The Limits of Acceptable Use

This week we're looking at some of the reasons why Acceptable Use Policies exist, and why they can be so draconian.

If you’ve ever browsed around the budget end of the mobile market, you might have noticed that there are some quite amazing deals, especially when it comes to mobile data. How does an MVNO (mobile virtual network operator) such as Vaya sell 10Gb of 4G mobile data for $33? How does Kogan sell 6Gb of 3G mobile data for $29 on an 'unlimited' voice and SMS plan? The truth is they can’t without suffering an enormous loss. Let’s look at the numbers.

Of course, I am not privy to how much, say, Kogan or Aldi pay for their data from ISPOne (who in turn buy it from Telstra), but industry estimates put the cost of wholesale data between 5c and 13.5c per megabyte (Mb). (I strongly suspect that Optus and Vodafone resellers pay a cheaper rate than Telstra resellers, although again I have no way of knowing this without seeing the agreement.) In any case, we can work with this number range (5-13.5c) and make some educated guesses.

The MVNO operators invariably calculate one gigabyte (Gb) at 1024Mb, which is standard. Thus we can say that 1Gb of wholesale data costs reseller between $51.20 (1024 x $0.05) and$138.24 (1024 x $0.135) to purchase10Gb of mobile data therefore costs Vaya between $512.00 and $1,382.40 to buy. They then sell this to the customer for $33. I’m sure you can see the problem here. How can such a model hope to turn a profit, when they are potentially losing $1,350 per customer per month?

The answer is that they rely on average usage. The average customer doesn’t use anywhere near their full data allotment. Indeed, Dog and Bone’s own Audit and Review figures show that the vast majority of mobile data services use less than 10% of their monthly allotment. We deal primarily with larger fleets of devices, and the usual pattern is for the vast majority of users to use little to no data, and for a few to generate huge blowouts. It is for this reason that aggregated data plans provide enormous value. (For more on aggregation, see here. The basic message, however, is that it is almost always beneficial.)

The MVNO’s know this, and they are banking on the average customer using less data than will generate a loss. They calculate their prices accordingly. It’s a tricky balancing act, and there are serious consequences if the carrier gets it wrong. If the average data usage exceeds a certain breakpoint, then the carrier makes a net loss. The Acceptable Use Policy (AUP) is there to prevent this from happening.

For example, let’s say Vaya is paying 6c per Mb. In order for their $33 10Gb plan to make any money, the average monthly data use cannot exceed 660Mb ($33 / $0.05). If the data costs them 13.5c, then this data limit drops to about 244Mb per month. And this merely looks at the basic cost of the plans, and ignores any operating costs. In reality, Vaya will have set the breakpoint lower than that in order to make a profit. The margins in this sector remain extremely tight, and many MVNOs post losses until they've built a substantial customer base.

But what happens when some heavy users notice those great prices – 10Gb of 4G data at $33! – and decide to hop on board? These people are usually savvy, and use most of their data allowance without going over (excess usage at astronomical PAYG rates is a real windfall for carriers). Sudden those hair-fracture margins have disappeared entirely.

This is why Acceptable Use Policies exist for these carriers, and why they are enforced more stringently than they are by Layer One providers. Dog and Bone has dealt extensively with both Telstra and Optus on this matter, and they rarely ever enforce the AUP on business clients. We’ve had clients running multiple Unlimited SIMs through a GSM dialler – effectively slashing their fixed line spend to almost nothing – and the telco has told us they’re fine with it. But MVNO’s are operating at different economies of scale.

This explains why Kogan’s new, more explicit, AUP has such strict measures around data usage. The $29 plan might include 6Gb, but you’re certainly not allowed to use it however you want to. Indeed, the policy states that a customer will violate the policy either by using more than 1Gb in a single day, or by using more than 400Mb for three consecutive days. That’s pretty strict, and mostly explains the recent troubles that have been reported extensively. About 200 Kogan customers were unable to renew their service as a result (although Kogan insists the decision was made by ISPOne). Many users are also claiming that the speed on the service has now been throttled (to about 1.8Mbps).

Here are Dog and Bone we are broadly sympathetic to the view that anyone advertising 6Gb of data should provide 6Gb of data, and not stipulate how you’re allowed to use it. Nonetheless, these very cheap plans would not be possible if everyone used their full allowance. They are possible only because the average usage remains below the point at which it is no longer cost effective for the MVNO to provide it. If pricing was based on the idea that everyone uses all of their data allowance each month, then a $33 plan would provide 660Mb of data at best. I don’t think anyone wants to see that. Indeed, it is the power users that would be most affected by such a change.

It is the power users that have the biggest impact. According to ISPOne's own AUP (see section 8. Traffic Management Policy), 5% of users tend to use about 70% of the data. Removing the heavy users, or limiting their usage, frees up an enormous amount of resources. Those 5% of users are well within their rights to complain, since they are justified in feeling they’ve been misled.

Of course it is necessary for any business to assume that not every customer will do a certain thing. ISPs can only offer 200Gb download limits so cheaply on ADSL plans based on the knowledge that not every will use that much each month. An all-you-can-eat buffet assumes that not every customer will be a Sumo wrestler. Of course, this analogy is not perfect – I understand that, and as I say, I agree that imposing small print conditions in the Acceptable Use Policy is a bad way to go about things. But it’s also worth bearing in mind that the 200 customers that Kogan lost – although they’ve since been gifted a $50 voucher each – represented only a tiny proportion of their entire customer base, and most users will never come up against the AUP at all.

In summary: MVNOs certainly indulge in misleading advertising, and offer a service whose limits aren’t properly made clear, and in many cases aren’t provided at all. Some users come up against these limits while acting well within their rights, and are summarily penalised. The limits should be made much clearer (and terms like 'Unlimited' certainly don't help). Nevertheless, these limits – hopefully defined in the AUP – are necessary for the cheap plans to be available at all, for anyone.