2.6 Mobile Data Business Model
2.6.3 Financial Arrangements .1 Revenue Models
2.6.3.3 Cost Analysis
be included for Web browsing and email using 2G or 3G GSM for the subscriber's account.
Expected Capacity may also be included for 2G and 3G GSM data traffic as well as Edge Pricing and Paris Metro Charging for email and data traffic. Subscriber's requirements vary greatly from students to business users, from light domestic users to heavy personal users. By modifying and combining charging models tariffs can be developed for the major demographic groups of subscribers (Cushnie & Hutchinson, 2002).
The illustration above shows the overlap between the various pricing models and how the boundaries can be made flexible depending on the subscriber usage profiles. For example, the mobile network operator may use Packet Charging in both Fixed Price and Metered Charging tariffs for some subscribers but only use Packet Charging with a Fixed Price charging model for other subscriber groups or tariffs. Some subscribers may only want to use limited Internet services, for example only text email and no Web browsing. The tariffs for the subscriber may become complicated but may ultimately give the subscribers more control over the way they are charged for using the mobile voice and Internet services and the Quality of Service (QoS) they receive from the network (Cushnie & Hutchinson, 2002).
The network operators will also have the advantage of being able to charge the subscribers for different level of QoS for the different services and network provision. There will always be a trade-off between the complexity of the billing system to be implemented and the advantage the network provider will receive for having the systems in place. Fixed price charging schemes reduce the overhead of the charging and billing systems infrastructure, as they tend to provide the simplest charging scenarios. Usage based charging models provide incremental and harder to predict income for the network operators as well as requiring more infrastructure investment.
incumbents. It will be very hard for a new operator to achieve profitability. Northstream (2001), have demonstrated that in the case where the new operator can obtain the same market share as an incumbent, will in the long run require an ARPU increase of 37%
compared with the incumbent. In the case where this market share cannot be reached, the ARPU required becomes even higher. For a new operator with 15% market share by 2005, the required ARPU is 60% higher than for an incumbent with 20% market share.
A migration from the traditional operator role to a focus on network resource provisioning (bit-pipe operations) will reduce costs significantly. The mobile value chain is constantly changing. The 3G technology opens new opportunities for operators to establish themselves in traditional as well as new parts of the value chain. The position taken by an operator will have a large effect on the business case, affecting the capital expenditure (CAPEX), operational expenditure (OPEX), risk factor, revenues, and overall business success. Costs are reduced significantly when the operator becomes a bit-pipe provider. According to Northstream (2001), an operator operating as a bit-pipe operator will require ARPU levels 40% lower than those required by an operator that is also functioning as a service provider and a mobile portal. The revenues that are 'lost' by the bit-pipe operator will be transferred to service providers and Mobile Virtual Network Operators (MVNOs). There are no fixed rules dictating which position an operator should undertake. An analysis should be carried out on a case by case basis.
The dimensioning of the network and service platforms is based on a calculation derived from the traffic and sizing. CAPEX includes investments in intangibles like licence fees and various types of equipment. A detailed investigation of the OPEX should also be carried out.
The CAPEX required for an entity holding a licence to operate a 3G network depends on where the operator wishes to be in the value chain. The assumption is that the operator will own the network, be the service provider and host a mobile portal. Bhargava (2002), lists the following major CAPEX items and its drivers:
• Customer Care and Billing Systems
Customer care and billing systems will play an increasingly important role in mobile data implementation. Good customer care and flexible billing systems will not only help operators understand user behaviour in order to provide subscribers with services and applications
based on their usage pattern, but also generate new revenue streams. Flexible billing systems will create opportunities for sharing revenues with service and application providers. The main drivers for this part of the CAPEX are the number of subscribers and the complexity of services and charging methods.
• Sales and Marketing Expenses
The major components of the sales and marketing expenses are:
> Handset and accessories cost - operators in many markets subsidise the terminals purchased by their subscribers. Terminal subsidy accounts for a large part of the operator's OPEX. The level of subsidy depends on the competition within the market and the bargaining power of the operator. The main drivers of terminal subsidy are the number of gross adds (net adds plus churn), target user segments and the type and price of device.
> Advertising and promotion - these are costs that relate to the establishment of the brand name of the operator. Advertisement costs are usually high in the initial years and should come down (per gross add) as the operator becomes established in the market although the operator may have to sustain or even increase the advertising cost in highly competitive markets. The main driver of this cost is the number of gross adds and the level of competition.
> Commissions, retail location rent, direct sales force salaries/expenses, printing and materials etc - all of the above expenses tend to be high on a per gross add basis in the early years but should fall as the number of subscribers increases. The major drivers are the number of gross adds, the level of competition, availability of trained work force and the macro economic conditions of the market.
• General and Administrative Expenses The main components of the G&A expenses are:
> Bad debt expense - this cost depends to a large extent on the credit standards imposed by the operator. It generally varies with the level of revenues. The main drivers for this cost are target segments, proportion of prepaid customers, the number of subscribers and the macro economic conditions. There is, obviously, no bad debt expense related to prepaid customers.
> Billing cost - these costs relate to the generation and delivery of bills to the post paid subscribers of a network. Prepaid customers, obviously, do not receive any bills. The main driver of this cost is the number of post-paid customers.
> Customer care expense - these costs relate to the salaries of the customer care staff and other expenses incurred in operating the customer care department/centre. The main driver of this cost is the number of subscribers.
• Other General and Administrative Expenses
A number of other expenses such as salaries, rent, and insurance are included in this category.
These costs tend to be fixed and grow with inflation plus a margin.
• Depreciation and Amortisation
The level of depreciation in any year really depends on the level of capital expenditure and the choice of depreciation method. Due to the different types of equipment involved in a 3G network (including the equipment required for the mobile portal) the assets will be depreciated over varying lengths of time (ranging from a few years to 8-10 years).
Amortisation expense results primarily from goodwill and licence cost.
• Interest Cost
The interest cost for a 3G network operator will depend primarily on the perceived risk of the project, security offered, competition within the financial community, debt to equity ratio (size of debt), type of debt and the level of interest rates in the market.