Tuesday, May 12, 2009

Paying the piper, having your cake and eating it too

A few posts ago I talked about telephone price plans and how ridiculous they are if you compare them to broadband price plans. I've also talked about how (legal) digital download services like iTunes and Hulu are flawed in their business models. Recently, we've all been hearing news of doom and gloom from the newspaper industry which is still trying to find its place in a world of bloggers and free online news. Just this week, the Wall Street Journal announced it is trying a new micropayment system. In this blog post, I'll try and put all that together and propose a solution to all of these industries' problems.

With broadband, you pay a flat fee and get "the whole Internet." With phones, you get charged per call, text message, or anything else you do. The reason telephone companies do this is because, since just about every person in the developed world has a mobile phone by now, the only way they can grow their business is by raising what's called average revenue per user, or ARPU, and they have been trying to do this by persuading users to pay for so-called "premium" services - overseas calling, video calling, ringtones, you name it. The trouble with this plan is that people are very inflexible about how much they're willing to pay! Users have a more or less fixed budget for their telecoms needs, and only when the cost of having a phone drops beneath it do they stump up the cash. They are rarely, if ever, drawn to premium services until they fall within that budget.

Of course, this isn't the whole picture. Most phone companies offer you bulk price plans that allow you to pay a fixed fee every month for (one hopes) enough talk time, text messages and data traffic for your needs. Broadband providers, on the other hand, are slowly (and sanely) transitioning from a model where the price is based on the speed of the line to your home (8 megabit, 16 megabit etc.) to the amount of data you download (3 gigabytes per month, 10 gigabytes per month and so on).

The reason the broadband providers have such a simpler model for the customer is because they have a much better model for sharing the costs between themselves. I won't go into the details, but the system of peering and transit that governs who pays whom to get packets across the Internet is a wonderfully simple and elegant system that allows anyone to lay down some cables and build a data centre and start making money if he's helping grow the network. It won't be long before the Internet gobbles up the telephone network and they become one and the same. As I have said before, I firmly believe the internet model will prevail. Still, broadband providers have the same problem as phone companies - when everybody has broadband and won't pay for more services unless they become as cheap as what they get today, how do you grow your business?

Telecoms companies move the bits around with no regard as to what they contain and what the cost is of producing them - and this is a Good Thing. They invest in network infrastructure and present (or, in the case of telephone companies, should present) consumers with simple price structures: $15/month for low usage, $25/month for high usage or $50/month for unlimited usage, whatever that means. It's up to them to build their networks and strike deals with other networks to make the profits out of that.

Of course, this still leaves everyone stumped for a higher ARPU. The reason is because they're ignoring both the biggest problem with the Internet and the biggest asset both ISPs and telcos have that can fix the problem. When I was talking about telecos and their insane pricing, I mentioned there was a way they could make more money - and here it is.

The problem is that everything I've been talking about covers the cost of moving all this information around, but nobody has found a good way of covering the cost of producing this information in the first place.

Video footage shot from a home camera of something trivial can be several gigabytes in size. A scientific research paper could be just a few kilobytes - millions of times smaller, and hence cheaper to move around - than that video. However, the cost of producing the research paper can easily be a million times the cost of producing the video if it is the product of years of laboratory research. If that video was instead a major Hollywood movie - the same size as your home video - it would again have cost millions to produce.

When I lambasted Big Content for their pitiful attempts at providing legal downloads of music and video (this applies to text too) I mentioned how the lack of tiered price plans was a major disincentive. You see, tiered price plans aren't just there for simplicity and consistency. If you're on a prepaid plan, it means you don't have to make a purchasing decision every time you want to use the service. My satellite TV subscription means I don't have to worry about the incremental cost every time I want to watch a movie. My mobile talk time plan means I don't have to worry about the incremental cost every time I make a phone call. This is value above and beyond the discount that these bulk price plans offer over pay-per-use price plans. Time and again, consumers have shown that they like the idea of paying a flat monthly fee and not worrying about anything else.

What they should offer me is a subscription that I will choose based on my usage habits - am I movie freak or a two-a-year guy? Am I a news junkie or did I just pop in to check out something interesting?

Who can offer me this service? You guessed it, the same people that get the data to me in the first place. Why does this make sense? Because they already control the billing! I have a price plan for data to my home and a price plan for data to my mobile phone, I get the bills and they get paid from my bank account, or if my credit rating is crap I can pre-pay. We've already established that most people won't pay above and beyond the standard $10, $20 or so a month for these services. However, if the data providers open up their billing structure, and allow the content providers of this world to charge for their content, they can take a cut of that - and everybody makes more money. Techically, this couldn't be simpler - the same company that delivers the data to your house or mobile device can charge you for accessing the expensive, copyrighted content.

This is not a new idea - Japan's NTT DoCoMo has applied it very successfully in its i-mode system (though when telcos tried to bring that technology over to Europe they made a horrible mess of it), Qualcomm has had the ill-fated BREW platform that had a bit of traction with Verizon, and just this week Vodafone announced that it will be offering a similar service as part of the efforts coming out of the Joint Innovation Lab (with partners Softbank and China Mobile). Hopefully they can make this stick - opening up their billing structure is the only way mobile operators can increase their ARPU, and if this happens they'll abandon their hopeless campaign to charge us for so-called "premium" services that you can get for free on the Internet. What the ISPs of this world need to do is get in on this action so that I can use the same mechanism to pay for content on my mobile device as I do on the devices (computer, TV, whatever) in my home.

In order to entice users to flock to this service, however, they need to aggregate big bags of content, grouped roughly by the cost of producing it (all movies in one place; all TV shows in one place; all music in one place; all news in one place; all science papers in one place) and offer tiered price plans.

It makes little sense for your telecoms provider to charge you different rates for different types of content, when it's all bits and bytes to them. It makes even less sense that the producers of this content have no easy way of recouping their costs when they make this information available on the Internet. With this model, the telecoms companies offer aggregation and billing, linking the creators with the consumers in a friendly price plan.

The content creators can put their stuff on the Internet knowing not only that regular users will consume it, but that casual users can stumble upon it as easily as a YouTube video - because it's included in their monthly plan, these casual visits are hassle-free for the end user and still monetised by the producer. The search engines, academic institutions and aggregators can access all this premium content for a flat fee - and possibly make money from referals too, if their service helps people get to the content. And finally, the telcos get a fair cut for providing their billing services and connecting the creators to the consumers, in addition to charging people for the privilege of using their network to move all those bits around as they do already.

Let's see how long it takes the content and telecoms industries to get this system up and running - and for everybody to start making money from producing content again. Anybody got odds on the next decade?

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