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Wednesday, July 30, 2008

Should device purchase subsidise connectivity, not vice versa?

Whether or not PCs come with 3G modems embedded (see the debate here) there seems to be a general belief that the way forward is to offer "free laptops" as long as someone signs up for a contract for either fixed or mobile broadband.

While I can see the appeal of this type of subsidy, I'm wondering if it is the wrong way around.

Given that millions of people seem pretty happy to stump up cash (or at least credit cards) for PCs at the moment, why try and dilute value in the industry by persuading them to get computers for nothing instead?

Why not try a different approach - have a $1000 (or $400) laptop, that comes with "connectivity for 2 years" included free in the price, or as a bolt-on upgrade option like extra memory? Lots of physical electronic products come bundled with some service element (eg a warranty) that eventually expires but could be renewed. Just like a warranty, you could have terms and conditions, excusions and policies.

The problem here for the MNOs is that they would no longer "own the customer". But so what? Customers are certainly not owned by the warranty company working with the dealer of their new cars either... but warranty companies are (generally) highly profitable.

This approach - "embedded connectivity" - and the reverse subsidy model of hardware purchase including "free service" isn't new in technology markets either. Telematics products like car tracking systems often come with a year's service included in the upfront price. Software may include a year's maintenance or upgrades.

This also gets around the thorny issue of monthly billing, as well as limiting the credit risk the mobile industry might expose itself to if it started to subsidise a good proportion of the world's roughly $100bn worth of annual laptop sales.


Anonymous said...

Hi Dean,

The problem is how much data should an MNO let someone use over those two years? Our research shows that 3G data users on laptops range from 10MB to 100GB usage per month - this is a huge range. How would it be priced to genuinely allow 2 years access for everyone at the same price?

This is why it is so very hard to have unlimited mobile data. There is a real cost with carrying each additional MB, and I have seen figures as low as 5c to 20c.

Paul said...

It's certainly a model that has been tried with AV software in the past, usually with a shorter offer (3-6 Months) and is also being offered by Lenovo with Vodafone in the UK (albeit only 1 Month Free) with their laptop including embedded modules.

It has also been tried in the past with Mobiles, and I took a One2One (T-Mobile) subscription where I paid 100GBP up front for 12 months package with low minutes back in the 90s.

I think you still need to have monthly billing for 'overages' and roaming (perhaps a certain amount of roaming could be built in) and support the option to upgrade the package.

In theory it's a great way to encourage use right from purchase, where usage habits form quickly, but the relationship will always come back to the MNO in the end.

Anonymous said...

it wouldn't work because its been tried and it...er...didn't work?

Craig Plunkett said...

This is exactly the model that the Kindle is being sold with.

I'm not really buying the variable data problem in the first comment. As long as the MNO doesn't allow roaming on the device, their cost of supporting that device should be relatively fixed, at least in the US. The only problem would be if that device didn't move, it would constantly take up a slot on a cell site, leading to the necessity of increased tower infrastructure. We've seen this before in the days before broadband, where everybody had second POTS lines for dialup, and the market response was the rise of wholesale dialup providers.

What's not attractive about getting 2 years of revenue prepaid?

Dean Bubley said...

Thanks for the comments.

Anon#1 - a warranty company doesn't know how much they'll have to spend fixing your car either. You might need just a new windscreen wiper in 2 years, or you might need a new engine.

Perhaps the answer is to mimic the insurance industry and profile the laptop and or customer to "guess" the data consumption level and price according to risk. Sell a multimedia PC to a student, and expect lots of traffic. Sell an entry-level PC to an 80yo who just uses IM, and expect 10x or 100x less. Offer discounts in pricing "extensions" according to past behaviour patters and so on.

It won't be perfect, but I bet a bit of data mining would give a model that's within acceptable statistical limits.

Roaming would probably have to be dealt with separately - but again, insurance policies sometimes need an extra payment to take the car abroad, or on a racetrack.

Anon#2 - where/when was it tried? what went wrong & was it attributable to the pricing structure itself, the equipment, the service quality, or how it was marketed/supported?

Anonymous said...

There is another issue: the large MNO's (e.g. Vodafone, Telefonica etc.) are trying to make exclusive deals with the "Dell's" of this world. Small MNO's have a weak position to do this.

This means that for the smaller MNO's it will be very hard to get large market shares in the mobile laptop market. If they start subsidising laptops, the Vodafone advantage, regarding exlusive deals, is limited. And, as soon as an operator in a country starts subsidising laptops, the others operators will have to follow.

Dean Bubley said...

The idea of exclusive MNO distribution deals for laptops is large pointless, and will only lead to an even greater % of mobile broadband being delivered by USB dongles rather than embedded modules.

Customers aren't stupid - they know that mobile broadband is both cheap, and available from multiple suppliers. They will pick the laptop they want (based on usual criteria like memory, screen, graphics card etc) then look for the best place to buy it. Tying themselves into a mobile broadband contract with a single operator is unlikely.

Edsard Ravelli said...

Hi Dean,

I am very happy you touched on this subject! it's great that someone is voicing new models.
Hopefully smart MNO's will pick up on.

I wonder where "Mr. Anonymous nr.1" gets his/her data from. We do research on traffic of Mobile Broadband notebooks as well. and everyone know where we get it from :-)

Our data shows that, with the exception of abuse, most never get above the 3 Gig a month and the average is at 800 megs. Well below what people are forecasting.

However I don't believe a discussion about gigs per month will ultimately help.

In my opinion a notebook should come with embedded connectivity as part of the offer. No contract, no subscription. I also believe that this can be subsidized by the hardware (the bundle). The trick is not to limit to an X amount of data over 2 years.

Why not, offer a specific Connected service as part of the package? in other words; with "free browsing" and/or "free messaging" or "free skype".
This way we get people online easily, with no hassle. The result would be that, in the current world as the MNO's knows it, the notebook OEM could own the customer. (which will happen anyway in my opinion). BUT NO roaming! As this involves actually our of pocket costs for the MNO.

If a user wants to use bit torrent or many gigs, they can upgrade to a paid poweruser subscription service. What you essentially get is a notebooks with "Free surfing and Gmail" sponsored by Vodafone" out of the box - for X years.

This also enables the MNO to transform into a service enabler.
This way they can offer more innovative offers.

Browsing is free for 2 years
e-mail is XX per month
Mobile-IP is XX per month
Mobile TV is XX per month
Online backup is XX per month
Theft protection is XX per month

To top it off, offer a webbased portal where the user can always go to (because of free surfing) where they can purchase packages.
Such as a Traveller package which includes roaming. Which is niche anyway. Contrary to us geeks, roaming is at an avergae of 0.1% of all connections (Yes, measured by us).

When the user buys the notebook they can choose an innovative carrier that offers these services. And Vodafone and the other big boys have 0 advantage here in my opinion. The days of exclusive deals with Dell and HP are over. Not only that, they are stupid to begin with. Why the heck would i want to be tied in with a certain operator for 2 years!?
For a notebook? Hell no!

The other advantage of this approach is that you can do it all in a prepaid approach. So this month you want Mobile TV, prepay using the portal for next month. All the billing problems go out the door. Maybe smaller MNO's actually have an advantage. They needs balls, but if they do, they can act faster and respond more quickly than an operator that needs to discuss strategy across 15 countries not to piss of a local OpCo.

Craig Plunkett raised a very interesting point regarding the issue with attaches to the Celltower. This is a real issue that needs addressing anyway. today when you yank out yout USB dongle or shutdown your laptop, the network still thinks you went into a tunnel. And this happens for hours on end. So this is not a new issue and contrary to believe, most connections are to the same celltower today anyway. But this issue can easily be solves (and is being solved). After a certain amount of inactivity, the modem should do a detach from the network. As for the DSL at home solutions, that need to stay on, this is the price the MNO has to pay if it wants to be the DSL replacement.

I hope this takes off!
Mobile Broadband for the masses!