Iliad, the French firm that launched a disruptive attack on pricing of communications services, now has launched a similar attack in Italy. Iliad is offering a “price for life” of about six euros a month (about US$7) for use of 30 gigabytes of internet data; unlimited domestic calling, unlimited domestic texting, unlimited calling to 60 countries and voice and text roaming allotments that are unlimited within Europe and include 2 GB of mobile data while roaming.
Competition, the internet, Moore’s Law, changes in consumer demand and above all the shift of value from access/transport to applications, platforms and devices is pushing access provider retail pricing towards “zero.” Some might call that an illustration of marginal cost pricing.
Many would rightly argue that mobile operator marginal cost to provide the unit of supply on a network that already is built is close to zero. But there is a problem with the sustainability of such a model. Pricing at marginal cost does not recover the full cost of the upfront and sunk investment required to build the full network.
Some critics like to argue that unlimited access to such networks is justified because the marginal cost of supplying the next unit of consumption is so close to zero. But that ignores the need to recover the capital it took to build the full network in the first place, and secure capital to rebuild the whole network in about another decade.
For example, mobile data traffic on Elisa's Finnish network has grown by more than 20 times over the last six years, while capital investment and operating expense was flat.
That, some suggest, does mean that--once built--the marginal cost of supplying the incremental demand is close to zero.
But that is precisely the problem: marginal cost pricing never recovers the cost of the network; only the cost of supplying the incremental demand. Near-zero pricing is not sustainable.
The big unsettled question now is whether marginal cost now represents capital recovery cost. That would be possible if the actual sunk costs of networks are dropping fast, pushing to levels where marginal cost is roughly equivalent to replacement cost pricing.
That is a huge and vital question. If, in fact, the cost of mobile networks can be driven down enough that marginal cost is somewhat close to recovery cost levels, then the mobile business model is made more sustainable, without reliance on major new revenue sources, and if the underlying business model remains stable.
That means subscriber counts remain high, average revenue per user does not drop too fast, new competitors do not enter the market and take significant share, capex ratios continue to fall and opex costs likewise continue to drop.
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