Third party pays – Six degrees of mobile data plan innovation

In this fifth installment of the Six Degrees of Mobile Data Plan Innovation blog series, Alcatel-Lucent’s Rich Crowe examines third party pays mobile data plans. With third party pays plans, application and content providers pay mobile network operators for the data that subscribers use in consuming their content.

Data on the house!

Have you ever enjoyed a great meal at a restaurant and then been told that it’s on the house? It’s a wonderful feeling! Third party pays mobile data plans bring that same feeling to the mobile experience. You consume mobile content and someone else — the content provider or another business — pays your mobile network operator for the data you used. It doesn’t count toward your monthly allocation.

Today’s business model favors application and content providers. They provide the content and consumers cover the mobile data bill through their data plans. So why would a content provider pay for mobile data? The reason is simple: If the provider’s content consumes a lot of data, mobile consumers may access it sparingly or not at all to save precious megabytes. This behavior may be even more pronounced toward the end of the month, as consumers approach data plan limits.

Reaching the mobile device is a strategic imperative for major content providers. For example, Nielsen’s Cross-Platform Report for June 2013 found that US consumers increased the time they spent watching video on their mobile phones by more than 9% in 1Q 2013 compared to 1Q 2012. The number of consumers watching mobile video grew by more than 25% during the same period. Content providers can’t afford to have mobile consumers shy away from their content or seek out alternative content sources because of concerns about data usage. Their brand loyalty and advertising revenue are at risk when consumers use less of their content.

Benefits of third party pays

Third party pays mobile data plans offer clear benefits to all mobile content stakeholders:

Subscribers can consume the provider’s content freely, without having to worry about exceeding data limits or paying overage charges. They also don’t need to worry about whether they are using the cellular network or Wi-Fi®. They may even be able to opt for a smaller monthly data plan if the provider’s content typically accounts for a significant portion of their usage.

The operator creates another source of revenue and growth. This is especially important given that subscribers’ mobile spending must eventually reach a limit. Operators can strike profitable deals with third party content providers, even if these providers negotiate wholesale rates or if subscribers opt to spend less on data by moving to smaller data packages. An operator can offset these wholesale rates and reduced subscriber payments with increased traffic and guaranteed minimum data purchases.

The third party content provider draws increased subscriber traffic. By subsidizing the data used for its content, a provider can become a favorite content source and attract increased advertising revenues. A content provider can also offer subsidized data only to its own paid subscribers, a move that may help attract new subscribers. In any case, subsidized data opens up new opportunities to upsell paid content to more consumers.

Advertisers can concentrate limited budgets on fewer but more heavily used application and content providers while still reaching the maximum audience. Larger payments provide leverage to negotiate the best possible terms with content provider partners.

Examples of third party pays data plans

The Amazon Kindle e-reader provided a platform for an early example of a third party pays data plan. When customers purchased and downloaded books over the 3G network, the data they consumed didn’t count against their mobile data plans. Amazon negotiated agreements with mobile network operators and embedded the data cost in the price of the book.

Today, the third party pays discussion goes a lot further. For example, ESPN is reportedly investigating the idea of paying mobile network operators to ensure that its mobile content will not count against subscribers’ mobile data plans. This goes far beyond delivering a relatively narrow and well-defined range of content that subscribers have paid for indirectly. For ESPN, it’s about delivering vast quantities of data (including advertising) with subscribers having no money on the line.

So everybody wins? Not so fast!

A third party pays plan is fair in that any content provider can subsidize the data its content consumes. This assumes that the net is neutral, meaning that data is treated with equal priority once it is on the mobile internet. In reality, third party pays favors content providers with deep pockets. Less well-funded content providers, smaller operations and start-ups that can’t afford to pay for data could lose traffic and face reduced advertiser support.

Content providers that subsidize large quantities of data will almost certainly seek service-level agreements (SLAs) that ensure a minimum level of quality for their traffic. These SLAs could de-prioritize traffic from other content providers, possibly to the point where providers’ services and brands are negatively affected. Subscribers consuming content that is not subject to an SLA could experience a corresponding service degradation.

The key parties involved in a third party pays agreement have their own unique stresses and motivations. The content provider wants to maximize its audience, which means striking deals with multiple mobile network operators and managing myriad accounting relationships. Most of these agreements must be in place before the payment plan is launched. For its part, the mobile network operator would benefit most from an exclusive content deal that might inspire consumers to switch operators. Ultimately, however, the content provider is in control.

Third party pays is inevitable with exploding mobile video use

Clearly there are issues that need to be worked through. But with video driving continued mobile traffic growth, third party pays data plans seem necessary. Consumers want to access more video on the go. Content providers want to reach the widest possible audience across multiple screens. Someone has to pay for the data, and there is ultimately a limit to what the subscriber can pay. The challenge is to make it fair for everyone and avoid causing collateral damage to less well-funded content providers.

Making third party pays a reality

There is no blueprint for how third party pays plans should be implemented. Solutions will vary based on agreements between third party content providers and mobile network operators. For example, revenue share, flat rate payment, and payment based on metered use would require different implementations. However, there are a few key ingredients that can make third party pays a reality.

A strong policy control function will be essential for determining which subscriber data is zero-rated and billable to the third party content provider. Proper traffic identification is critical to policy control performance. It calls for deep packet inspection or knowledge that the access network identifier is unique to the third party traffic that is subject to the agreement.

Billing of the third party content provider is most often done offline and requires a billing support system. An online charging system is required to meter the traffic, and a subscriber data manager is required to store subscriber and third party provider entitlements. Subscriber entitlements are most useful in cases where the provider offers to pay for data only for its own subscribers.

In all likelihood, video will be among the media types most frequently delivered using third party pays mobile data innovations. Mobile network operators may wish to investigate how content delivery networks (CDNs) can help optimize the delivery of this traffic to improve margins and minimize network strain.

This blog post was initially featured on TMC Net, as part of an eight-part blog series. In this series, Rich Crowe answers these questions by presenting six degrees of mobile data plan innovation that can help operators build closer relationships with customers and grow data revenues.

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