Why consumers will lose Vodafone's pricing war

Vodafone may have caved to consumers with its latest data charging plans, but the telco is set to have the last laugh with its long-term pricing ambitions.

Sunday’s backdown by Vodafone Australia on its mobile data charges is a small win for consumers, but it’s a war customers will almost certainly lose as telcos rebuild their margins to reflect how mobile data now dominates their businesses.

Vodafone’s struggle with introducing plan changes is one small part of the challenges the world's telcos have in funding the huge investments required to meet our voracious appetite for data.

Speaking at the launch of their annual Technology, Media andTelecommunications industry survey last week, Deloitte’s telecommunications partner Stuart Johnston described how this means the days of falling data rates are over.

“I don’t expect it to go down” said Johnston, “I think as consumers we should be expecting to be paying more rather than less over time.”

While Stuart sees large price rises being kept in check as providers try to entice consumers onto 4G services, telcos are quietly shaving away existing data allowances for mobile and fixed line internet plans as they struggle to keep up with demand from smartphones and tablet computers.

The iPhone’s introduction in 2007 caught telcos around the world by surprise, in Australia it was Vodafone whose network crumbled first under the surge of smartphone traffic. The widespread service problems gave birth to the Vodafail campaign and the desertion of over half a million customers.

Given the company’s fragile market position, Vodafone is the least capable of the three providers to dictate terms to its users and so it proved when it tried to increase the size of individual billing units which would see some prepaid mobile users going over the monthly plan limits. 

When prepaid subscribers learned of the changes the reaction was swift and promised to send even more customers into the arms of competitors.

The beneficiary of Vodafone’s woes was Telstra which has used its increased market power to lead the way in ratcheting up customer bills. Plan changes last June saw handset rebates reduced, data allowances shaved and various charges increased.

In October Optus followed Telstra’s lead, with various changes seeing mobile and fixed line subscribers hit with changed download quotas and increased fees on services like 1300 numbers. 

The changes to Vodafone’s plans were following Optus’ and Telstra, unfortunately for the number three network their position in the marketplace means they aren’t in the position to dictate prices to the customers they have left.

While Vodafone’s remaining customers can celebrate this win, the party won’t last long as the rapid growth of smartphone data traffic – nearly 80 per cent last year according to the Australian Communication Media Authority – is running ahead of the telcos’ ability to meet the demand.

In 2011, mobile equipment vendor Nokia-Siemens projected that by the end of the decade there will be a thousand fold increase in mobile data demand. To meet that challenge is requires major investments for telecommunications companies.

With demand overwhelming supply, telcos are taking the opportunity to improve their margins, which has the added advantage of increasing executive bonuses along with fattening their war chests for the necessary network upgrades.

The telcos’ rebuilding may also have consequences for the Federal government’s spectrum auction currently being held, Optus’ consumer CEO Kevin Russell yesterday flagged that his company might concentrate investment on more base stations rather than spending on new licenses. 

“We’re not going to see the same transition we saw from 2G to 3G” said Deloitte’s Johnston on Friday, “it’s an incremental step rather than a revolutionary step.”

A repeat the frenzy of ten years ago when hungry bidders pushed up the value of 3G licenses would be a relief for the Federal government, though it won’t be good news for customers as this time they will be paying, rather than the hapless shareholders who paid for the last decade’s excesses.

While customers might celebrate their win over Vodafone, it might be worth locking in mobile phone and data contracts while the prices are good.