AT&T IPhone Users Irate at Idea of Usage-Based Pricing

In less than two years, the iPhone has changed the way people think about and use their phones. As with any paradigm shift, reverberations can be felt in many ways. Wireless data usage has spiked, clogging AT&T's network.

Now signs point to AT&T possibly changing the way it bills customers, moving from an all-you-can-eat data plan to usage-based pricing.

Earlier this month, Ralph de la Vega, CEO of AT&T Mobility and Consumer Markets, speaking at the UBS conference in New York, strongly hinted that AT&T will move toward some kind of usage-based pricing scheme.

"We are going to make sure incentives are in place to reduce or modify [data] uses so they don't crowd out others in the same cell sites," de la Vega said, adding, "We have to get to those [high usage] customers and get them to recognize they have to change their patterns, or there are things we will do to change those patterns."

Bandwidth Hogs?

Currently, AT&T charges $30 a month for its unlimited data plan. For many consumers, the plan works as it should. But AT&T has found that 3 percent of its smartphone users are responsible for 40 percent of total data usage, thus clogging up the network and degrading service for the vast majority.

Who are the wireless data bandwidth hogs? That's easy: iPhone owners--that is, iPhone owners ravenously download apps, video and web pages. Some even stream data all day long.

Roger Entner, head of telecom research for Nielsen, told USA Today that the typical smartphone customer consumes about 40 to 80 MBs of wireless capacity a month, whereas the typical iPhone customer uses 400 MB a month.

Bernstein Research analyst Toni Sacconaghi echoed this sentiment, saying that the average iPhone user consumes five to seven times the monthly bandwidth of the average wireless voice subscriber and twice the amount of the average smartphone user.

AT&T has responded by investing millions shoring up its network--nearly $65 million since 2008 to improve its 3G wireless network in the San Francisco Bay Area alone. The exclusive carrier of the iPhone is also rolling out HSPA 7.2 technology nationwide with completion expected in 2011.

But the problem will only get worse. The App Store has surpassed 100,000 apps, many of which hog bandwidth. Location-based services, which also consume bandwidth, are on the rise. AT&T has delayed opening up its data network to tethering, which would allow laptop computers to connect to Internet via the iPhone, because usage will spike and its data network will be even more burdened.

AT&T's de la Vega singled out video and audio streaming as major culprits of data bandwidth consumption. Mobclix, an operator of a mobile ad exchange marketplace, predicts 95 percent of phones will have mobile video capabilities, such as video chat and videoconferencing, by the end of the next decade along with 100 million apps and mobile websites.

Will Tiered Pricing Actually Fix Bandwidth Woes?

Analysts differ on whether or not usage-based data pricing--also called tiered-pricing--can stem this data consumption tide.

Forrester analyst Julie Ask points out that wireless carriers like T-Mobile already have data caps, although many people aren't aware of them. Ask feels usage-based pricing is only a matter of time for AT&T. "I think it's fair that carriers have the ability to protect themselves against the handful of users who degrade the experience for other people," she says. "So much of AT&T's brand equity and low churn numbers are associated with a high quality of service."

AT&T's overtaxed data network has led to shoddy service. AT&T received the lowest score among wireless carriers with a below average rating in a recent Consumer Reports customer satisfaction survey. This prompted AT&T to deliver an iPhone app last week that lets customers submit complaints about dropped calls and poor coverage and voice quality.

Ask thinks the majority of consumers will want usage-based pricing because many don't come close to the cap anyway, and the data network will be improved.

Krishna Subramanian, founder of Mobclix, doesn't agree. "As a consumer, you definitely don't want" usage-based pricing, he says. "It's going to limit the number of applications you download, the amount of content you consume, the amount of music you're downloading."

Consumer pushback, Subramanian says, will squash usage-based pricing. "What I think will happen is there will be more competition from other carriers with other devices that will force the load across different platforms," he says. Subramanian points to New Yorkers who are fed up with AT&T's service for the iPhone and thus looking to jump to other carriers and devices.

Tiered pricing for data downloads is a controversial issue, not just for wireless carriers. Broadband carriers have imposed "soft caps" in the UK. In the U.S., some carriers have also started imposing caps that customers have found out about only when they exceeded them in their inaccurately labeled "unlimited" plans.

What Plans Might Look Like

If usage-based wireless data plans are inevitable, what form will it take? Slate Magazine's Farhad Manjoo wants to see $10 a month for each 100 MB you upload or download on your phone with a cap of $40 for 400 MB or more.

But this won't solve the problem. If $40 is the most you'll pay instead of the current $30, iPhone users won't be monitoring their usage. They'll just think AT&T is on a cash grab, bumping up the data plan to $40. The three percent of AT&T customers using an unfair share of bandwidth will continue to do so.

Another form of usage-based pricing is overage charges--that is, paying for usage that exceeds a limit. But this could lead to sticker shock. After all, nobody wants to be surprised by a huge bill like the one an unemployed father from Hayward, Calif., recently got after his son ran up thousands of text messages on an account with a limited amount of text messages and overage charges. The Verizon bill: $21, 917.59.

Chances are there will be a compromise, whereby app developers and carriers work together to rein in data download junkies. Already the App Store forces you to download certain apps and updates over wi-fi and not AT&T's wireless data network because the files are too big. Perhaps there might be overage charges or separate charges for mobile video chat.

Nevertheless, some form of tiered pricing will be needed to change the all-you-can-eat consumer mindset when it comes to Internet data downloads. If U.S. broadband carriers are any indication about the future of the mobile Internet, expect things like usage caps and overage charges to make their way to the iPhone.

Tom Kaneshige is a senior writer for CIO.com in Silicon Valley. Send him an email attkaneshige@cio.com. Or follow him on Twitter@kaneshige. Follow everything from CIO.com on Twitter@CIOonline.

For comprehensive coverage of the Android ecosystem, visit Greenbot.com.

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