Who's Devouring AT&T's Data Capacity?

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What does a mobile network hosting 41.2 million smartphones look like? A network where growth in data traffic far exceeds data revenue growth. AT&T is selling a lot of smartphones and data plans, but even millions of new iPhone customers don’t fully account for the huge spikes in mobile data traffic AT&T is experiencing.

AT&T’s first-quarter earnings show that new smartphone customers aren’t the ones straining its data networks. Rather, AT&T’s chickens have come home to roost. Customers are finally starting to consume the big buckets of data AT&T is selling them, taking their fair share of network capacity while not paying more for the privilege. Consequently AT&T is seeing a massive increase in data traffic without a corresponding jump in data revenue.

During AT&T’s Tuesday earnings call, Mobility Chief Executive Ralph de la Vega revealed that AT&T had added a net total of 10 million new smartphones over the past year. The devices now account for nearly 60 percent of its postpaid subscriber base. De la Vega also revealed that AT&T’s wireless data revenue is tracking about $24 billion per year, growing at a steady rate of more than 20 percent per year.

But AT&T has pointed out before that data traffic on its mobile networks is actually doubling each year. So that means a 100 percent annual increase in mobile gigabytes shipped is being driven by a mere 32 percent increase in smartphones. What’s more, AT&T is collecting only a few billion dollars more in revenue to handle that deluge of new data.

The lion’s share of the growth in AT&T’s data traffic isn’t driven by new smartphone customers; it’s coming from its existing subscribers, and for the most part they’re not paying more for that extra consumption. AT&T’s numbers would indicate that many customers are getting a lot a closer to their data caps without exceeding them. Basically, they’re consuming more data while still paying the same amount on their monthly bills.

Some of those customers are AT&T’s grandfathered unlimited customers, but they’re a shrinking minority, accounting for 39 percent of smartphone customers in the first quarter. Plus, AT&T has begun throttling back speeds on those customers once they exceed 3 GB on HSPA+ and 5 GB on LTE. That means most of AT&T’s data traffic explosion is coming from tiered plans, which makes sense if you look at AT&T’s pricing structure.

Of the 25 million smartphone customers on tiered plans, 70 percent subscribe to an upper-tier plan, which means a 2 GB plan under the old pricing scheme and a 3 GB plan under the new one. But in a recent study, wireless analyst Chetan Sharma found that 70 percent of smartphone users in the U.S. consume less than 1 GB per month, which is one-half to two-thirds less than the amount of data most of AT&T’s customers are actually paying for. There’s been a huge disconnect between the amount of data customers buy and the amount they actually use, but that gap is finally starting to close.

As you have probably figured out by now, AT&T’s capacity crunch seems to be a problem largely of its own making. Customers are finally growing into the data plans, and they’re eating up all of AT&T’s mobile data network capacity in the process. I should also point out that AT&T’s networks have become far more efficient than they used to be, allowing it to deliver more bandwidth over the same infrastructure and spectrum. When the iPhone 3G was first launched in 2008, the typical AT&T HSPA cell could support a theoretical limit of 3.6 Mbps. That number is now 14.4 Mbps. An LTE cell using the same amount of spectrum can theoretically support 37.5 Mbps.

So I wouldn’t feel too sorry for AT&T, despite all its claims of being broadsided by traffic demand. When it set up its current tiered pricing structures, it knew its customers would eventually scale their usage to match their monthly allowances, and they’re still a long way from even getting close to those caps. If AT&T didn’t know this, it never should have offered 2 GB and 3 GB tiers in the first place.

This is what infuriates me about the way the operators price data. The per-megabyte cost we pay for mobile data has actually fallen considerably in the past few years, but we wouldn’t know that by looking at our bills. If carriers from the beginning had set reasonable tiers that actually reflected how customers consumed data, operators could have gradually lowered prices as their networks became more efficient. It’s probably a stretch to say they would have come off as heroes, but their mobile data policies probably wouldn’t be vilified the way they are today.

Instead, they chose to gouge customers by selling them far more gigabytes than they could possibly use. Now that customers are actually starting to use up those gigs, carriers are claiming they’re running out of capacity. Didn’t you guys see this coming?

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