Posts Tagged Mobile

Unit Trains and Railroad Pricing Versus Mobile Operators

In my background, I used to manage the product marketing for chemicals shipped on the Southern Pacific railroad (now the Union Pacific).  While railroads are not known for their cutting edge business skills, it is instructive to see how another capital-intensive, network business dealt with pricing.

So how might you think railroad price their services?  By the carload?  In some cases, yes.  But not all cars are the same size.  Frequently, they priced freight by weight.  And they would give shippers incentives for loading as much in a car as possible. For example, $30 per Net Ton (this excludes the weight of the car) with a 70 ton minimum, and $28 per Net Ton with a 80 ton minimum. Three scenarios:

Weight

Price

Total Charge

Under 70 tons

$30/Net Ton, 70 ton min

$2,100

72 tons

$30/Net Ton, 70 ton min

$2,160

82 tons

$28/Net Ton, 80 ton min

$2,296

At some point, it makes sense for the shipper to pay the “next minimum” – between 74.6 and 80 tons.

In some ways, this rail model is similar to the “buckets” (e.g. $60 for 1000 minutes) offered by mobile operators, but with some differences.  Both collect a minimum revenue.  However, in the rail pricing, there are incentives to load more and generate even more revenue.  In contrast, most mobile carriers penalize a user for going beyond his “bucket” size by charging an overage charge. 

The rail pricing model and incentives make sense relative to the capital investments. For a rail carrier, the capital investment is two assets. First the fixed rail network itself.  Second is the locomotive(s) required to pull the train. 

The rail network is a fixed item that has a capacity that is rarely maxed out (requiring double-tracking to expand). The more likely capacity constraint is in the switchyards.  Switching locomotives in a “hump” yard is a time-consuming and serial process.  The “minimum” of pricing model serves to cover the cost of the rail network.

Locomotives are an asset that is modular and mobile enough that additional locomotives can be added if the cars need it.  Plus, there are economies of scale for longer trains – most of the power is to get going and braking.  So it makes sense to price to attract incremental weight and revenue.  Every additional car on the train has a lower marginal cost.

A different rail scenario to consider is the “unit” train.  Unit trains typically involve high volume commodities like coal.  The entire train is made of ~100 coal cars plus a locomotive set that is efficiently matched to the weight of the entire train.  For rail carriers, unit trains are a beautiful use of capital.  They generate a lot of revenue via their volume.  They are constantly moving, meaning the investment is constantly producing a return.  They are efficient, not wasting locomotive power. And, perhaps most importantly, they do not require any switchyard time.  They can go from point A to B, bypassing the costs and time of switchyards which represent the “nodes” of the network.  Because of these efficiencies, unit trains receive very low prices.   Why?  Because of lack of variability in unit train movement and their low impact on the overall sizing of the network.  Unit trains represent a “baseload” of traffic that rail carriers need to survive.

In next post, I will talk a little more about how this relates to telecom, mobile networks.  Then we will look at the electric power industry.

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New Mobile Services = Network Usage = Pricing Problems

The Wall St Journal had an interesting article about the downside of AT&T’s iPhone’s success: increased network usage.  http://online.wsj.com/article/SB124200303430005275.html

While I won’t go into depth about  AT&T per se, this echoes comment from clients examining many bandwidth-intensive, new services.   Carriers are struggling to balance three imperatives of service

1)      Marketing imperatives: the service must be cool enough to attract and hold customers

2)      Network Engineering:  the network must be capable of delivering the service reliably

3)      Finance: the service must generate sufficient money to pay for the network

Looking from the sidelines, the network engineers remind me of the guy who buys a shiny new car, parks it in the garage, and washes it every day.  One day, his wife asks him if she can drive it to the store.  The guy looks at her incredulously, “Drive? This car is not for driving.  You might break it.”

What did network engineers think would happen when they build a fast network.  Marketing will find exciting ways to fill it up.  But this is unfair.  The flip side of this view is that Finance and Marketing have not worked effectively to put together a business model that pays for the use of the network.

alcatel-bandwidth-usage2As the article points out, if you look at the data intensity of various services, some of the newer services – e.g. web browsing, take much greater bandwidth.  One way to look at this is on a $/bandwidth basis (which is probably not the right way).  Email  service is pretty darn profitable as far as bandwidth is concerned.  It generates ~$10/month, but absorbs only 4% of total bandwidth.   And it is typically offered with an unlimited data plan.  For example, AT&T offers  Blackberry personal plan with unlimited data for $35/month. 

Wait.  Did someone say unlimited data?  Email was bundled with it back when folks were not using the network for much beyond email/SMS.    So they let the cat out of the bag.  Now they have to get the cat back in the bag before streaming video starts sucking up the network bandwidth, but generating limited incremental revenue.

However, there are many different ways carrier can and should be looking at charging.  In future posts, we will at ways different industries deal with the pricing and capacity.

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