The Wireless Data Boom Will Cost the Carriers

In the U.S., which has a population of 304 million, there are about 270 million cell-phone subscriptions. With a market so saturated, conventional wisdom says there's not much room for growth, especially as the amount paid for voice declines. And this is why mobile data has loomed so large for carriers in the last few years. According to the CTIA, a cellular industry association, wireless-data-service revenues for the year 2008 rose to more than $32 billion—a 39% increase over 2007, when they totaled $23.2 billion. Wireless data revenues for 2008 amounted to nearly 22% of all wireless service revenues.

So now that the market for phones is saturated, carriers are positioning themselves to gain in the next wireless revolution, which will be about data connections. But it will become more expensive to sell data plans to people in the next 5 to 10 years, just as more consumers seek to use them.

Right now, wireless data is booming. Verizon saw its wireless data revenue rise 41% from 2007 to 2008. In the same period, operating income on wireless rose 3.5%, to almost 30%. But those profits may come under fire as carriers deal with more people on their networks. Chetan Sharma, a wireless industry analyst, says that carriers will see demand rise for wireless data to the point that even lower-cost networks such as the next-generation long-term evolution (LTE) network, will not be enough to make delivering wireless broadband profitable without drastic changes in both pricing models and alternative forms of delivering the service.

a few data cards use most of the data

"LTE will help force costs down 60% on a per-megabyte basis, but usage might go up by the same amount," Sharma says. "Most of the gains [for network upgrades] are in the cost savings, but with faster throughput, things will download faster and people will do more of it, and since the price of the service is fixed, the cost of delivering the content will only go up."

One problem is smartphones such as the iPhone, which can access the web and bring wireless networks to their knees. Also becoming a growing nuisance are data cards that allow a laptop to get online. Sharma says that when operators look at data use on their networks, 4% of subscribers are using about 68% of the bandwidth on a given tower. Those users are surfing from data cards. Ericsson has estimated that data cards comprise 73% of traffic on a wireless network, which is amazing, given that they make up 3% of the subscriptions.

To manage this, AT&T has turned to Wi-Fi hotspots to dump traffic from its more constrained 3G network. T-Mobile has embraced femtocells, which offload cellular traffic to a home broadband connection when users are inside their home. But Sharma and others in the industry believe it's only a matter of time until the pricing model will go from a flat fee to pricing based on when people want to surf the Web, as well as how much bandwidth they are willing to pay for at a time. (Perhaps people would pay more for a 1.5Mbps connection to download a movie but would settle for 200kbps for downloading e-mail.)

The carriers keep discovering that if you give people access to fat pipes, they're going to use them. That's good for innovation—but on the wireless side, it can cause problems for the carriers' bottom lines.

Before it's here, it's on the Bloomberg Terminal.