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Misinterpreting the Economics of Billing

  •  I have just spent a week of seemingly relentless insomnia in Singapore. I am looking forward to passing out in BA Economy class – I mean World Traveler. So as I wait at the gate…. Some thoughts on economics. The economics of BA World Traveler is simple though disagreeable - pillage “consumer surplus” regardless of class. Make sure tourists suffer abysmal seats and surly attendants at acceptable prices (just) - make sure business class pay exorbitant prices for just marginal luxury.

    Their analysts and their precious econometric models’ estimates of price elasticity have got it right –and therein lies the problem. Passengers definitely feel they are not getting a deal. BA is living on the edge – eating up all their customer’s consumer surplus leaves BA open to a mass exodus. They have made a fundamental mistake – the amount of utility per pound between economy and business class is the same – the two classes are almost exact substitutes. There is no incentive to prefer business – and BA’s policy of making economy class a mild version of hell does not make paying through the nose for the business classes an option in an economy where a CFO watches every cent. It is a vicious circle and it has trapped BA. Other European airlines have escaped by limiting prices in upper classes and making the peons just a little bit more comfortable.
    Now, back to the topic at hand: Billing. The theory of billing has evolved over the years. It started as a purely accounts receivable process – get the money for services delivered, to being a primary customer communication tool, to increasing consumption through innovative promotions, to helping customer manage spend and now to “Revenue management” (a term that encompasses AR, spend management and revenue promotion).  I think it misses two key areas:
    ·         Application of negotiated terms in B2B (enterprise) billing – which I will leave to another day
    ·         Cost management
    Cost management… the other term in the equation Profits = Revenue – Cost. And business is about profits not revenue. Now this equation is readily understood in the case where operators resell services (i.e. content) – it is difference in the sales price over the purchase price. But – for core services (the bit pipe for instance) it is generally thought that marginal costs are zero and therefore maximizing revenues is a good proxy for maximizing profits.
    I think an example will show how wrong this can be. When users use 3G services they use network capacity. Investment in the network must be sufficient to support peak loads – not average. When users push up peak usage (i.e. with their new iPhones applications) beyond the local capacity – it forces the operator to make new investments in capacity. So the marginal (incremental strictly speaking) cost of increased consumption is not zero. Ask “att” – it is substantial.
    An economically rational business would seek to limit these costs by driving consumers to moderate their usage at peak times. This is pretty obvious stuff in the energy markets where capital investment equals new power plants. And billing in the energy market with smart meters is very much about getting the most revenue while minimizing capital investment. And of course – saving the Earth by having people use energy wisely is no bad thing.
    Now in the world of 3G – the all you can eat plans (even with fair usage policies) are pure revenue exercises. Peak usage is not being controlled – network investment is reactive and profits will suffer. And it is all the fault of a misunderstanding of the role or billing as a pure revenue tool. We here – consumers won’t like it – they are used to all you can eat plans. Maybe – but I can tell you that not being able to get decent VoIP quality at 7pm as my whole neighborhood downloads videos is something I will never get used to. 
    Cloud computing is already reconciled to the need to have users pay for what they consume, how they consume and when they consume. Whenever consumers of services force up peak capacity (new servers, new routers, new disk) a billing policy measures and charges 24x7 (like Energy) will be needed. SaaS vendors be aware! Though you are not selling disk, CPU and hardware directly – you are definitely doing so indirectly. An all you can eat policy will drive your capital costs through the roof. More difficult to bill like an energy company as opposed to simple monthly fees… perhaps. Economically viable… depends.
    So a final thought. Billing network usage like energy makes sense. But be aware that volumes of data that must be measured is an order of magnitude greater than voice CDR…. Just add up measurements every 15 minutes 24 hours a day for 30 days. Old style CDR billing is a dubious approach.
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