AT&T announced new smartphone and iPad data pricing plans yesterday, a scant month after the release of the new 3G tablet and one week before the anticipated announcement of the next generation iPhone. As of June 7, new customers will no longer be able to purchase unlimited monthly data for $30. Instead, new smartphone users will have to decide between a $15 per month plan that allows 200 MB of data transfer and a $25 per month, 2 GB plan. iPad 3G users who opt for the cheapest plan will get an extra 50 MB but will still face the 2 GB cap on the more expensive plan.
“The all-you-can-eat pricing was a great deal for the big users of capacity and not for the small users,” said Shane Greenstein, a professor of management and strategy, adding, “The heavy use was hurting performance.”
The change could lower many customers’ bills while alleviating congestion on AT&T’s network. But the new scheme could also backfire by frustrating the heaviest iPhone users. “If many iPhone users move [to another carrier] or potential iPhone buyers resist purchasing, then it will make Apple very unhappy,” Greenstein said. “That might encourage Apple to use multiple carriers instead of just one.”
Greenstein said other wireless companies may step in to capture AT&T’s dissatisfied high-end customers—who will have to pay $10 for each additional gigabyte past the first two provided with the high-end plan—which could encourage competition. But if you had hoped AT&T’s move would shake up the industry, don’t count on it. “This cannot make much difference to the fundamental facts of this market. There are limited number of carriers and nothing will change that,” Greenstein said.
AT&T’s new pricing scheme resembles a “classic de-averaging” of prices, where users pay differentially based on some criteria, Greenstein said. In this case prices change based on data usage, but the telecom industry also de-averages based on geographic location. Though the Communications Act of 1937 implicitly discouraged de-averaging for more expensive rural customers, many telecom companies de-average geographically when selling wholesale access to their lines.
Greenstein thinks such geographic de-averaging would have been a tenable solution to AT&T’s data woes. “The cost of providing the cell capacity at 2 AM is virtually nothing in every city of the country. But for a heavy user in an urban setting during peak hours, the cost for units of capacity was far higher than the revenue being collected for that use. AT&T’s old all-you-can-eat pricing averaged out those factors,” Greenstein said.
The new pricing scheme “might make a difference to capacity utilization in San Francisco, but the company should not have reason to care about heavy use in areas where capacity rarely reaches a maximum,” he said.
Though AT&T says 65 percent of its smartphone customers use less than 200 MB per month, Greenstein said one challenge will be alerting customers when they approach the limits. He said customers of metered plans “need helpful information frequently” to avoid overage charges. For it’s part, AT&T said it will send text messages when users reach certain levels and has mulled apps that would track monthly data use. But alerts are not enough, Greenstein said. Customers will also need an easy way to change their plan when they reach their data limits. AT&T has said it will allow such plan changes mid-month, but that the customer will be responsible for making the changes. If the customer fails to make the change, they will be forced to buy costly additional blocks of data.
Other companies have yet to announce changes to their data plans, and Greenstein said the decision they face is a “tricky” one. Wireless carriers must weigh the extra revenue they receive from low-capacity, low-cost users against the higher costs of the high-capacity users, he said. AT&T the first to test the waters with their new plans.
“I bet the other firms are watching very closely.”