Business model innovation in mobile broadband - the insurance model?

At the recent Telco 2.0 event in Palo Alto, I was on the panel discussing mobile broadband economics.

I had an idea there, on the spur of the moment, that I haven't had a chance to write up until now. It's still in "prototype" form and definitely not 100% practical straight away, but nevertheless represents the sort of lateral thinking I have yet to see in the mobile industry.

I pay my car insurance based on an annual premium payment. I phone around (or look online) for quotes, which typically ask me for my age, address, type of car, security I use, history of accidents or convictions, some evidence of history of my actual insurance usage (ie claims) and a bunch of other questions that help them categorise my risk level with some very complex software. Some specialist insurers target particular demographics, or have detailed underwriting expertise that allows them to provide custom quotes, taking into account unusual circumstances. I also get a discount if my previous year's driving didn't result in excess "usage" - ie a no-claims discount.

It got me thinking - why don't we price for mobile data in a similar way? A 37yo male living in central London with an iPhone 4, commuting during busy periods, with a history of video downloads & obsessive Facebook use might get quoted £500 a year for mobile data, while a 57yo female with a BlackBerry living in a rural area and working from home might get a quote of £200. And if someone "abuses" the service, the operator has the right to decline to quote them for a continuation of service next year - or raise the premium considerably - so there's an incentive to be sensible.

Now clearly, this would need a major change to IT and billing systems - as well as some interesting discussions with regulators and re-training of customer service. I'm certainly not saying it's easy. But leave that aside for a second - do you really believe that if the *insurance* industry (hardly the most dynamic group of companies....) can do something like this, then the telecoms industry couldn't as well?

The nice thing about it is that the actual metrics that the telco uses to estimate risk are hidden privately inside the system. It might be a measure of GB data "tonnage". It might bias against people who use lots of signalling-intensive applications. It might involve clever location-based algorithms. It might give discounts for people who have use of 2+ phones. It might discount people prepared to accept a higher "excess" (eg policy management downgrades during busy periods). There's an infinity of clever ways to tweak the system.

I'm sure that there are other industries whose pricing schemes might be borrowed as well - energy, airlines, hotels and so on. Once again, it's about getting rid of the notion that "subscriptions" - especially monthly-based - are the only way to bill or market for telecoms services.

There's lots of nonsense being talked at the moment about "personalisation" fo mobile data - picking from a menu of apps and other such implausibilities. *This* is an example of true personalisation - a unique price and policy, just for you, calculated by examining your individual "risk" characteristics based on network cost and contribution to congestion.

Is KPN about to hit the Net Neutrality "suicide button" in the Netherlands?

According to this article on TelecomTV, the Dutch incumbent operator may be about to try to attempt the so-called "personalisation" approach to mobile broadband, charging "per-service" for Internet functions, in an effort to stem the rising use of 3rd-party applications that are substituting for SMS - behind last week's surprise profit warning.

Disruptive Analysis' view is that most app-specific personalisation concepts for mobile data charging are deeply flawed, and will likely lead to churn, counter-measures and outright animosity from otherwise neutral Internet players, as well as probable regulatory intervention. They will also most likely have significant problems with "false positives" and "false negatives". In other words, they will make a bad problem even worse. I wrote a blog post detailing some of the complexities a few months back - here. Although details are still sketchy, it looks like KPN's management may have made a knee-jerk reaction to its poor figures in an attempt to reassure investors.

Although this is in essence a "Net Neutrality" issue, it's not really something where I feel the issue is the principle at stake. It's more that it's a tactic that just won't work - and may quite possibly backfire to the extent it becomes suicidal.

To recap, KPN explained last week that its Dutch consumer wireless revenue shortfall in Q1 2011 was because:

"accelerated changing customer behavior became visible amongst smartphone users. New popular ‘apps’ on smartphones offer alternative ways of communication beyond traditional voice and SMS. The increased usage of these ‘apps’ lead to decreasing SMS and voice usage resulting in lower service revenues."

It further said that "Short term measures are taken to mitigate the impact on service revenues from these trends; these measures include personalized ARPU optimization and reduced discounts on data."

The accompanying presentation to the results shows the icons of Viber, WhatsApp and another service I'm not sure of (on slide #22). I suspect that KPN picked some relatively-minor examples rather than stir the pot by blaming Facebook or BlackBerry Messenger straight away. In other words, what many people have long, long expected has finally started to come true - SMS is starting to be eroded by alternative IP-based messaging firms. I described SMS as a "sitting duck" as long ago as November 2006.

Given that the writing has been on the wall for that long, you might have reasonably imagined that operators and their standards bodies might have thought about creating newer, better versions of messaging to compete. And that doesn't just mean relying on the pipe-dream of IMS RCS or old-style mobile IM - but actually creating something innovative that has the appeal of FB or BBM. Yet KPN only invested €82m in R&D in 2010 in total, against revenues of €13.4bn, much of which probably went on testing LTE and new fibre systems, developing back-office systems and so on. I'd be surprised if more than €10m went into trying to invent new services and applications, either solo or collaboratively. By way of comparison, one of the companies that has KPN scared has only just raised $8m - and so has presumably spent less than $5m so far.

But no.

KPN seems about to try to bill "per-application" for things that compete with SMS. Even leaving aside the inevitable use of email as a work-around, there are dozens of gotchas relating to mashups, VPN tunnels, or even hiding messages steganographically inside images. Will it block PCs from accessing parts of the web as well? What about prepaid data users? Roamers? MVNO subscribers?

I got upgraded to the new Facebook messaging platform the other day, which blends email, IM and FB messages. All inside an SSL tunnel to facebook.com. Packet-inspect that...

Now it's possible that KPN is going to try and do this in a more sensible fashion - perhaps zero-rating "friendly" sites, and increasing data prices for everything else. White-lists are sometimes easier to manage than black-lists.

But I have a sneaking suspicion that KPN has been over-sold on "personalisation" capabilities, and is about to bite off more than it can chew. Becoming "part of the problem" and taxing innovative substitutes will not succeed in competitive markets. Operators need to become "part of the solution" and offer something better. Despite the appealing Dutch folklore, this is not a hole in a leaking dyke than can be plugged by a small boy's DPI-enabled finger.