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As mobile networks develop towards 3G services, operators face one of their biggest challenges so far: billing for them. Gavin Freed, chief executive of elata, a U.K. mobile data software specialist, argues that operators should learn from the Far East and become more like shops than network managers.

As wireless Java opens up mobile devices, there’s going to be an increasing amount of interest from mobile operators in new applications developed by third parties. It’s widely expected to drive GPRS and 3G services and revenue forward, but unfortunately, it’s all going to be wasted if some operators persist with outmoded revenue models and billing.

Most operators have done well by billing their customers using a traffic volume model that collects revenue based on the amount of time a particular service is used. Perhaps they’d be satisfied to stick with the basis of that model if GSM were the only infrastructure out there for offering services.

But as GPRS is rolled out in Europe, they’re already recognising the need to tweak the revenue model as services such as streaming audio, video and enterprise applications will call for a more sophisticated pricing and billing infrastructure. With the advent of 3G, the urgency of this situation is going to be magnified. It’s worth noting that NTT DoCoMo, the innovative mobile unit of the Japanese incumbent, has already begun modifying its approach.

This model can certainly be learned from, as the operator develops the 3G service called FOMA it launched in October 2001. It has already begun charging customers for the value of certain services, not necessarily for how long they are used, and this is an important model.

For example, it means a ring-tone can be downloaded relatively quickly and the customer then pays a flat fee rather than for the bandwidth used or the time the network connection is in place. More importantly, it means being able to bill for separate data services despite the fact a connection to the network is always on, as it is with GPRS. However, it’s obviously no use trying to bill for airtime under these circumstances, as subscribers will go to a competing operator if they’re charged for the length of time the download takes.

The subscriber needs to know exactly how much it will cost up front, and the operator needs a service that is priced attractively enough to encourage uptake and customer loyalty. The catch here, of course, is that operators just don’t yet have the ability to bill for the value of a service depending on which application it uses, and revenue models consequently look very immature in Europe.

However, operators are rapidly reaching the point where they must cross the Rubycon, as adopting this sort of model is vital to their survival and the success of 3G services in a turbulent market. Key to doing this is changing their approach towards becoming a shop rather than just a network operator. They need to forge new relationships with third party content developers and providers, in the same way a shop needs a network of suppliers, in order to make sure they can offer a broad cross-section of interesting and relevant content.

They then need to be able to rate and bill for different types of content at different price points, and also think about allowing their suppliers access the billing platform if they need to bill directly themselves. DoCoMo has largely been successful so far because it offers a broad range of services from third party providers, leaving it to focus on the operation and management of its billing infrastructure.

It says its model is to take only about 10% of service revenue for itself and offer the bulk to its content provider and developer partners. Giving content providers a good, sustainable return is key to the proliferation of high quality services and a steady, if modest, revenue stream. The composition of the percentage breakdown between operator and content partner in Europe is up for debate at the moment, and success or failure for operators will no doubt hinge on striking a practical balance.

But even though DoCoMo says it keeps only 10% of content revenue, a figure that may appear too low for some European operators, it makes money from the relatively large number of services it provides. Once this relationship between operator and content provider is in place, it’s then a case of being able to respond quickly to pricing changes in the local market, just as it would if the operator were a shop.

Reacting to price change, and therefore staying competitive, is critical. Operators have some experience of this as they have to adjust their voice tariffs regularly because competition in the mobile voice market, especially in Europe, has been brisk for some time. But competition in new markets, such as GPRS and 3G services, will be different and will call for new subscriber management and billing systems.

Handing over control of service development to third parties, is a good way of concentrating resources on billing. After all, we’re no longer talking about a platform that simply detects the duration of a voice call, and then charges according to the current rate. It must be a more complex platform which embraces subscriber management, while enabling service discovery and service delivery. Integrating these functions is the key to a quick market response time.

Firstly, operators need to use service discovery in order to present new services to customers through either their branded portal or a device browser menu. It’s essential to invest in a platform that supports the subtle task of helping users discover only services for which they’ve expressed a preference, and be able to modify their selections easily and quickly.

The next task is the delivery of services from an often diverse range of third party application providers across any device, managing both service packaging and the eventual upload onto the device. Once users have a service package in place, the challenge is two-fold: to manage it responsively according to clear market segmentation, and to keep subscribers exposure to technology to a minimum. Operators need to remember, for example, that their subscribers don’t actually care about wireless Java at all, just the applications it provides.

Obviously, a system that doesn’t have usage data or user interest patterns that are easy to interrogate, is one that allows little headroom to justifiably increase Average Revenue Per User (ARPU). It’s of even lesser value if it doesn’t have the flexibility to allow for a combination of traditional voice and new value-based pricing, when in fact this will become paramount to building and keeping a customer base. Customers will need a very compelling reason indeed to pay for a large file when they’re charged for the amount of time it takes to download it over a sometimes flaky connection.

On the other hand, if you’ve got a platform that is ready for value-based billing, you at least have the choice of charging a lesser flat fee up-front. Experience has shown that customers are positive about transparent, value-based, set tariffs, and are more likely to buy a service if they know beforehand how much it will cost them, even if that amount is slightly more than they’d normally expect to pay.

It’s an approach that also simplifies tariffing for the operator and leaves them room to respond to competitors’ pricing rapidly enough to hang on to customers that may go elsewhere for a lower price. Third party content developers also need to be kept happy, and an integrated platform will need a micro-billing capability that gives them access to your mediation interface.

Providing the platform already has a mechanism to transport the identity of individual devices and linked usage information to a third party, micro-billing rules that form the basis of a content relationship can be created. elata tackles this using a system called Variable Replacement ID, which allows the third party to collate user subscription volume data from the network transaction. They can then charge the user directly for content based on usage patterns, or use a single bill option and charge through the operator.

This whole approach should encourage the type of productive content relationships popular in the Far East to take root in Europe. Solid 3G tariffing models, and the billing and management systems to back them up are noticeably absent, and operators in Europe look by comparison less mature and sure-footed. Although they do need to adopt these systems, they should be wary about exactly how much access they give third parties to their network.

There are two access protocols emerging, which give third parties either ‘known’ or ‘trusted’ status, and effectively allow them rights to publish applications directly into the operator’s infrastructure. While offering a third party network access under any circumstances would go against most operators’ principles, it’s worth considering if that party is a close partner which warrants trusted status. There’s no doubt publishing direct offers cost savings, but it also kicks up risks that operators will have to weigh up carefully.

Intec Systems, the UK-based operational support systems specialist and an elata partner, says operators are likely to continue using the current Call Detail Record (CDR) they’ve been using for years. Its primary purpose has been for bill settlement between operators for network interconnection, but there’s no reason why it can’t be extended to cover billing between operators and content providers. However, if CDRs are used for this purpose, they need to become standardised and content providers more familiar with them.

How value-based billable events and transactions are actually detected is a matter of more debate. Aside from information capture and privacy issues, there’s also the central problem of how to detect and process micro-billable events. For example, a series of many small, low-value handset transactions can cause problems because it costs the operator more to process them than they are actually worth.

Allowing third party access to the billing platform under these circumstances arguably offers a solution because it makes processing the transactions more cost effective. Trusted access might also be made available to large financial clearing houses such as Visa if a particularly large transaction from a handset needs to be authorised quickly. The introduction of high-quality interactive content using Java is likely to encourage many more transactions like these, in much the same way as access to fixed broadband content has driven up e-commerce usage.

Operators in Europe will come under increasing pressure as the next few months reveal if DoCoMo can successfully transplant its i-mode mobile Internet service to Europe. But it looks like European operators already have the upper hand because they own the subscriber base, and European customers would need to be prepared to invest in a new handset to start using i-mode. So although the Japanese have a good tariffing and billing model, they’re unlikely to be as successful in Europe as they have been in the home market they still monopolise.

This is particularly true if European operators make good progress towards becoming more like shops than network service providers, by developing a solid and flexible billing infrastructure. The operators that are successful will be the ones that adapt their tariffing and billing systems for GPRS and 3G services. The future looks less certain for the ones that don’t.

Gavin Freed – Chief Executive Officer

Prior to elata, Gavin’s experience was primarily in corporate finance, first with Price Waterhouse Corporate Finance and more recently with IBM. Whilst at IBM, Gavin was key to transforming IBM from a working capital lender to a serious player in the acquisition finance market. As CEO of elata, Gavin has been responsible for taking the company from its privately owned research and development roots to becoming an autonomous VC-backed wireless infrastructure software business. In September 2001, he secured EUR10million (£6.3m, $9.1m) of funding during adverse IT and telecoms market conditions. In addition to finance raising, Gavin is tasked with management of the executive team, raising the profile of elata, plus the strategic direction and business development of the company.

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