John Paczkowski

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Usage-Based Data Pricing: The Solution to AT&T’s iPhone Problems?

December 2, 2009 at 5:15 am PT

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attAccording to Bernstein Research analyst Toni Sacconaghi, the average Apple iPhone user consumes five to seven times the monthly bandwidth of the average wireless voice subscriber and at least twice the amount of the typical smartphone phone user (see adjacent summary; click to enlarge).

With usage levels like these and the network degradation and customer satisfaction issues that go along with them, is it reasonable to think that iPhone carriers like AT&T (T) will swap their all-you-can-eat data plans for usage-based pricing? Sacconaghi thinks so.

“iPhone users consume web, email and video data on the mobile network at levels that many believe are adversely affecting other subscribers on those mobile networks. Network congestion in turn is triggering higher capital spending requirements for carriers. Unchecked, the iPhone’s very high usage levels could severely undermine the economic returns of offering the iPhone,” Sacconaghi explains.

“We believe carriers will increasingly have to manage the usage side of the equation as well,” the Bernstein analyst asserts. “Carriers that have not already done so are increasingly likely to adopt usage-based pricing schemes that more fairly match price to usage but which will also inevitably discourage the most profligate kinds of applications.”

Sacconaghi adds: “Today’s combination of a subsidized iPhone with an all-you-can eat data plan can be likened to a carnival where there is a relatively high price of entry, but where all the rides are free. The adoption of usage-based pricing plans is akin to also charging for the Ferris wheel. When the rides are no longer ‘free,’ the value of the entry ticket could decline.”

That’s unfortunate. But in this case, the carnival’s wireless data traffic has increased 50-fold since the introduction of the Ferris wheel and there has not been a commensurate increase in revenue. In other words, AT&T is not getting paid for the level of data traffic it supports. Says Sacconaghi: “Over the…3-year period over which AT&T’s data bandwidth consumption has grown by 50-fold, its data revenues have grown by only 250 percent, resulting in a severe drop in revenue generation per megabyte of data.”

As more adopt unlimited data plans, they become unsustainable from a carrier profitability perspective. So what’s to be done?

Spend even more capital improving your network.

And raise the price of data by adopting usage-based pricing.

That might seem disadvantageous to Apple (AAPL), but as Sacconaghi notes, Apple could use the switch to usage-based pricing to its advantage. It could, for example, introduce a “non-data plan” iPhone that expands the device’s addressable market.

“A non-data plan iPhone might be something like an ‘iPhone Touch,’ a lower cost-of-ownership device (requires voice plan only; utilizes wifi for Internet connectivity) with which to attack the more traditional handset market…while exploiting Apple’s twin unique competitive differentiators: (1) A vibrant App Store with 100,000+ Apps and (2) a large and global iPod community that remains fiercely loyal to the iPod,” the analyst writes. “Such a product would have a price (to customers) that would be similar to a stand-alone iPod Touch today, and have a cost of ownership equal to standard voice-only phones.”

Tagged with: all you can eat, App Store, Apple, applications, apps, AT&T, bandwidth, Bernstein Research, capital spending, carrier, congestion, customer satisfaction, data, data plan, data traffic, digital, email, Ferris Wheel, hardware, Internet, iPhone, iPhone Touch, iPod, John Paczkowski, megabyte, network degradation, non data plan, pricing, profitability, revenue, smartphone, subscriber, subscribers, telecom, Toni Sacconaghi, unlimited, usage-based, video, voice, voice only, Web, wireless

comments so far. Add yours.

  • Anonymous

    When the cost per megabyte for ATT was and will remain unknown, this sounds to me like a good old case of capitalist greed. I mean, 250% increase in revenue? And they’re crying?!

    Think they might want to fulfill some of their advertised promises first. Otherwise, when a second iPhone carrier finally emerges in US markets, all ATT may hear is a giant sucking sound.

  • jeffreyhaviland

    Well I guess there are times that the level of greed cant keep up either. Services need to improve for the same costs. Data profit?? Servers and other hardware has plummeted in cost. They have to improve the infrastructure and have already made billions. Don't try and burden the users and not take a reduction in profits while you invest in back into your business.

  • chinnabbai

    Why do technology writers in USA come up with these kind of back ass suggestions? It like a Neanderthal mentality. When every country in the world is striving to improve the network speeds, I have seen the same general basic speeds for the past 5-6 years here in USA. What has become to US in technology leadership?

    Instead of trying to come up with excuses (data cap, etc) for not doing things properly, I believe there will be growth for both companies and customers if companies strive towards improving the infrastructure. The press in this country also should stop patronizing companies and put their feet to fire for not innovating.

  • jshuler

    This is just like the Cable network, which came out with a promise of commercial-free viewing in exchange for monthly subscriber fees, but then doubled up on the revenue side by breaking that promise and adding commercials once people got hooked on the service and tossed their antennas. Same with unlimited Internet data plans, which they are now fighting to take from us by charging both users and service providers for the privilege of transport. Now that people have been hooked by a flat-rate mobile data network, they are going to double-up on revenue again. I'll bet that (1) the phones do NOT get cheaper, AND (2) the penalties for switching carriers do not go away. Data networking is cheap and getting cheaper, and congestion is self-regulating. The carriers just need to keep investing their 10% per year in infrastructure, and things will keep getting better.

  • macaddicted

    I realize that they are different industries, but to extend the metaphor, why would the wireless “carnival” industry take up what Disneyland dropped decades ago? Sure it's more expensive to get into Disneyland now but I don't need to ration my E-tickets.