Priming the pipe

Mar 5th 2009
From The Economist print edition
Mobile operators discover the dangers of being reduced to a dumb pipe

AS HANDSETS turn into computers, laptops are becoming more like mobile phones. Even industry veterans have been surprised by the rapid take-up of mobile broadband—using built-in receivers or plug-in “dongles” to provide internet access to laptops via high-speed mobile networks. The advantage of this is that it works anywhere—unlike short-range Wi-Fi technology, it is not limited to a few hotspots. In Western Europe alone, the number of mobile-broadband users will grow by 50% to 27m this year, according to IDC, an analyst firm. Worldwide, there are thought to be around 100m.

What explains this unexpected boom in such troubled times? Operators have been cutting their prices for data-only connections: in Britain, 3, a subsidiary of Hutchison Whampoa, charges as little as £10 ($14) per month for one gigabyte of data. Prices for dongles are falling, too. Connection speeds are improving as operators upgrade their networks. And then there is the surprising success of netbooks—cheap laptops that are small enough to take everywhere. Operators have even started giving away netbooks with some mobile-broadband contracts.

The growth, however, comes with a couple of big drawbacks for the operators. One is loss of control. Subscribers can do what they want: the operator is merely a “dumb pipe” to the internet. Next, rates have been falling quickly. “The pricing is crazy—mobile broadband is becoming a commodity way too fast,” notes Didier Bonnet of Capgemini, a consulting firm. Another problem is overuse. Operators complain that a small group of users eats up most of the available network capacity. Some are users of illegal file-sharing networks who want to be harder to track down. To throttle them, operators are thinking of giving some data packets (such as web traffic) priority over others (such as file-sharing). “Network neutrality”, the principle that operators should not discriminate between different forms of traffic, will not succeed on mobile networks, says Holger Knöpke of T-Mobile, a European operator.

If they do not want margins to drain away, operators must find ways to enhance and differentiate their offerings. “We have no choice but to innovate,” says Olaf Swantee, head of mobile operations at Orange, a big European operator. That is a tall order. But the alternative is to become low-margin utilities.

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