AT&T (T - Free Analyst Report) has long offered unlimited data usage to its smartphone customers for a flat monthly fee. But now, in an effort to rein in data hogs and alleviate wireless-network pressures, the carrier has transitioned to a metered pricing scheme. What impact will this new business model have on the company and the industry as a whole?
While it is often said that there's no such thing as a free lunch, wireless subscribers in the United States, equipped with powerful new smartphones and tablet PCs, have been happily enjoying unlimited data usage for a flat monthly fee. Until now, that is. In what promises to be a seminal moment for the domestic telecommunications industry, the nation's second-largest wireless carrier behind Verizon (VZ - Free Analyst Report) and the exclusive U.S. provider of Apple's (AAPL) hugely popular iPhone and iPad, has stopped offering its customers unlimited, $30-a-month data plans.
Instead, the company has rolled out metered packages for mobile device (except laptop PCs) users that assess charges based on total bandwidth consumption. New AT&T subscribers now have a choice of monthly plans that offer 200 megabytes of data for $15 (the DataPlus option) or two gigabytes of data for $25 (the DataPro option). And bandwidth-hungry customers that exceed their data allotment will have to pay an additional monthly fee of $15 or $10 under the DataPlus and DataPro packages, respectively. (Existing smartphone customers need not switch to one of the new plans, but may opt to do so without a contract extension.)
The new pricing scheme, though somewhat controversial because it imposes limits on subscriber behavior where once there were none, is not so surprising, considering the proliferation of high-capacity handheld devices and video applications that are pushing the country's wireless networks to the breaking point. (AT&T has been widely criticized for the uneven performance of its wireless network in large markets, such as New York and San Francisco.) Moreover, data hogs, a small group of ultra-heavy bandwidth users, frequenting streaming-video sites like Google's (GOOG) YouTube, are becoming more of a problem throughout the industry. In fact, AT&T estimates that while only two percent of its smartphone customers use more than two gigabytes of data per month, this download-happy bunch is primarily responsible for clogging up its network.
The new tiered metered plans, likely to be copied by other major wireless carriers, including Verizon, Sprint Nextel (S), and Deutsche Telekom's (DTEGY) T-Mobile USA unit, before too long, may actually be money savers for most data subscribers. That's because the majority of wireless customers-those that use their handheld devices mainly for phone calls, email, and Web surfing (as opposed to downloading large video and music files)-will have their bandwidth needs met by AT&T's $15/200-megabyte-a-month option, which is half the price of the current all-you-can-use data package. Network performance, meanwhile, will likely improve with the help of the usage caps. This is critical at a time when new content-consumption products (e.g., the iPad) are taking off and data use is poised to soar even further.
From a carrier standpoint, the new metered plans will probably make AT&T's mobility business more profitable, since they'll likely lessen, at least to some degree, the need for costly network upgrades. (With the usage caps in place, network enhancements and related costs can be spread over longer periods of time, alleviating pressure on the bottom line.) This ought to come as good news to AT&T stockholders, who seem to have garnered only modest benefits from the Apple exclusivity deals and the recent smartphone/data usage explosion. (Notably, AT&T shares have significantly lagged the benchmark Standard & Poor's 500 Index over the past year.) Indeed, the altered wireless business model should bolster earnings growth going forward and support a higher share price.
In the meantime, it will be interesting to see how consumers and other sector participants respond to AT&T's wireless pricing shift. While this promises to be a key turning point in the industry, it is too early to tell which data pricing model will become the standard: AT&T's new metered scheme or another carrier's plan?