Dr. Martin Fabel, Partner and Senior Media Expert at A.T. Kearney Middle East
Recent traffic growth figures and forecasts for Internet are impressive but raise serious challenges regarding the viability of the current Internet model for regional network operators. A study by A.T. Kearney, a global management consulting firm, shows that European network operators will need to budget an additional 8 billion Euros annually to manage the data explosion to maintain current service levels, a scenario that could confront Middle Eastern operators as well.
Internet traffic delivered via fixed networks is currently growing at 35 percent per annum and more than 100 percent via mobile networks. In this scenario video content is having a dramatic effect on Internet usage, as more capable devices and high-bandwidth services are unleashed every day. The Internet risks becoming a victim of its own success as this video traffic, much of it free to the end user, threatens to swamp network capacity, causing unacceptable levels of congestion for users and little revenue for operators.
If networks were upgraded to address the forecast capacity needs for 2014, with no new price structures or increase in revenues, A.T. Kearney forecasts that network operators would see their returns on capital decline by 3 percentage points to around 9 percent and potentially as low as 7 percent.
“The technical robustness of the Internet is closely tied to the sustainability of the underlying commercial model and therefore both are vital to support the growth of current and future economic activity. Operators and regulators in the region need to think now how to tackle the problem of ever increasing dataflow via the Internet,” said Dr. Martin Fabel, partner and senior media expert at A.T. Kearney Middle East.
Based on the learnings from Europe and the almost exponential growth in online video usage, A.T. Kearney is convinced that a major structural problem demands attention from regional industry stakeholders to maintain the success of the Internet and its services in the Middle East. The increased costs of handling rapidly growing traffic will not be matched by additional revenues for those who operate the networks. Moreover, current pricing models of the services do not promote efficient use of existing capacity in bandwidth availability.
Telecom providers need to overcome homogenous “bandwidth for everyone” and introduce a more differentiated approach to bandwidth, service and pricing that addresses the current and future needs for business, entertainment, communication, and for some mission-critical applications, such as online banking. Alternative service models will be key to long-term success and profitability and benefit all stakeholders according to A.T. Kearney.
“Without significant improvements in pricing and investment incentives, Internet services could be seriously jeopardized. This will have an immense impact on sectors that want to offer new services but are reliant on efficient networks,” added Fabel.
In the study four different approaches are examined and quantified:
- A modification of retail pricing schemes
- Traffic dependent wholesale charges
- Enhanced quality services over the public internet
- Enhanced quality services based on bilateral agreements
However, the report also demonstrates that no single solution can solve all the structural issues. Instead A.T. Kearney expects the right answer for the industry to be a hybrid of these different options. It is therefore crucial that policy makers and regulators do not restrict the process of innovation and competition, but start thinking now how to move forward in the region.