AT&T is taking a major PR hit for terminating its all-you-can-eat data plan for smartphone users. Customers are angry. The media has been negative. Blogs have been nasty.
AT&T is making the right decision, but the company could have handled it better. This is the sort of situation that demands transparency. AT&T needs to have an honest dialog with its customers, to help them understand why maintaining an all-you-can-eat pricing plan for data is unsustainable.
The World Has Changed
When the iPhone was introduced in 2007, fewer than 5% of Americans had smartphones. Average data usage on a Blackberry, the market-leading smartphone at the time, was about 50 MB per month. Five years later, nearly 50% of Americans have smartphones. Average usage on iPhone and Android devices is about 750 MB per month. That's 10x the number of people using more than 10x the amount of data per average smartphone. In ballpark terms, that's a 10,000% increase in data demand.
Additionally, when AT&T introduced the iPhone (and the all-you-can-eat plan) five years ago, EDGE was the prevailing wireless data network, capable of delivering about 100 kbps download speeds. This naturally limited what customers could do from the standpoint of video and rich media. Today's enhanced 3G and 4G networks deliver consistent download speeds of 5-10 Mbps and upload speeds of 1-5 Mbps - not quite what the typical broadband customer gets at home but enough to deliver a reasonable video experience when in good coverage.
Put simply, all-you-can-eat was not designed for a scenario where half the U.S. population is approaching some 1 GB of monthly cellular data use.
This is About Economics
This is also about economics. Wireless operators have had to accommodate the explosion in data demand without a significant increase in spectrum - the radio "real estate" of wireless networks. It's like a trying to accommodate a housing boom without more developable land. AT&T and Verizon, the two leading operators, hold approximately twice the amount of usable spectrum in a typical city than they did ten years ago. That's only 2x the "supply" to accommodate an exponential increase in demand. Operators have asked, loudly and persistently, for more radio frequencies. The FCC has acknowledged the need, but has not exactly acted with a sense of urgency. Additionally, the Commission blocked AT&T's effort to acquire T-Mobile, which was, essentially, a private solution to the spectrum crunch. The recently signed bill allowing for additional spectrum auctions will provide relief - but it will be late 2015 at the earliest before that spectrum is ready for commercial use. That makes it seven years since the last swath of spectrum was allocated - an eternity in today's hyper-connected, video-on-demand era.
In the meantime, AT&T has invested more than $50 billion in its network since 2007 - a combination of 3G and 4G network upgrades, coverage expansion, and myriad measures to increase capacity such as providing fiber backhaul to cell sites.
For those customers who think the end of all-you-can-eat is just a license for AT&T to print more money, let's take a quick look at the carrier's financial picture. Even though 40% of AT&T's wireless revenue now comes from data, its average revenue per subscriber is essentially flat compared to five years ago. AT&T's stock price has been anemic. Smartphones, with their $400-500 average subsidy, have hammered operator margins.
Those who are critical of AT&T's ending unlimited data believe this is a thinly veiled price increase. But the world was different when AT&T launched iPhone with this plan. Its EDGE network wasn't capable of delivering the rich media that is driving up usage. Phones weren't shooting and uploading HD video. The Netflixes and Hulus of the world weren't offering video streaming to every connected device. I don't think the operators are trying to get users to pay more for data plans. After all, the $10 per GB overage charges discourages usage in the same way that $0.45 per minute overage does for voice. And in a further example that this is about economics, AT&T is allowing 5 GB of usage on LTE compared to 3 GB on HSPA -- because LTE is markedly more spectrally efficient. Even so, despite LTE's "broadband" capabilities, Verizon and AT&T have not priced LTE to encourage heavy rich media usage.
Why should unlimited data have to last forever, or why do wireless operators get such flak for increasing prices, when their fundamental economics and the industry's balance of power have changed so markedly? I might get slammed for using this analogy, but cable companies pass on price increases to consumers when networks such as ESPN raise their per-subscriber rates or when content providers such as the NFL garner higher rights fees. Starbucks increases the price of coffee when its costs go up and doesn't get sued by its customers. Apple doesn't come under fire for charging up to a 50% premium for the HD version of TV shows and movies on iTunes.
How Can Sprint Do It?
Now, the logical question is, how can Sprint offer an all-you-can-eat data plan for smartphones? Well, at this moment in time, Sprint is in the fortunate position of being able to afford to do it. The company has about half the number of smartphone users as AT&T, but nearly the equivalent amount of spectrum in most markets (if the Clearwire 2.5G spectrum is included). Sprint simply has a more favorable capacity demand and supply situation compared to its major competitors.
Unlimited data has become a major element of Sprint's competitive differentiation. It is akin to Southwest Airlines marketing bags fly free", when all the other major airlines charge for baggage. If Sprint, which a year ago added a $10 surcharge to smartphone data plans, ends up facing the same capacity crunch as AT&T, or finds unlimited data an untenable economic proposition, it too will implement usage pricing, as the company has intimated publicly.
Usage Pricing Coming to Broadband
Regular Lens readers might have noticed that I have been writing extensively about data usage and pricing issues for several years. I'll reiterate that we are at the beginning of a new discussion about pricing for data and rich media services, across wireless and wired networks. Tiered or usage-based pricing is the first salvo. I've also predicted that there will be creative pricing models for video content. This was one of the key themes emerging from the recently completed Mobile World Congress in Barcelona. Expect content providers or advertisers to underwrite some portion of usage pricing, or to bundle the price in with the content, a la Amazon Kindle.
I also firmly believe that this discussion will broaden to include fixed broadband networks. Video, and the explosion of connected devices - from tablets to TVs - are driving an explosion of demand for network capacity. Comcast and the other broadband providers are going to start pushing back. They will either pressure content providers to absorb some of the cost or they'll take other measures, such as passing on the cost of highly consumptive content to consumers or implementing usage caps (Comcast does have a 250 GB per month cap in its fine print). Broadband pricing, which has remained relatively stable for the past number of years, will come under pressure sooner than many think.
AT&T should not be faulted for ending a practice that had become economically untenable. 3 to 5 GB per month is still a lot of data. If customers want to stream or download Law and Order over cellular networks, they should be prepared to pay a premium for it.
P.S. Incidentally, can we in the industry come up with a more marketing-friendly term than "throttling"?
Other Relevant Columns on This Issue:
What's Next in the Wake of the AT&T/T-Mobile Deal Collapse?
We Need More Data on Data
Toward a Dynamic Connectivity Model
Re-Thinking Data Pricing