The Good, the Bad and the Ugly of AT&T’s New Pricing Plan

Updated: AT&T (s T) changed its mobile data plans today — effectively putting an end to the all-you-can-eat mobile broadband pricing plans for smartphones. Having watched this space for the last year I knew that given the demand for mobile broadband and the capacity of the mobile networks, carriers were eager to end the practice of unlimited data because it wasn’t economically sustainable for them. As I wrote last July:

“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.”

Why Usage-based Pricing Is Here

The answer to that problem would be usage-based broadband, and in a GigaOM Pro piece (sub req’d) I outline how several of those pricing scenarios could play out. What’s key to understand here is that few folks in the industry believe it’s possible to offer the level of mobile broadband that people want on current wireless networks — even after carriers switch to more efficient technologies like LTE. An exception might be Clearwire (s CLWR), which has deep spectrum resources when compared with the other major carriers. Indeed, Clearwire’s Mike Seivert told me that currently its mobile customers consume an average of 7GB each month, a feat that would cost $75 a month on AT&T’s new pricing plans (on Clearwire it could cost $40-$55).

Clearwire, in which Sprint (s S) holds a 56 percent stake, has said it has the ability to stick with true unlimited service over the long term, and will likely use that as a competitive differentiator in its fight for customers among the major carriers. Meanwhile T-Mobile, the fourth-tier carrier, plans to offer unlimited speeds — until users reach 5 GB a month, at which point it will slow them down. There are no options to buy more bytes per month, and the slowdown will take place regardless of whether the network is congested or not.

Kevin did a great job laying out AT&T’s new pricing in his story this morning, but here’s the quick summary version:

  • DataPlus — 200 MB of data for $15, which equates to $75 per GB. Customers that exceed the data cap will pay an additional $15 for another 200 MB.
  • DataPro — 2 GB of data for $25, which works out to $12.50 per GB. Customers will pay $10 for each GB over the cap in a given month.
  • Tethering — $20 per month for smartphones, on a DataPro plan. This option does not provide additional data — it uses the 2 GB provided for in the DataPro plan.

How AT&T’s Usage-based Plan Falls Short

AT&T’s pricing has taken current usage into consideration, with the carrier claiming that 98 percent of its users consume less than 2 GB per month, while 65 percent consume less than 200 MB. But in the long term, it isn’t a great option for consumers, and when it comes to the tethering fee, is downright punitive. It’s also inconsistent with managing user demand for broadband given that one reason for the shift is to manage scarce spectrum resources and prevent network congestion. Instead what it does is push more subscribers into a higher tier of service by creating an extremely low-usage tier with high overage fees, and a higher-usage tier with fees that, comparatively speaking, are much more reasonable. For example, using 201 MB on the lower-usage, DataPlus plan costs $30 whereas $25 on the DataPro plan will yield up to 2 GB. If you’re anywhere in that broad middle (or worried about landing there), you’re going to select the 2GB tier, even though most iPhone users use an average of 500 MB.

That’s not ideal, and the $20 fee for tethering is simply paying AT&T for the privilege of using your phone to connect your laptop to the web. Basically that fee is a $20 “Keep Your Laptop Off the Network” sign.

Effects on Innovation

Underlying the entire pricing structure is the idea that 2GB is enough when it comes to mobile broadband, a fact disputed by Cisco’s data noting that mobile users currently consume, on average, 1.3 GB a month, an amount it expects to grow to 7 GB by 2014. Already folks like Andy Abramson are noting how AT&T’s plan will limit the value of using Skype (especially video), since video on mobile phones will drive demand through the roof, AT&T’s pricing will cause pain for YouTube.

Data provided by Allot Communications

Also affected will be the app economy and developers looking to create the next big thing for mobile networks. For example, augmented reality requires a network connection that sends location data to offer information, but one day may rely on a database of imagery and photos sent by the camera to get a more accurate sense of where people are. Sending photos, especially those taken with 8-megapixel cameras, uses data, and could consume more if AR becomes an everyday way of finding information.

Other applications, including those that stream music, send real-time traffic updates or even web video conferencing, which is rumored as a possibility on the next-generation iPhone, would also be hampered by lower data caps, not to mention gaming and even ads consumed on the handsets. How acceptable will Apple’s iAds platform be if those fancy ads consume precious megabytes that might push consumers past their data plan limits?

What It Says About Competition

Aside from the potential shackles it may place on the app ecosystem, particularly around the iPhone, the pricing plan says a lot about the state of wireless competition in the U.S. Recently, the FCC issued a report on the status of competition in the wireless industry that laid out how, from an infrastructure point of view, AT&T and Verizon have clear advantage. They both own large amounts of really good spectrum (about 92 percent of the spectrum in the 700 MHz band in the top 54 U.S. markets is owned by At&T and Verizon) and own their own wireline networks, which means they don’t pay other people for backhaul the way that T-Mobile and Sprint do.

The top two carriers also have the ability to set voice and data plans prices that are higher than both Sprint and T-Mobile — and yet still have the lion’s share of the customers. This might be because of better network coverage, possibly attributable to those spectrum and backhaul assets. Regardless, a better network is a competitive differentiator that could lead people like myself to pay higher prices for a better experience. The top two carriers are also more profitable, likely because of their infrastructure advantage.

Yet so far only AT&T and Verizon have raised their early termination fees on smartphones and unveiled plans to implement tiered pricing. While the details of Verizon’s tiers aren’t published yet, its CEO said last week that Big Red would offer buckets of data that a customer could use to connect multiple devices. Clearly, AT&T’s pricing change is the tip of a very large iceberg that could slow innovation and cause some consumers to pay more over time. However, it’s also a symptom of our demand for data and perhaps a warning that our wireless industry isn’t as competitive as we thought it was. In short, the U.S. wireless industry was always going to kill all-you-can-eat broadband eventually, but AT&T’s method isn’t a forward-looking one, nor does it effectively help the company manage peak demand on its network.

Update: For AT&T’s explanation on the particulars of the pricing plan and the timing of the changes, please see my interview with AT&T exec Mike Collins.