between data traffic and revenue have carriers taking a
closer look at how they price services.
The iPhone is AT&T’s rock star handset. It is also a huge burden on AT&T’s network: Nielsen estimates that the typical iPhone customer consumes 400 MB of data a month. By comparison, the average smartphone subscriber consumes between 40 MB to 80 MB of data a month.
That’s all well and good, except for the fact that both AT&T’s iPhone users and other smartphone subscribers are on the same $30 per month, all-you-can-eat plan. The result: iPhone customers are undercharged for service while the rest of the carrier’s smartphone customers are overpaying for service.
By no means is this issue limited to AT&T’s network. Current consensus estimates by industry analysts indicate 5 percent of users generate about 90 percent of network traffic. Current pricing plans bear little relation to the actual amount of data consumed, say analysts, and the industry is about to implement some major changes to fix that.
“To make mobile data succeed, [changes to pricing plans are] going to have to happen,” says Frost & Sullivan Analyst James Brehm. “It’s happened in Europe already: not just tiered pricing based on speeds but on the type of application you’re running on it as well.”
Brehm says that tiered pricing models are on everybody’s radar: “Data caps won’t work and unlimited isn’t going to work, either. They’re going to have to go with a tiered model.”
Though AT&T, Verizon Wireless and Sprint declined to disclose their plans for future data rates, there have been some hints that carriers are planning some major changes to the way they charge for service.
In a third-quarter conference call with analysts, Ralph de la Vega, president and CEO of AT&T Mobility and Consumer Markets, said that the carrier would “continue to look at pricing options” to hold down data usage and was researching ways to “get a small percentage of the customers to carry their weight, if you will, without imposing on the majority of the customers something that perhaps is detrimental.” Although the carrier’s research is ongoing, de la Vega said the industry could expect AT&T to address the issue in the “near future.”
Verizon hasn’t let anything leak about tiered pricing, but recently launched prepaid wireless broadband. At $15 per day for 75MB, $30 per week for 250MB, or $50 per month for 500MB, the service isn’t cheap – Verizon’s postpaid mobile broadband plan is $30 per month for 5GB. Still, the new pricing plans mark a move toward flexible pricing based on data usage.
Like Verizon, Sprint Nextel has been cagey about its forward-looking business strategy around data pricing. However, at the Sprint Open Developers Conference in late October, the company spoke about tiered pricing for data. According to a blog post written by an attendee, Sprint argued that unlimited plans were intended to be an enticement, not a permanent pricing structure. Sprint was unable to confirm or deny statements made at the conference but said it had no formal plans to change its prices.
Billing providers Comverse and WiChorus say their carrier customers are increasingly interested in changing their pricing models, and for good reason: Right now, their pricing doesn’t really work.
Tal Dagan, who handles voice products at billing company Comverse, says the U.S. market is “way behind” the rest of the world when it comes to pricing data. “[Flat rates] were good for the initial uptake, but for mass market uptake, they’re not good enough,” he says. “It needs to be managed more smartly.”
Dagan argues that flat-rate plans are too expensive for some users and unfairly favor subscribers consuming more than their fair share of bandwidth. He also says that current pricing models are hindering adoption of data services. “Thirty percent of consumers say it’s too expensive, 30 percent don’t understand the pricing and 30 percent don’t get the service on their device,” he says.
Dagan says that the operators he is working with “want to be able to offer cheaper plans and to get higher penetration in order to give every segment exactly what they need and be able to charge for exactly what they’re getting.”
Eric Andrews, vice president of product management at WiChorus, says operators are working to address the increasingly urgent problem of the decoupling of data revenue and data traffic. WiChorus, like Comverse, specializes in billing systems. Andrews says subscribers who consume more than their fair share in data are “really not willing to pay as much proportionally in fees.”
Andrews says that he expects carriers to move beyond basic moves like tiered pricing. He predicts carriers will diversify their revenue stream with services like those provided to the Kindle. He also says mobile advertising, content-based billing and capacity limits may also be parts of future business models.
“The explosive amount of capacity demand has operators nervous. These spectral resources are scarce, high-value assets,” Andrews says. “There’s a need on their part to manage and control traffic going across that network, to manage the resources on their network.”
While most analysts expect to see some form of tiered pricing come down the pipe over the next year, some are not so sure that’s the method carriers will use to get people to pay for their fair share of data consumption. Telecommunications strategy firm inCode Telecom says changing pricing plans will be problematic because of the precedent set by unlimited plans.
“Having provided customers with unlimited usage plans, operators find it very difficult to increase pricing or start usage-based charging,” said inCode in its seventh annual Top 10 Telecom Predictions list.
“…wireless operators increasingly turn to charging for incremental features and capabilities beyond basic transport. This is most evident in wireless data services and leads to quality of service pricing,” the firm said. “Applications such as VoIP or video streaming that require more guaranteed service are priced higher than just best-effort connectivity. Total cost of service for customers increases, but in many cases not from basic transport fee hikes.”
CONNECTING NONTRADITIONAL DEVICES
Aside from likely changes to pricing for wireless data and mobile broadband, industry experts also expect to see major changes stemming from the rapid increase in nontraditional wirelessly connected devices.
Items ranging from the HP Dream Screen to the Kindle have been embedded with wireless connectivity that appears seamless from a user’s perspective. From a carrier’s perspective, it’s an opportunity to diversify their revenue stream.
However, it’s just not practical to send individual bills for connecting devices like cameras and heart monitors to the network. “All the research seems to indicate that we’re going to see monthly recurring charges below $20 for the connectivity in other categories of devices. For carriers this means they’re going to have to find new ways of servicing the customer for the connected data devices,” says Dan Hays, an analyst with consulting firm PRTM. “There’s no way a carrier can afford to send me a bill for a $20 per month charge.”
This conundrum leads some analysts to predict that carriers may begin charging by the household, instead of by the device, for connectivity. “Consumers will continue to pay for connectivity, but in a much different manner,” says Yankee Group analyst Chris Collins. “It will go from per-device subscription feeds to per-house subscription plans – the obvious analogy here is electricity.”
Collins says the main barrier to this approach is that the investor community has been conditioned to see success on a per-subscriber, ARPU basis. While a per-household measurement may become more relevant in the long term, Collins doesn’t expect carriers to change their financial metrics in the near term.
One business model that has already been put into place is the connectivity for e-readers. Amazon connects the Kindle via its Whispernet service, which allows Kindle users to access the internet and download content over a 3G wireless connection.
In this model, the subscriber is Amazon itself. Amazon, not the Kindle user, directly pays for use of the network. The complicated back end process is completely hidden to Kindle users. The model has been so successful that analysts predict it will be used to pay for the connections in an increasing variety of embedded devices. Users may indirectly subsidize the cost of their connection through additional fees, but the cost for wireless will be invisible.
Jasper Wireless, a firm which has historically specialized in the M2M market, inked an exclusive deal last spring with AT&T to handle the activation, billing and connectivity support for all the embedded devices running on AT&T’s network. The deal includes devices that range from traditional M2M services like fleet management to consumer electronics like the Kindle.
In a statement, AT&T’s emerging devices head, Glenn Lurie, referred to the deal as “the ‘technological underpinnings’ to make our strategy possible.”
“We’re [now] equipped to pair these devices with the most sensible business model, enabling us the ability to offer customers the flexibility they desire in pricing and data plan choices – making these new categories of devices even more attractive for consumers and businesses,” he said.
Other companies in the M2M space offer similar connectivity services for applications like telematics and fleet management. Aeris Communications, a wireless carrier exclusively devoted to the M2M market, has expanded its device ecosystem by certifying devices from the likes of Motorola and Telit Wireless Solutions. Aeris’ deals with Telit and Motorola certified the companies’ respective CDMA modules to run M2M applications on Aeris’ network in the United States, Canada and Mexico.
Back at PRTM, Hays says the work companies like Jasper and Aeris are doing could pave the way for as-yet-unknown business models for wirelessly connected devices. “Jasper and Aeris are experimenting with novel pricing plans,” he says. “I think we’re at the tip of the iceberg right now; it’s very early.”