedish krona (US$197.5 million) in Q1 to 1.86 billion krona in Q3. CEO Mats Granryd referenced the offer when praising the performance of Tele2’s Swedish subsidiary at the company’s Q3 2014 conference: “Tele2 Sweden gave the group’s best result, showing other units the way forward with a profitable data-orientation.”
The fact that this was a time-limited offer implies a simple business model where both companies benefited from an opportunistic win-win. Tele2, for example, aimed to migrate or acquire subscribers by showcasing LTE’s capabilities with free videos. According to Granryd, the strategy was successful: “Tele2 Sweden’s service revenues from end-users grew by 6 percent, a result of the increased use of mobile data…for individual customers the strong demand for mobile data resulted in an increased sale of postpaid plans with higher data allowances.”
In turn, HBO Nordic aimed to gain traction in this highly competitive market. Presumably, HBO gave Tele2 a billing commission for those who continued their HBO subscriptions after the free trial period ended. Although, there aren’t any corroborating statistics to prove to what extent the offer benefited HBO, the American player managed to establish itself as one of the three biggest players in the Swedish video-streaming market, paving the way for the launch of HBO GO back in the US home market.
White labeling and the second partnership model
A smaller, but interesting twist on the previous category is made up of operators who choose to white-label their movie offers with a third party. As far as individual consumers are aware, the content comes exclusively from the operator.
The UK’s EE (EE Film), Virgin Media (Virgin Media TV and Virgin Media Online Movies), and Channel 4 (Film4oD) all run this model. With free apps for Android and iOS, EE film delivers a one-stop shop for UK residents. It offers movie reviews, personal recommendations, and a video rental portal that provides downloads as purchases and streamed content as rentals. EE subscribers can download one free movie a week and, until the end of December 2014, enjoyed zero-rating for streaming movies whereby data consumption was free of charge.
The second type of partnership involves converged operators that own video content based on a large TV subscription base. Depending on specific packages, they offer a number of channels and premium content for free. Verizon and AT&T in the US and NTT Docomo and KDDI in Japan provide the best examples of this approach.
Vodafone’s acquisitions in 2014 suggest that the Vodafone group is shifting from the first to second category. However, this indicates operational restructuring rather than a strategic move that’s aiming to increase LTE uptake.
What does it all mean?
Video is to LTE what voice was to 2G. Operators are now bundling video content and enticing users to switch to LTE and embrace new, data-intensive behaviors. Converged operators that own video content can easily attract customers with special video subscriptions. Others, especially mobile-only operators, benefit from partnering with high-profile content owners or white-labeling.
In 2014, most operators that launched LTE have used such schemes, and early evidence indicates that they have been successful.
Huawei has helped operators around the world design and implement an optimal video-strategy for accelerating consumers’ transition to LTE. This type of strategy considers user needs in tandem with operators’ capabilities, desired market position, and network evolution plans.
It also recognizes video as the new star of the show.
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