Can AT&T Tame the iHogs?

Pity poor AT&T (T). The wireless operator with exclusive rights to sell the iPhone in the U.S. is bashed incessantly for service that rarely lives up to the elegant promise of Apple's (AAPL) sleek device. Now, when many consumers feel they should be receiving rebates, the company is getting lambasted for hinting it might take measures to rein in the heaviest iPhone users. Some customers even planned to crash the company's wireless network on Dec. 18 in protest.

Yet Ma Bell, for all her shortcomings, has a point. With the smartphone fast replacing the PC as the center of many consumers' digital lives, changes in the way people use mobile computing are inevitable. Analysts and other experts say wireless operators need to train American consumers that bandwidth isn't unlimited. That won't just be good for phone companies; it'll be good for virtually all mobile phone users. Today, AT&T says 3% of iPhone users account for 40% of the traffic on its data network. The other 97% may get better, cheaper service if YouTube (GOOG) video and online radio addicts paid more for the network upgrades required to support their habits. "It's not a question of if this changes, it's a question of when," says analyst Charles S. Golvin of Forrester Research (FORR).

The moment may be upon us. In an interview, AT&T Mobility President Ralph de la Vega says the carrier is mulling changes to the $30-a-month unlimited data plan that most of the company's smartphone customers use. He emphasizes that no final decisions have been made, but AT&T could institute tiered pricing models similar to today's voice plans or caps on the amount of bandwidth a consumer could use before getting bumped to a slower, cheaper network. "Carriers need to end up with a sustainable model," says de la Vega.

TRAFFIC JAMSThe old model is certainly looking dated. Verizon Wireless introduced the first unlimited wireless data plan in 2002, when most subscribers simply made voice calls and swapped e-mails on their phones. Today, iPhone users think nothing of listening to hours of online music and playing games over the Web. The difference in data use is enormous. A short video takes as much bandwidth as 500,000 text messages. In the three years since the iPhone's debut, data traffic on AT&T's network has soared 5,000%.

De la Vega is certain it's just the beginning. Tens of thousands of software developers are dreaming up applications to run on the iPhone and devices from Research In Motion (RIMM), Motorola (MOT), and Nokia (NOK). Several apps already use unprecedented amounts of bandwidth: Ustream allows people (like actor Ashton Kutcher) to broadcast live video to millions of fans over the iPhone. "Other carriers are just getting a glimpse of what's coming," says de la Vega.

Many analysts think other U.S. operators are just waiting to follow AT&T's pricing lead, in part because AT&T's exclusive right to the iPhone is expected to lapse next summer. As other carriers get hit with the tsunami of data from the iPhone and other devices, they will "need to introduce tiered pricing," says Forrester's Golvin.

The approach is already widespread abroad. In Britain, Orange and O2 offer cheaper data packages for iPhone owners who stay below a monthly minimum. In Australia, Telstra offers four pricing plans. And in countries such as Canada, there are caps on monthly data usage.

There's no question that AT&T has made mistakes in managing its network. Consumer advocates point out it has relied heavily on cost savings from acquisitions to boost profits rather than innovations or reliable customer service. The company also clearly underestimated the demand for iPhones and the amount of data customers would use. In a December survey by Consumer Reports about wireless operators, AT&T came in dead last.

Verizon Wireless has mocked the company in TV ads for its spotty network coverage. The campaign prompted a lawsuit from AT&T, but the suit was later withdrawn after Verizon held its ground. Verizon Chief Technical Officer Anthony Melone tells Bloomberg BusinessWeek that his company has been investing ahead of time to handle iPhone traffic, should it ever get rights to sell the device. "We have put things in place already," he says. "We will handle it if we ever get it."

AT&T, meanwhile, is racing to improve. It's upgrading software that should double the speed at which bits move from a phone to the nearest cell tower and digging trenches to add 100,000 fiber-optic lines to connect cell towers back to the Internet. Overall, the company is expected to invest $7.5 billion in its wireless network this year, says market research firm Ovum, slightly more than Verizon. Whatever his pricing strategy turns out to be, de la Vega says the company will improve its reputation for service. He recognizes, however, that may take time. "Perceptions are a tough thing to change," he says. "We understand that."

With Spencer Ante in New York

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