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The 'Tragedy of the Commons'
Thinking out loud about how operators can influence customer behavior on overcrowded mobile networks. Ideas of bandwidth quotas and pricing incentives are bandied about, but first marketers and CFOs m

By Susana Schwartz / Connected Planet
June 9, 2010

When it comes to dealing with today’s over-burdened mobile networks, mobile operators must think not only in technical but also economic terms. For example, billing vendor MetraTech has been forwarding the concept of the “crowding out effect” when it comes to mobile data networks – the idea of considering the difference between high-value customers who prize their time (and are willing to pay to preserve it) versus low-value customers on whom wasted time has no impact at all (but who are happy to contribute to network overcrowding).

In a conversation with MetraTech’s chief technology officer Doug Zone this morning, I started to see what CFOs and marketing managers tasked with keeping mobile networks up and running actually worry about day to day, including variable costs, finite capacity and maxing out in terms of profitability.

Zone is doing research for a developing white paper that will convey how the "cost" of time hits different people in different ways, driving different behaviors according to what value they think is lost in terms of time, not just money.

At first, I thought that as consumption on mobile networks decreases, it made sense for prices to go up, and that as consumption increased, prices would go down. But apparently there is a point where supply and demand intersects and where network quality starts to go down—at which point certain users begin to consume less. Ironically, it is usually the less-profitable consumers whose consumption patterns do not change regardless of the network performance, while it is the more-profitable customers that begin to drop off or look for alternatives once they feel their time would be better spent elsewhere.

In other words, people who have time to waste are happy to waste time on over-subscribed mobile data networks; people who are busy and can’t afford to waste time will quickly look elsewhere.

While higher prices across the board might reduce network burdens (by encouraging people to more closely monitor their consumption), jacking up prices may actually make the very customers you want to keep as unhappy as the ones you want to control.

Now that killer apps and devices have demonstrated just how “finite” network capacity can be, the variable costs will change. When marginal costs are “zero,” flat-rate pricing and the strategy of sell, sell, sell to the last red cent makes sense, as there’s no cost to the telco.

But that changes, according to Zone’s beliefs, once operators have to start investing in network capacity to try and preserve a quality of experience for every one of their customers. Then, the variable costs will increase as they bump up against a finite supply curve, and so too should the prices to cover those costs. But what can mobile operators do when all-you-can-eat plans rob them of that mechanism for increasing prices?

The issue, as explained by Zone this morning, is to better understand the feedback mechanism between supply and demand: As people demand more, the total number of units supplied per unit of time decreases. The total bytes may increase, but the total number of bytes per second decreases, so network capacity falls. As Zone said, “you can think of it like a traffic jam,” where people stuck in traffic at 8 a.m. and 6 p.m. couldn’t care less about how much the city invested in building more highways if the availability of “transport services” decreases during peak hours because more people are competing for the same resources.

In much the same way, people don’t care how much money operators have spent to boost reliability. They just care about the experience and the time wasted waiting for what they used to get instantaneously. Certain users might not mind waiting three hours to download a movie in the future, but others who consider time as valuable will drop the service if they can get better service on broadband, Wi-Fi or Ethernet connections.

So the point Zone is trying to push forward is that operators have to go beyond thinking about cost simply in terms of money and start thinking about the value of people’s time. MetraTech calls it “income-based billing,” as opposed to “revenue-based billing” because cost is being factored into the equation of profitability.

To further complicate the issue, Zone believes there are two demand curves: one for business and one for consumers. He talked of high elasticity for businesses and low elasticity for consumers: “If you reduce the time cost of the service for a business, then you will increase consumption; if you do that for the consumer, it doesn’t impact the behavior very much, as consumers are willing to wait or to move to an alternate connection for a data service."

As marketers study “elasticity” and demand, they typically see that different consumers react differently at different times of the day and in different roles (when assuming a working persona as opposed to a leisure persona, for example).

For this reason, it will be interesting to see how supply discrimination or price discrimination plays out. Metratech thinks intelligent pricing can dis-incentivize bandwidth hogs while making room for high-value customers with money to spend, whereas quotas are something Zone derides as economically inefficient because low-demand users think they pay too much and high-demand users think they’re getting ripped off with penalties.

Rather than make all classes of consumers unhappy with quotas, MetraTech is preaching a message of intelligent pricing to push certain behaviors in certain customers and at certain times of the day.

Maybe they’re onto something. The question remains how to do it.

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