The End of Unlimited Data – Part 2: Who’s Being Subsidized?

The end of unlimited data is nigh! As I discussed in yesterday’s post, AT&T’s announcement of limited data packages at lower prices has everyone up in arms. But the switch to a-la carte data is a positive move for everyone involved, including AT&T, the customer, and the US wireless phone industry as a whole.

Reality Check

Despite the hollers from the crowd, AT&T is not proposing pay-per-byte service. Their new plans serve up moderate (200 MB) and generous (2 GB) portions of data at much-reduced monthly fees of $15 and $25, respectively. Overages trigger large additional blocks of 200 MB for $15 or 1 GB for $10, respectively, and those on the smaller “DataPlus” plan can upgrade to “DataPro” on demand during months of heavy usage.

AT&T claims that 98% of smartphone users transfer less than 2 GB of data per month, and I’m betting that’s true even of iPhone power users. Of course, some people might use crazy amounts of bandwidth: Video streaming, Internet radio, and tethering come to mind. But I wonder how much data even the first two will require once they become available and popular. An hour-long podcast is about 25 MB, so Pandora, iTunes Live, and Spotify are presumably about the same. One could listen to those sites for 80 hours a month without exceeding AT&T’s new $25 2 GB DataPro package, and an additional 40 hours (1 GB) would only be $10!

The carrier also claims that 65% of smartphone users will be able to save money by opting for the $15 200 MB plan, and that this will drive further adoption of smartphones. Heavy iPhone users probably make up the outlying 35%, but the more-casual iPhoners will be able to cut their bill in half by selecting this plan.

Easy Savings

My own household includes three iPhones. My iPhone 3GS usage hovers around 400 MB per month, and I frequently stream audio from MLB.com At Bat and my favorite podcasts over the air. The other two iPhones average just 50 MB per month, with the occasional spike of around 100 MB. We currently pay $80 per month for data service: Two 3G plans at $30 and one original plan at $20. Under the new system, we can reduce our monthly data bill to $60 by switching the 3G phones to the $25 and $15 plans, respectively.

Don’t know how to stream big podcasts? Check out my article, How To Stream Any Size Podcast to an iPhone, Even Over 3G or EDGE!

We could trim the cost even more by moving both 3G phones to the $15 DataPlus plan and judiciously switching to DataPro during months of increased usage. I could also make more-frequent use of free Wi-Fi service at Starbucks, McDonald’s, Panera, and the local coffee shop, or flip on the Cradlepoint PHS300 and use my unlimited EV-DO hotspot. I imagine most iPhone users could economize similarly.

Follow the Money

Unlimited data plans hurt us all, forcing us to pay for the excesses of a few and limiting the availability of the coolest devices. Let’s get back to AT&T’s numbers for a moment. According to AT&T, only 2% of their smartphone customers transfer more than 2 GB of data per month. With everyone paying the same flat rate for unlimited data, each of those data gluttons was being subsidized by the bills of 50 regular subscribers. This kept monthly data fees artificially high and limited the adoption of smartphones in general. Even the iPhone, a smashing success by any measure, probably lost customers due to the high cost of data service.

But it gets worse. If 65% of smartphone users consume less than 200 MB of data per month, and AT&T can make money selling that much data at $15, then the company was pulling in seriously-massive profit margins until now. AT&T has between 15 and 20 million customers using smartphones, so this represents at least $150 million in monthly profit. All but the heaviest 2% of data users were profitable, and the company was gouging everyone else and pocketing the cash. Sure, they’ve spent some money on upgrades, but the AT&T 3G network is notoriously bad, from bottlenecks and dropped calls in New York to poor coverage in the heartland.

Then there’s the sorry state of competition among mobile phone carriers in the United States. Thanks to carrier locks and exclusive deals, the price for wireless data service remained fairly static until now. Unlimited data at $30 became an unofficial fixed price, and as Planet Money noted recently, price ceilings tend to act as a magnet. Perversely, the widespread availability of unlimited data plans kept prices artificially high. Until AT&T’s announcement, no one was willing to make the first move and initiate real competition.

Stephen’s Stance

Many criticized yesterday’s article, claiming a “peace of mind” benefit from “all-you-can-eat” offerings. I can understand their desire to know exactly how much their bill will be, no matter what their teenagers decide to do with their phone. But they should also consider that, all this time, they were subsidizing data gluttons, getting ripped off by their carrier, and restraining competitive pressure to lower prices. How much are they willing to pay to achieve a bit of mental calm? And aren’t these facts troubling, too?

I can’t wait to see Verizon’s response. AT&T’s pricing changes and their recent early-termination fee modifications mean they’re scared to death. Perhaps the rumors of Verizon iPhones and iPads aren’t off-base after all. At long last, we might be witnessing a real shake-up in the American mobile device market, and that’s something we can all cheer for!

It’s not all roses, though. Unlimited data promised to usher in a new era of mobile video and other innovative applications. It also posed potential competition for wired broadband providers, another market in serious need of competitive pressure. I’ll take a look at the downside tomorrow.

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