Usage-based pricing key to AT&T’s iPhone woes, analyst says
By now it’s commonly known that consumer data habits on Apple’s (NASDAQ:AAPL) iPhone haven’t been friendly to AT&T’s (NYSE:T) overloaded 3G network. The average iPhone user consumes five to seven times the monthly bandwidth of an average wireless subscriber, and two times the amount of an average 3G smartphone user, according to Bernstein Research senior analyst Toni Sacconaghi. As smartphone penetration continues to increase, his belief is that usage-based pricing is inevitable in the US.
We believe that as smartphone democratization occurs and becomes more mass market, lower priced email centric and 2.5G devices will proliferate, with handset OEMs pushing for more metered (and affordable) data plans, Sacconaghi wrote in a research note. The unavailability of tiered data plans in the US today may be attributable to (1) carriers determining the appropriate way to limit usage of the bandwidth-hungry minority, without adversely impacting the perception of the majority; and (2) fears of disenfranchising Apple.
While tiered pricing could hurt Apple’s momentum in the short-term, it also puts the company in the unique position to offer a potentially lucrative non-data plan iPhone, similar to an iPod Touch with a $40 per month voice plan, Sacconaghi added.
For the iPhone, as with most 3G smartphones, pricing plans have remained relatively fixed in all-you-can-eat models even though the average iPhone monthly data usage amounts to 200 to 300 MB, in addition to 50 MB of voice usage higher than both AT&T and Verizon’s entry level data plans, which cap out at 200 to 250 MB for $35 to $40 per month. Further stressing the network is a high-usage group of iPhone users consuming 1G to 5G per month.
For these reasons, usage-based pricing is quickly becoming necessary for AT&T. Offloading traffic will not be sufficient for the iPhone network expansion is the only alternative if pricing stays unlimited. AT&T does not profit from supporting so much data traffic, Sacconaghi pointed out. It already spends around $100 in annual cap ex per postpaid subscriber, and while it maintains that iPhone subscribers are twice as valuable as average subscribers, they are also much more expensive.
Faced with this dilemma of low price/megabyte, and relatively high costs to expand capacity, there are two broad options: raise the price or lower usage, Sacconaghi said. Usage based pricing seeks to accomplish both.
December 4th, 2009 at 3:41 pm
It’ll never happen!!
December 4th, 2009 at 4:39 pm
The ISPs are selling connectivity to the network, usually measured in bandwidth. Bandwidth is just a measure of the maximum rate that bits can (theoretically) be provided, not an actual amount of bits. It costs the ISP money to actually send bits through the network, but they donât get paid extra for providing more bits. Thus, it is in the ISPâs best interest to provide as few bits as possible, while convincing the subscriber that they are receiving good service.
The results? The subscribers pay for a bandwidth âpipeâ to the network, and try to pull as many bits through the pipe as they can. The content providers buy a pipe to the other end of the network, and try to push as many bits through it as they can. The ISPs try to keep the subscribers happy while allowing as few bits as possible through their pipes.
What if this situation was changed and the ISP was actually selling bits? The ISP would then have an incentive to provide as many bits as possible, by enticing the subscriber to request more info and entertainment services. The ISP would be motivated to work with the content providers to make the information and entertainment services as appealing as possible. And, rather than threatening to charge the content providers to deliver the content, the ISPs would be working with them to provide better content.
The problem with selling bits is measuring the bits, and then billing. Micropayment schemes have been too complex and costly. But, Telephone companies have been collecting the equivalent of micropayments (for long distance calls) for years, and the technologies and software are finally falling into place to make this viable. Or at least to make some experiments worthwhile, in spite of numerous problems to overcome.
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