Flat-Rate Data Plans Are Dead. Is That a Good Thing?Kevin C. Tofel
Demand for wireless data around the globe will double each year through 2014 as the population turns to smartphones and data devices for instant information everywhere. To battle this growth, carriers are dropping unlimited plans in favor of tiered data buckets, which research firm iSuppli today says will boost declining carrier margins while also helping to predict demand for service. That makes sense, but it's too early to tell if customers will come out the winners.
Indeed, carriers weren't prepared for the explosive growth in mobile broadband use in recent years. Jump back in time prior to the debut of Apple's iPhone in 2007, and you'll see an industry focused on voice and messaging revenues; data was only useful to the mobile enterprise worker and early adopters using smartphones with clunky browsers that made mobile Web surfing less appealing than a root canal.
With the first iPhone and credible competitors that followed came a growing appetite for data—first in the browser, later with mobile apps and the desire to use phones as mobile hot spots. Indeed, as noted in a GigaOM Pro report on the data traffic tsunami (subscription required), iPhones were the primary driver behind the 5,000 percent increase in data usage on AT&T's network from 2007 to 2010. With the relatively recent addition of 3G tablets and MiFi devices, demand for data will only keep growing, yet the problem remains: How can carriers predict data use and manage service revenues against operating costs?
Inability to Predict Demand
Tiered data plans are one answer when compared with the old model. Until this year, consumers generally chose one of two data plans: a low-capacity option at roughly $25 to $30 (200-250 MB) or an "unlimited" plan, at $50 to $60, that typically provides 5 GB of data. The latter plan appears to be a better value on a cost-per-MB basis, but it also introduces a problem for network providers, because the capacity variance between the two plans is quite wide and gives little room for operators to predict demand accurately. As a result, AT&T led the shift away from unlimited plans earlier this summer, and others are following.
Industry analyst Chetan Sharma sums up the problem best in his report, "Managing Growth and Profits in the Yottabyte Era:"
"Operators typically have great intelligence on voice usage, but for data, the infrastructure and efforts are generally not on par. There is little understanding of what consumers are doing, which applications and services they are tuned to at any given instant, forecasting traffic spikes, etc. As [the] cost of supporting data services exceeds the cost of managing voice services, and as the revenues from data services become more prominent than those from voice services, operators will have to pay much more attention to the specifics at a very granular level and design business models and pricing plans per the trends and forecasts."
Consumers may want unlimited plans, but carriers can't provide them due to limited infrastructure. Increasing demand will outpace fixed supply as carriers invest more to keep up with the growing wave of data demand. The investments to try to do so aren't outpacing revenues from demand; iSuppli provided a chart below which shows a declining trend of network operating margins over the past year. Consumer demand is the one variable that unlimited plans can't account for.
Throwing Predictions Off
A "pay for what you use" model might be the second-most desirable data offering on a consumer's wish list, but like the unlimited model, it does little to help operators predict demand in advance. Only by looking at prior usage habits can a carrier even try to predict how much data a consumer may use in the future. And all it takes is a new, hit social networking service or popular, must-have bit of software to throw that predictor model out of whack.
This topic of managing network capacity and data demand is particularly timely, given that T-Mobile is the latest U.S.carrier to offer tiered data plans. Om recently spoke with Neville Ray, T-Mobile's chief technology officer, about the plans and Om's vision of the Gigabyte phone. Ray agreed it's just a matter of time, saying, "You're seeing some of these very capable smartphones emerge, and in several cases, we're seeing devices [whose] data consumption will be greater than a gigabyte per month."
It's good to hear that carriers are thinking ahead, both in terms of demand and the best plans to offer and predict usage, so a migration to tiered data could fit the bill for all parties involved with both 3G and 4G networks. (Related: see our mobile broadband guide to understand how data networks are currently migrating to 4G). The only remaining variable is, how will consumers take to such limits? Yes, the plans will be marketed as potential cost savers for some, but the heaviest of users will balk at having to refill their data bucket several times a month. Of course, as that happens, we should see a very different margin chart in as little as six months from now, much to the carrier's delight.
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