For all the hype, the most revolutionary thing about the iPhone 5 may be its compatibility with a wonky technology standard called LTE (as in Long Term Evolution) used in the high-speed 4G wireless networks being rolled out around the world. Carriers have spent billions so they can offer faster Internet connections and boost their capacity—and they need to win over consumers to recoup their investment. “The iPhone is going to be the first big catalyst for adoption of LTE,” says Murali Nemani, a director of marketing at Cisco Systems (CSCO).
LTE promises to enable smartphones to stream high-def movies, handle videochats, and store files and photos on cloud services without a hitch. Getting consumers to pay the freight for all those bytes is another story. While LTE networks can handle twice the traffic of most 3G networks, the proliferation of smartphones, tablets, and video-streaming and cloud-computing services will drive up demand for mobile data eighteenfold through 2016, according to Cisco. So far, carriers are dealing with the increase by moving away from unlimited plans in favor of usage caps. If they charge too much, customers may stick with cheaper 3G networks or piggyback on free Wi-Fi at work or the local coffee shop. If they price 4G plans too low, there could be traffic overload that would slow or disrupt service.
Thanks to the iPhone 5, it won’t take long to discover how things shake out. Sales of the device are expected to approach 50 million by yearend. There are currently only 2 million LTE devices connected to AT&T’s (T) network, says BTIG analyst Walter Piecyk. Carriers say they’re prepared to manage the data deluge, but they still risk a backlash if too many customers blow past their data caps and incur extra fees. “In a world where data usage is rising and disposable incomes aren’t, there’s a question as to whether this is all sustainable,” says Craig Moffett, an analyst with Sanford C. Bernstein (AB).
The telecom companies hope the new iPhone will get consumers more fired up about 4G networks. In an August survey by Piper Jaffray (PJC), 47 percent of people polled said they don’t have any interest in 4G. The iPad version unveiled in March is LTE-compatible, but less than 20 percent of consumers choose that model, says Moffett, and roughly half of those who do don’t turn the service on. “It’s unclear how much LTE is driving user services right now,” says Piecyk.
To get customers to move off unlimited plans, AT&T and Verizon Wireless are both pushing shared data options that offer convenience and some protection against accidental overage charges. AT&T offers 1 gigabytes of data starting at $40 a month, plus $45 per smartphone and $10 per tablet. Exceed the data usage limit, and a user incurs a $15 penalty for each extra gigabyte used. Only struggling Sprint (S) and T-Mobile (DTE:GR) still offer unlimited plans.
These shared plans may help carriers lock in customers to their services, but they may not generate the additional revenue required to pay the bill for building out LTE, says Hans Vestberg, chief executive officer of Ericsson (ERIC), the world market leader in wireless infrastructure. The industry has spent a combined $6.75 billion to secure spectrum rights and buy equipment and will need to invest an additional $62 billion by 2016 to roll out 4G coverage globally, says market research firm Infonetics Research. Carriers will have to get a lot more creative with the packages they sell. Rather than just sell data capacity, they’ll need to offer deals attractive to consumers—for example, an extra $10 a month for unlimited movie streaming. “We’re going to see operators try to reach different types of consumers with different needs,” says Vestberg.
It’s already happening outside the U.S. Turkey’s Turkcell (TKC) offers Facebook (FB) on a “zero-rated” basis, meaning time spent on that site doesn’t count against the consumer’s monthly data limit. In Tunisia, French wireless carrier Orange (FTE) has run Happy Hour promotions that offer lower rates for off-peak hours.
Fortunately for carriers, LTE networks work in a way that makes such innovation easier to implement. Certain types of traffic—say, a high-def Dodgers game—can be more easily diverted to an available Wi-Fi network. Cisco’s Nemani says large carriers are testing technology that will allow them to send a warning that offers three options when a consumer is approaching a data limit: accept a lower resolution to use fewer bits, agree to watch a 10-second ad, or pay to finish what they’re doing. “The struggling student may go for the lower resolution, while the businessman will pay the 99¢ to watch the rest of the game,” says Nemani.
Ultimately, carriers will try to pressure content owners and distributors—including Apple (AAPL)—to pay some of the cost for the millions of movies, songs, and other data they put on carriers’ networks. Amazon (AMZN) already bakes the cost of bandwidth to download books into the price of its basic Kindles. But books can be compressed into mere megabytes of data. A single high-definition movie along with a few videochats could easily blow through a 5 GB monthly limit.
Executives at Netflix (NFLX) and online game companies may know that they’ll need to subsidize premium offers to guarantee glitch-free delivery as LTE networks get more congested. So far, though, they’re not saying much about it publicly, says Marcus Weldon, Alcatel Lucent’s (ALU) chief technology officer. “It’s been a bit of a staring contest between operators and content owners to see who’s willing to come to the table first to have a realistic conversation about the future.”