The role of 5G in driving mobile service packaging innovation

The majority of the world’s most popular apps, social media sites and music or video streaming services depend on connectivity that works anywhere and anytime. In Q3 2022 mobile networks carried 108 EB of traffic per month, growing at a rate of around 40 percent per year. As usage increases, service providers keep building network capacity and improving performance – for example, with the introduction of 5G – which benefits everyone.

The November 2022 update of an Ericsson study of consumer retail packages offered by 310 mobile service providers in 139 countries showed that, although the various types of service packaging remain largely the same globally, consumers are being offered increased variety in most markets. To gain further insights into service packaging, Ericsson interviewed 10 service providers, looking at their experiences within a few of these packaging principles.

Does a premium service command a premium price?

or economics perspective, it makes sense to have a higher price tag for a product that adds value over similar products. It sends a signal to the consumer that there is value worth considering.

However, in the 6 months between the 2 latest iterations of the study, the number of service providers charging a premium for 5G has dropped to 25 percent. However, there may be hidden price increases amongst the other 75 percent of service providers, since it has become common to completely replace 4G offerings with 5G. The strategy of service providers has shifted toward moving as many subscribers as possible over to 5G, as it is the most efficient network in place. The next steps will involve sunsetting older technologies, freeing up assets like spectrum, site space and service resources, and focusing on the most efficient systems.

The bucket model vs. unlimited data

Since the introduction of smartphones, the prevailing pricing model has been to charge for mobile data usage through “buckets of gigabytes”. Nearly all (306 out of 310) service providers offer data buckets as the base model, targeting most or all of their subscribers.

This model has sometimes been criticized for being difficult for consumers to understand but has nevertheless become widely accepted worldwide. Over time, consumers learn about their usage patterns and data allowance, how this relates to the package they have and when it might be time to upgrade. The model provides a simple yet clear correlation between consumer data usage and the revenues benefitting the service provider.

Provided the buckets are reasonably sized and generally match usage, there will be a natural movement from smaller to larger buckets within the customer base. Not all markets show this pattern, however; in some places, bucket sizes are much larger than actual usage. For example, in some of these markets, the smallest buckets available may offer as much as 50 or
100 GB per month, although the average usage could be well below 15 GB.

One service provider in Latin America mentioned that only 3 percent of its subscribers at the lowest tier actually reach their quota. As a result, there is very little natural movement from one tier to another since users never end up running out of data. Another consequence is poor segmentation and a price spiral where more and more data is offered with almost no price increase over time.

Around 45 percent of service providers in the survey offer true unlimited data packages to their smartphone users. In the vast majority of cases, these packages are the top-tier offers in monthly bill plans.

The key selling point of unlimited data is that users do not have to worry about what they use or how much they spend. But it is very much a one-size-fits-all model without any inherent differentiation. Therefore service providers are required to combine this model with additional elements for effective segmentation. Unlike the bucket model, there is no clear means of connecting revenue growth to increased usage.

In fact, the most obvious argument against unlimited offerings is that they allow data usage to grow indefinitely without additional revenue gains for the service provider. One service provider who had abandoned unlimited plans mentioned that, as differentiation is key to its position as a challenger, it needed to look for other methods that would serve it better and not risk driving it towards commoditization.

In the early years of 5G, many service providers began adding boundary conditions to their unlimited offerings. These conditions were in addition to some of the more “traditional” fair-use policies and were intended to limit extreme usage or what might be considered “abuse”. They typically targeted very specific scenarios like connecting surveillance cameras or other IoT devices,
or tethering computers and sharing data widely amongst multiple users when the subscription was intended for personal use. These actions are indications of some of the risks associated with unlimited data plans, especially when performance allows huge amounts of data to be generated in a short amount of time. However, in the latest iteration of the study, a slight reduction in the use of such policies can be observed, coinciding with the introduction of speed tiers.

The reasoning may be that speed in itself, at least in the lower tiers, is a limiting factor as to how much data can be generated. This remains to be seen, however, and may actually be something of a false safeguard, as even a 10 Mbps connection can theoretically generate up to 3,300 GB a month.

Speed as a differentiator

A segmentation model that seems to be growing in popularity is the use of speed tiers. Between April and October 2022 alone, the percentage of 5G service providers using speed as a differentiator grew from 18 to 24 percent. Unlike fixed networks, there is a lot of variation in the theme. Around 74 percent use it in some combination with the bucket model, and around 45 percent use a hybrid version (speed in combination with both buckets and unlimited data tiers).

The simplest version is one where each higher-speed tier also commands a higher price. Speed is never marketed with a guarantee towards consumers: Rather, it is presented as an “up to” promise. In many markets, especially in Western Europe where speed tiers are most widely used, the tiers are well separated with a hundred or a few hundred megabits per second. However, service providers in a number of markets have chosen to use what might be considered low speeds in relation to 5G capabilities. An argument brought forward in the interviews is that consumers may not need more than 10 or perhaps 50 Mbps for the services they use today. The ease with which these speeds can be delivered ensures that service providers are not overselling, and are well placed to deliver future increases and price tiers.

Most service providers who do not use speed tiers today mentioned the inability to guarantee performance as the key reason for not implementing this offering. Some regard speed tiers as irrelevant, as speeds are already much higher than what consumers actually need on a smartphone. At the same time, most concede that perception of value is key and that speed can be an emotional motivator for consumers to pay more.

A number of service providers are using the combination of speed, buckets and unlimited plans to allow consumers a choice between data usage and speed. One perspective on speed tiers brought up by a few of the interviewees was that in order to avoid commoditization, they felt a need to combine these with other value items, or sweeteners.

At a given price point, the consumer may be offered the highest 5G speed coupled with only a limited amount of data. Alternatively, at the same price they can get unlimited data, but speed of only 5 or 10 Mbps. Interestingly, this variant has been brought up in some discussions with service providers looking to move away from unlimited offerings.

Given that consumers are used to having unlimited packages as the default offering, removing unlimited offers might present a challenge. Therefore service providers are looking for some form of soft introduction of the bucket model. Speed is considered the “equalizer” between the bucket and the unlimited offer, both set at the same price. Starting with the lowest tier offers, the unlimited alternative is gradually given less and less attention and value.

Looking ahead

The most commonly used and popular packaging principles among service providers are quite basic, yet effective in monetizing connectivity. In an increasing number of markets, these packaging principles are being adjusted, developed and complemented with other packaging. These include variations on the bucket theme with family and device share plans, and discount schemes during the night or other times of low network traffic. Triple- and quad-play offerings have seen an increased rate of growth in the past 6–12 months, likely due to more mobile-only service providers starting to offer FWA combined with media service packages.

There is a desire for stability in the market and, in some cases, disruptions have pushed all players into a reactive mode which is not necessarily good for that market. Some of the service providers interviewed voiced concerns about short-sighted plans and campaigns that sometimes have no other effect than driving down prices for all, effectively reducing the market space and the long-term ability to invest and grow.

The current macroeconomic environment seems to have triggered some specific changes that may have a positive long-term effect on industry revenues. One aspect of this is that service providers have confidence in a return to long-term contracts, which may have a stabilizing effect on the market. Another, more significant, impact may come from the yearly price adjustments (a few percent increase) which many service providers are writing into subscribers‘ contracts. It is interesting that service providers are now venturing to increase prices like this, and if it becomes commonplace, it may benefit the industry as a whole, clearing the path for more stable behavior. It is significant that connectivity is regarded as one of the last things consumers abandon during tough times.

The theme of monetizing 5G has been very clear in discussions with service providers. Much of what is happening today simply builds upon previous technologies. Speed tiers, however, indicate a move towards a quality- and value-oriented pricing focus. In addition, new services have already launched, like cloud gaming and AR on smartphones, which are promising and are being looked at by many service providers. With the right business models in place, revenues from connectivity can continue to grow. Adding new capabilities like 5G standalone (SA) and network slicing will further strengthen the case for service providers, as flexibility in pricing and packaging may be enhanced significantly, especially if more offerings related to quality of experience and tied to specific services become a reality.