AT&T Explains Its Pricing Change: It’s All About Value

AT&T, the nation’s second-largest carrier and the exclusive provider of the iPhone (s aapl), today introduced new pricing that eliminates unlimited broadband for its smartphones. Some people responded with praise, while others declared AT&T (s t) evil. My colleague Kevin laid out the pricing changes in a morning post, and my analysis of the issue is here.

I spoke with AT&T’s Mark Collins, senior VP of data and voice products, mobility and consumer products to get his explanation as to why AT&T moved away from all-you-can-eat broadband and why it chose the plan structure it did. The result is this lightly edited Q&A:

GigaOM: Why move away from the all-you-can-eat model?

Collins: In the early days of wireless data there were few compelling use cases for wireless data. In the first few years there were two use cases: one was text and one was email. Only in the last 3-4 years do we have devices where you didn’t have to convince customers there was a reason to use data. There are still some customers that don’t see the need, and there’s still growth left, but with the proliferation of smartphone devices customers have now seen a reason to believe and are more than willing to pay, so the rationale now is you have scarce resources and you don’t have to offer an unlimited plan. And now you need to price it according to the value equation so the market can allocate the resources accordingly.

GigaOM: How did you come up with this plan?

Collins: We thought about this and worked on this for a long time. We wanted to go about this in the most customer-friendly way possible. No one likes a billing surprise, so we have industry-leading tools to tell people when they get close to their limit and proactive tools that show what people use so they can choose a plan. And customers can switch back and forth between plans.

We also know that…the laws of physics mean fixed broadband is more efficient than wireless. So we offer free Wi-Fi, which is available where 70 percent of usage takes place. We cut our top price by $5 and 98 percent of users don’t reach 2 GB per month, and 65 percent don’t use more than 200 MB.

GigaOM: Why go with tiers as opposed to congestion pricing and why only two tiers?

Collins: Simplicity. We wanted to make it as simple as possible and simple to execute. As for congestion pricing, that’s something that is difficult for a customer to get their arms around and understand. It gets really complicated, and certainly it’s an option and one that we could pursue at some point in time.

GigaOM: Why implement this plan now?

Collins: We’ve been contemplating it for quite some time. We’re quite a bit ahead of the rest of the market in penetration of wireless data plans as well as smartphones so we’re in a different league in terms of the megabytes phones on our network are actually producing. This time is as good as any, and we think we can take market share with the pricing we’ve introduced today.

GigaOM: What about the $20 tethering fee? It looks like a convenience charge.

Collins: That capability is enabling something you can’t do today. You can use one device and get multiple connections so it’s more useful to you. You’re going to use more data so the price is based on the value that will be delivered.

GigaOM: What about the idea that this will limit application usage or even innovation for mobile networks?

Collins: If there was not a cap or limit on spectrum maybe we’d have a different conversation, but this is not a cap on innovation. Overall this is a way to reallocate demand based on products and services that customers are willing to consume and pay for. It goes back to the phrase, what is something worth? It’s worth what someone is willing to pay you for it.