Vodafone floats idea of outcome-based pricing for IoT devices

Vodafone has discussed plans to introduce ‘outcome-based’ pricing for IoT connectivity, wherein customers are billed according to the outcome of the messages sent over the MNO’s network, rather than billed on a monthly cycle based around a usage limit.

Speaking at MWCA, Vodafone’s Ludovico Fassati, Head of IoT, Americas, said that the MNO had to be creative with its pricing, as it does not have access to the US networks directly. To this end, it would explore a different way of billing for services, given that AT&T, Verizon, and the likely merged Sprint and T-Mobile, will be able to beat it down on pure price alone.

So, the MNO is looking for other ways to compete – enter outcome-based pricing. The concept is similar in some ways to a revenue share agreement, in that Vodafone is only going to get paid if it can provide the network connectivity needed to create value in an IoT application. The example given was stolen vehicle recovery, where Vodafone only gets cash if its network can track the vehicle. If it can’t provide the connectivity, then it doesn’t get paid.

It’s an interesting idea, but one that doesn’t sit well with the current MNO paradigm of paying for throughput used – where you are paying for each message, call, or megabyte of data used. The outcome-based approach would be more akin to paying for capacity, rather than volume, in that the payment is for a guarantee that the network will be there when needed, rather than there to push packets at an acceptable speed per unit of time. Buckle up, as this is going to get a little wonky.

In the outcome-based model, the MNO would be taking on risk, in a model that is comparable to a Service Level Agreement (SLA). While that initially sounds bad for the MNO, it does improve the likelihood that it could successfully sell such services.

It’s a similar dynamic to insurance, where a customer might feel they have wasted the money spent if they never had to use it. In this, the customer will only pay when the network has actually been of use to it, and so should therefore not hold much in the way of resentment. Most consumers aren’t thankful that they went an entire year without having to claim, when it comes time to renew an insurance policy.

In this model, there won’t be the disincentive of wasted spend. If a customer is paying for capacity they don’t use, that leaves the door open for a competitor to undercut the MNO on price – if the competition is operating on the basis that they don’t actually have to support the 5,000 messages per month that the user was paying for, as the user was actually using only 500. As such, the competitor only has to support 500 messages, and so needs less network capacity per customer.

That’s somewhat of a heavy simplification of the problem at hand, but MNOs do sell consumers data in a way that is somewhat backwards. Broadly, there’s not much difference in the cost of a base station running at 90% load compared to one running at 30% load, besides the extra electricity, and maybe the additional peering/routing charges (although those tend to cancel out among carriers). The greatest expenses are the fixed costs of the installation.

Consequently, that base station could be serving the 30% of customers using 100% of its capacity, providing blazing fast speeds. It would then lower the speed available to each user as more join the cell, sharing the maximum capacity among the users. But the base station is not limited in its throughput. If it has 100 users and 1GBps of capacity, it could provide each user with 10MBps of capacity. Again, we’re oversimplifying things here, but this could shift to 200 users getting 5MBps, or 50 users getting 20MBps.

If this was the case, then they would be charging users for guaranteed available speeds. But as we know, we are not billed according to speed – we are billed according to our volume of data used. We don’t pay for a minimum guaranteed speed; we pay for a bucket of data.

It’s a strange way to look at it, in our view, given that speed is so prominent in marketing materials. Staying with Vodafone, the company advertises a UK data-only SIM on a 12-month contract, priced at £15 per month for 5GB of monthly data usage. A 15GB version is £20 per month, and a 50GB package is £30 per month.

Now, a user achieving Open Signal’s average LTE download speed of 20.07Mbps would use about 120MB of data in a minute, meaning they would burn through the monthly 5GB bucket in about 41 minutes of saturated use. If you were to try and ration that 5GB through a month by setting a hard-limit on the throughput speed, then you would suddenly reach a speed that is unacceptable for the user.

Thankfully, people aren’t pulling full capacity transfers continuously, but the illustration does show that there’s a tension in the way that customers pay for data services. In the IoT model, the bucket options are much smaller than the consumer smartphone packages, and so the concern is more about network availability than throughput – as they want to ensure their tiny message is picked up, as they don’t have the battery power to be concerned with maximum speeds.

There’s an additional tension here, which is that a lot of the data sent by the IoT devices is going to be mundane – boring status updates or meter/usage readings. As such, in a theft prevention system, the data usage is very similar to insurance – it is effectively wasted if it is not being used. You are paying for a service you aren’t directly getting value from.

As such, the outcome-based approach, if adopted, could alleviate some of that resentment. However, using insurance isn’t a great example, as there’s not an equivalent service that would replace a burnt-down home or crashed car for a one-off fee – that’s why we pay insurance in installments, after all.

However, we’ve been using as an example of ‘waste’ until this point, paying for a service you aren’t using, without really discussing the times where it does become valuable. When flipped, or initially considered this way (depending on your outlook), the outcome-based approach might get even muddier. If, for instance, the value of recovering an asset it huge, then you’re in the position of having to pay Vodafone for that service, which you might want to break into smaller monthly payments and then we’re essentially back to the current paradigm. It’s all going to hinge on the worth of the value, and how much an MNO can charge for that service.