Customers love unlimited data, but is it a sustainable model?

Unlimited data plans are back in vogue after many big carriers started offering them again last year. While simplicity is not necessarily a bad thing, do such flat-rate bundles risk reducing operators to the proverbial dumb pipes? Dominic Smith seeks answers.

As someone who has championed simplicity as being key to the success of telecoms services, I find the debate about unlimited data plans a very interesting one. The arguments for simplicity are clear – easy to use services with transparent pricing can only be a good thing for the consumers.

Essentially you know what using a service will cost and don’t expect any surprises when your bill arrives. In this regard, unlimited data plans offer a fairly straightforward approach, and are a great tool to attract the new breed of customers who have a voracious appetite for streaming services such as Netflix, Amazon Prime Video and Spotify, among others.

However, the problem for the network operators remains the same as it’s always been – where is the value in unlimited / flat-rate plans, and do they then go down the slippery-slope to being a provider of the access network and transport only?

At a time when telcos are struggling with wafer thin margins, competing with non-traditional players and encountering newer technological paradigms (such as Blockchain, Artificial Intelligence and the Internet of Things), telcos may be entering potentially dangerous territory if they continue to offer unlimited data plans. It seems that this is one of those rare moments when giving customers what they want, may not be the best course of action!   

Unlimited plans galore

A case in point is Verizon which started offering unlimited data plans again last year. The idea was to, of course, attract new customers and improve market share. However, this turned out to be a double-edged sword as these new subscribers started consuming lots of data (surprise surprise!) which resulted in a visible drop in Verizon’s 4G speeds. Six months down the line, the telco was forced to take corrective measures as the company started throttling videos to 720p and made its plans more expensive.

The strategy from AT&T also followed a similar pattern. In this time, arch rivals T-Mobile and Sprint took a radically different approach and concentred their efforts on boosting network speeds. While Verizon’s idea was to gain more market share with its unlimited plan, it ended up conceding market share to its rivals as customers flocked to carriers delivering a better experience – in this case, better speeds. Even though Verizon is now back on track, it clearly had its fingers burnt with its unlimited data plan offering.

Such trends are playing out elsewhere as well. Reliance Jio has opened up a new price war in India by offering incredibly aggressive unlimited data plans which has forced more seasoned operators such as Bharti Airtel and Vodafone to float similar inexpensive plans. And there is a growing pressure on other carriers in APAC and Europe who are having to contend with the ever-increasing data demand from their subscribers.

However, these unlimited packages are where the real trouble lies. Sure, aggressive prices for essentially unlimited services may bring benefits in the short term for those telcos with deep pockets. Nevertheless, a time will come when they will have to look at other important metrics such as ARPU, return on capital and CAPEX, to validate their strategies. The Verizon experience will then serve as a useful lesson for operators to re-focus on building value in their services and find a sustainable model within usage-based charging and billing.

Unprofitable customers

A cautionary tale can be found in the story of an old nightclub in London that used to offer unlimited free drinks for a fixed price as part of the entry fee. A classic all-you-can-eat, or perhaps that should read all-you-can-drink scheme. The trick here was of course to set the entry price at a point where they knew that the majority of customers would not consume as much alcohol as the entry was worth. Sure, there would be a few people who would drink more than their fair share, but it should still have been a profitable business if they attracted enough customers through the door.

The problem of course with this approach comes when the average customer is affected by the behaviour of the minority who consume more than their money’s worth – to the detriment of the majority. The result is that the quality of the product is diluted (quite literally in the case of the beer) and the profitable customers drift away, only to be replaced by the less desirable customers who over-consume and are not profitable. Does this sound familiar? Broadband providers with unlimited data plans, please take note.

Transparency

As the sector struggles with profitability, operators will have to do more than just offer all-you-can-eat bundles, for fear of only attracting the sort of customers that will not be profitable. Convergent charging will need to be deployed intelligently and take advantage of real-time customer interaction through mobile apps to provide a high-quality customer experience.

Transparent pricing where the customer knows what the service will cost before it is used, or what it is costing as the service is consumed, will be a critical factor in building customer confidence in the services they are using, and with this comes a loyal and profitable customer base. In fact, we’re already seeing the positive effect of transparency since data roaming surcharges were scrapped within the EU.  

In the future, unlimited data services may still have their place for specific market segments, but with increasing investment required in the network access and transport layers, operators will need to find other ways to make this pay, including sponsored data business models. There is no such thing as a free lunch, and it’s time telcos let their customers know that for their own good!