Why Verizon killed its unlimited plans

Verizon (s vz) stops offering unlimited plans on Thursday for new customers, and much like when AT&T halted its unlimited plans last June, the world will not end. However, it will get more confusing as customers try to figure out how much data they need to buy and developers wait to see what happens to their businesses. No matter what Verizon says, though, this pricing shift isn’t about supply or a lack of mobile capacity but rather about demand. In short, because we want mobile connectivity wherever we go, Verizon is willing to bet we will pay for it.

Why this pricing? Why now?

Verizon will now charge new customers $30 for 2 GB of data at the low end and $80 for 10 GB of data on the high end. The ability to buy different buckets of data is familiar to the telcos, which offered the same sort of pricing in the form of minutes for years. It is also a good way to milk profits, since consumers will generally pick a bucket that offers more capacity than what they need so they don’t go over the limit.

But unlike minutes, a gigabyte isn’t something consumers are familiar with, because it can be used for various web activities that vary in how much data is used. That means there is both a greater opportunity to capitalize on ignorance┬ábut also a chance to stifle innovation and mobile app use. Suddenly consumers will wonder if uploading that photo or watching that YouTube (s goog) stream is really worth it. Heck, I do that today when it comes to streaming music using Pandora (s p), and I never even come close to using more than 2 GB on my phone. Suddenly, instead of feeling free to experiment with silly apps that could become the next Foursquare, consumers may decide to forego an app.

A better option

So if gigabyte buckets are less than ideal, what would be better? If carriers are so worried about network congestion, then one option would be congestion-based pricing, where carriers charge more for using their networks during peak traffic. Another option would be to slow the data rate after a set amount of data is used, like T-Mobile does.

If this is more about making profits as opposed to congestion management (these are businesses after all), then I think plans that use more familiar metrics and that can be changed easily are better. So instead of buying a bucket of gigabytes, perhaps a heavy Instagram user might choose a photo-sharing plan that allows for unlimited uploads and only 5 hours of streaming video a month. Orange does this in several European countries and is even experimenting with personalized pricing plans for customers.

What about usage-based plans?

Whenever I cover pricing, a lot of people ask why we can’t just move to straight usage-based plans, where carriers charge per gigabyte or megabyte, much like people are charged for electricity. It’s a reasonable option, except that most people forget or ignore the fact that electricity is a regulated industry with the government involved in price setting, something I’d hate to see happen in the wireless industry. And the reason the government is involved? Electricity is a monopoly or duopoly in most places.

Now, AT&T is all about trying to prove competition in the wireless industry as it seeks to gobble up T-Mobile, but most people realize that the wireless industry is about as competitive as my challenging my four-year-old to a race. AT&T tends to move in lockstep on pricing changes and on issues such as ETF fees. Sure, there was a year before Verizon followed AT&T by cutting off unlimited plans, but it happened. And there was about half a year between AT&T following Verizon in charging high early-termination fees. And when the two largest carriers decided they had to somewhat match Sprint’s moves after it offered unlimited voice and data, they pretty much came out with similar and more-expensive “everything” plans.

Competitive? Maybe in the race to be less consumer-friendly, but not really when it comes to driving down prices. And since no one knows how much Verizon and AT&T pay to shuffle bits around the mobile web, it would be hard to keep them honest as it were in terms of charging a reasonable rate for a gigabyte. For those who love the free market, just look at how fast texting grew in Europe, where it was cheaper than some voice minutes, as opposed to here in America, where the carriers charged an arm and a leg for each SMS. Twitter couldn’t have flourished in that environment. Neither could ChaCha or any other service that shoots an SMS.

Could Wi-Fi help keep the flat-rate plan viable?

In general the loss of the flat-rate plan is inevitable, given the limitations of the wireless networks. But what if the wireless networks weren’t all cellular? Weaving Wi-Fi into a carrier network, as KDDI is, could change the load on the network in a way that allows for both capacity and profits. Wi-Fi networks are cheaper to deploy and are becoming carrier-grade. What if someone purchases an unlimited plan with the understanding that the carrier could shunt them to a Wi-Fi network whenever one is available?

As carriers pursue their new pricing strategies around mobile broadband ahead of faster Long Term Evolution networks and more-capable devices, they’re clearly keeping an eye on the bottom line, not pushing for American innovation in wireless. And that’s really a shame, because that kind of thinking slows the industry’s potential. Instead of becoming a platform for new ideas, mobile broadband has become a platform for squeezing easy profits.