By Aaron Blazar (ablazar@atlantic-acm.com)

Background: 

This month, AT&T announced that it is permanently changing its wireless data plan offerings to go from unlimited usage to two, lower-priced capped usage plans for new subscribers.  The low-usage offer will be 200MB at $15 per month and the second will be 2GB at $25 per month, with overage costs varying by plan.  This move aims to cut network congestion through usage-based pricing while covering costs driven by higher levels of usage among customers.  ATLANTIC-ACM has long predicted the inevitable emergence of such plans.

Analysis: 

Extreme growth in wireless data usage over the last two years has caused network providers to seek new methods of generating revenues to cover the costs of maintaining acceptable user experiences on their networks,  and to contain the explosive growth in network traffic that threatens that same level of experience.

• Massive Spikes in Demand Generating Pressure on Networks: In the last two years, the increased penetration of 3G smartphone devices has placed increased pressure on wireless carrier networks as capacity has failed to keep pace with booming consumer demand. In the first quarter of this year, AT&T reported that 46 percent of its postpaid subscriber base has integrated devices (smartphones or devices with QWERTY keyboards) -- a 24-percent growth rate year-over-year. Verizon reported that 30 percent of its retail postpaid base had similar devices, a year-over-year increase of nearly 26 percent. The proliferation of these devices has generated booms in traffic demand, placing pressure on networks. At AT&T's Business Services Analyst Day, its head of Mobility Network Management, Scott Mair, reported that wireless data traffic grew by greater than 200 percent in 2009 and by 5,000 percent over the last 12 quarters. Extreme traffic growth has forced wireless network providers to look for new ways to manage traffic in order to maintain quality user experiences.
  
• Shoring Up Wireline Infrastructure to Improve Wireless Performance: Traditionally, carriers have looked to network upgrades and other methods of taking pressure off the wireline networks that form the backbones of wireless networks. For instance, in 2009, facing customer backlash over lackluster network performance, AT&T poured capital into upgrading the wireline infrastructure behind its wireless network. The company added 1,900 cell sites, greater than 100k new backhaul circuits (four times the number of circuits that were added in 2008) and doubled the number of fiber-served cell sites. This enabled AT&T to drive a 25-percent year-over-year increase in data download speeds. In fact, wireless network expansion has been a boom market for wholesale providers as carriers like AT&T and Verizon have sought to quickly power up their networks to handle massive increases in data traffic.
  
• Attempts to Spread the Pain to Broadband Connections: In recent development cycles, providers have considered marketing alternative solutions to move mobile data traffic from traditional cell site connections to local and at-home hot spots in efforts to shift some of the traffic burden to customer's home broadband connections. Similarly, carriers also have explored other means of off loading data traffic by making Wi-Fi connections more accessible. AT&T, Verizon and Sprint all currently offer devices that allow individuals to link to home Wi-Fi networks for data services rather than relying exclusively on cellular networks to transmit traffic. AT&T reported that, in 2009 it experienced a four-fold increase in mobile data users connecting via Wi-Fi. Alternative means of connectivity, combined with mobile network upgrades, have allowed mobile providers to effectively cut down on network pressure and better manage network traffic.
  
• Unlimited Plans Unsustainable: Although traffic management efforts have logged some successes, the continued growth of usage, and increased penetration of smartphone devices, is driving carriers to reevaluate data plan pricing in efforts to reshape end-user behavior. As has been outlined in my analyses (e.g., "The Long, Slow Death of the Unlimited Access Plan"), as well as those of other ATLANTIC-ACM analysts, metered pricing has been a foregone conclusion for a very long time in our firm, even as other analysts disagreed and short-term pricing trends indicated otherwise. In our view, it has been a matter of which carrier would be the first to take this inevitable step. The possible downside for being a first-mover away from unlimited usage is widespread customer backlash over increased costs of usage driven by overages, while the upside is that lower pricing may allow low-level users better access to mobile data plans while at the same time helping to alleviate network congestion issues. AT&T's new plan will set the pace for the industry on this front. While Sprint CEO Dan Hesse publicly stated that Sprint will not follow suit, look for others to watch the effects of AT&T's new plans over the next quarter to determine if, or perhaps more practically, when, it makes strategic sense for them to follow suit.

Bottom Line:

With the colossal growth of mobile bandwidth usage over the past three years, which Cisco's most recent Visual Networking Index predicts will grow by a CAGR of 117 percent in North America from 2009 to 2014, carriers will have no choice but to reevaluate the methods by which they price and manage mobile data services.  It is not a coincidence that, in AT&T's case, the carrier that was the first to deploy smart devices with enough success to create network congestion issues also is the first carrier to make a move away from unlimited usage plans.  This move targets extreme users, encouraging users that chew up network time simply because it's available to curb usage while generating extra revenues from other ultra-heavy users in order to help offset the costs of network expansion.  If this model is eventually extended to existing customers when they renew, the extent to which this move will cause extreme users to go to other carriers would be an unknown, but few companies mourn the loss of unprofitable customers.  The bottom line is this is the path to a sustainable, long-term wireless model and, if AT&T is able to effectively communicate the benefits of this move to the extreme majority of its user base, it will serve as a baseline model for tomorrow's pricing plans.