Questions by Fred Taylor, Research Director, Mind Commerce on 3rd March, 2010:
I just saw this news item:
“AT&T CEO Randall Stephenson said he thinks the wireless industry is going to adopt usage-based pricing models for mobile data. While he did not provide specific plans for how AT&T Mobility might implement such pricing structures, he said there is a steady move toward those models.”
My questions is, are they out of their minds? This does not make sense at all to me. It seems that people will resist this in a big way. They need to make money off the add-on’s to data in terms of content and value-added service applications – not try to charge incrementally for data usage. They are adding 4G to increase capacity so that usage should (theoretically) become a non-issue.
Please help me. What am I missing here??
Mark Csernica’s response
Based on ATT data traffic growth and ATT’s congestion issues over the last year, Mr Stephenson is not out of his mind. I believe this is a coordinated effort to “lay the ground work” for usage based pricing and to set customer expectations.
This is not the first time an ATT executive talked about this issue. The San Jose Mercury News reported In January, 2010 that ATT (NYSE:T)’s Ralph de la Vega, head of Consumer Services, told investors that ATT is working to improve its network (bandwidth – in terms of addressing their capacity issues). But will also offer incentives to “reduce or modify customer’s usage”. (!?!?! 0
Isn’t this a very odd statement for an executive of a wireless company to make?
Let’s look into this further:
Two years ago, ATT was very excited about their exclusivity agreement with Apple (NASDAQ:AAPL) for the iPhone. They had a product to help grow revenue and data usage. Apple has fostered a mobile applications development environment for the iPhone that has developed over 120,000 applications (up from 35,000 in April of 2009).
Starting in the summer of 2009, there have been regular reports of capacity issues on ATT’s network. These capacity problems were traced to small (5-10 range) groups of iPhone users that were in close proximity to each other. These users were heavy data users and that usage was fully utilizing the existing radio channel capacity, causing congestion and impacting service.
ATT has to fix the problem, but solutions require either adding more radio channels or to upgrade network technology to improve bandwidths. These solutions will cost ATT in capital expenditures. An issue if this was an unplanned expenditure. This is very likely what is happening. ATT’s announced 4G upgrades were planned to occur over the next few years.
While upgrading the network might be the right solution for this situation, network upgrades might provide only temporary relief and not totally fix the problem. (Remember only a small number of iPhone users in close proximity can cause the problem. If you are gaining more and more iPhone users, there is a strong possibility that a larger percentage of them will be heavy data users and the problem will not go away.)
What other solution does ATT have? Mr de la Vega’s comment above gives the clue. The key part of the solution is to start offering usage base pricing for wireless data services. Up to this point, the flat rate pricing was used to encourage users to send more data and spend more sending data. Now that wireless data communications is commonplace as wireless voice communications and there are bandwidth problems, pricing is the logical choice to help control usage.
ATT has only one problem with implementing usage based data pricing now. None of their competitors need to do it now. So there is a strong risk, ATT could drive high usage customers away to their customers. Therefore, ATT starts talking about the need for usage pricing.
With ATT’s iPhone exclusivity agreement ending with Apple later this year, expect the iPhone to be released on ATT’s competitor’s networks later this year. With the emergence of Android phones and the iPhone on other networks, all of the network operators could eventually be in the same situation as ATT is now. The question is when will it happen? That is when usage base pricing will be accepted because it is the only pricing option network operators will make available to their customers.
I see Mr Stephenson’s and Mr de la Vega’s comments as a “ground work”. ATT is setting expectations with their customer base. Getting their customers use to the idea of usage pricing. But this bears watching. If ATT continues to experience serious capacity bottlenecks due to data usage, they may have no choice but to go to usage pricing before their competitors do. They could lose a lot more customers with service degradations than with usage pricing.
Mark Csernica is a wireless data expert with over fifteen years of wireless data experience. Mark has authored a number of papers on wireless communications for Mind Commerce, including one that delves more into the issues raised above. For more details refer to “Mobile Applications: Impacts on Network Operations and Wireless Business Opportunities”.