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.