Cutting out the 'scissor-effect'

Steven Hartley/Ovum
18 Feb 2010

The issue of mobile broadband profitability in developed markets today has arisen frequently in discussions with operators and vendors during the last year. Although ensuring profitability is a challenge, there will be ample opportunities over the coming five years for operators to avoid a cataclysm. Nevertheless, the industry as a whole needs to work together to stop the "scissor-effect" from becoming a self-fulfilling prophecy.

Economic theory stipulates that if costs rise faster than revenues then profits will eventually turn into a loss. When charted this creates a "scissor-effect" whereby the line drawn for costs overtakes that for revenues, creating a loss-making situation.

We do not disagree with this theory at all. However, our contention is with how this logic is being presented by vendors to sell their products and services. Instead they should be helping their customers (operators) to focus their attentions on maximizing profitability, which is undoubtedly of more mutual benefit.

First, in many diagrammatical versions of the scissor-effect theory shown to us in relation to mobile broadband, real costs and revenues rarely underpin the diagram, so they are not representative of today's situation. Second, where "real" costs are used, they rarely tell today's full picture, either being generous towards vendors making a pitch, or reflecting onerous cost allocation by operator finance departments founded on voice-centric assumptions. Finally, diagrams we have seen tend to represent a massive generalization and oversimplification of today's mobile broadband situation. They do not take into account the structure of an operator, its legacy infrastructure or the simple fact that the entire network is rarely congested.

Indeed, a more realistic generalization today is that a minority of users use bandwidth-hungry applications, such as peer-to-peer (P2P), on a few sites in the network. Backhaul is the more common network concern to operators rather than the radio access network.

Moving forward, absolute data traffic will undoubtedly increase. However, even if average usage per user increased rapidly, through the uptake of video for example, the outlook for operators over the next five years can still be profitable.

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