The real problem with unlimited data plans

Carriers are trying really hard to get everyone to move to some sort of tiered data plan, and it may not be for the reasons you think. Frequent readers know that the not everything is as it seems when it comes to unlimited data plans. Network carriers have pushed the “we must improve network performance for everyone else” angle, but cold hard facts have called that argument into serious question. While there are very real cases of network congestion caused by individuals who consume 50+ GB of "unlimited" data over a short period of time, studies show that the vast majority of unlimited users consume much smaller amounts of data than the equivalently priced tiered plans allow.

It turns out that even the vilified “top 5% of unlimited users” generally don’t exceed the amount of data available by tiered plans. Think about that for a second – customers with grandfathered unlimited plans tend to be among the longest standing and most loyal customers, yet in many cases they were getting their data throttled long before they had used as much data as a tiered customers is allowed to, even though both customers pay the same monthly rate.

The only reasonable conclusion is that carriers were trying to harass some of their best customers into changing to tiered plans, even though it would have essentially zero impact on network congestion. Recently, the big networks have relented somewhat; after being on the losing end of a very public small claims court decisions, as well as getting the sort of press coverage that makes corporate VP’s reach for the Pepto-Bismol, AT&T (long the worst offender) changed its policy, allowing unlimited data users to consume as much data as their tiered cohorts before getting throttled.

We certainly welcome AT&T’s move, but now that the “stick” of throttling is becoming less of a problem, the “carrot” of shared data plans is about to arrive. Shared data plans will be a boon to many, and will likely provide a compelling reason for many unlimited customers to switch. The ability to add a 4G tablet to your line without having to pay a separate monthly fee, or being able to put your spouse or children on your data plan will be very appealing to a lot of households.

But why should the carriers be so interested in saving you a little money (and therefore hurting their bottom line)? There are a couple of obvious answers; they can sell tablets that otherwise get sold in Best Buy or Apple stores. And if more people have smart devices that might translate to more people using V CAST, or the Verizon Navigator. But there’s actually a much bigger reason, and it has to do with revenue growth and basic math.

Revenue Growth

While smaller networks like Sprint and T Mobile concentrate on simply staying profitable (or trying to sell themselves to the highest bidder), Verizon and AT&T are profitable on a consistent basis. Sure, there are some quarters where their costs outweigh their profits, but those are generally due to strategic investments, not any danger to long-term profitability.

By virtue of being large and profitable, networks like Verizon and AT&T have a different problem; they have to show growth at a rate that meets analysts expectations. Remember that simply being in business and making money is no longer considered sufficient for publicly traded corporations. Instead, the modern benchmark is increasing your stock price, and to do that companies must increase their top and bottom line over time.

Why? When all of a company’s stock reaches a value that is too large relative to the company’s earnings, investors fear the stock is getting overvalued, and the stock price stalls (or decreases). So when the main goal is a rise in stock prices, growth is paramount. That’s fairly easy when you are a smaller company in a new market, but larger companies in established markets generally find it harder to find new ways to grow revenue.

As luck would have it, AT&T and Verizon both have a fairly clear path to consistent revenue growth over the coming years, but to do so they need to get everyone moved over to tiered pricing, even at the cost of short-term profits. The reason why?

Basic Math

Data consumption is growing rapidly. When customers are on unlimited data plans, they pay the same amount even as a carrier must invest in additional infrastructure to meet the rising demand. Obviously, a tiered data customer can only use as much data as they paid for; that much is obvious to everybody, but now think about how this plays out over the course of the next five years, as LTE networks get faster, devices get faster, and more services become available on mobile devices. It’s not that carriers are overly concerned about clogged networks, it’s that tiered pricing turns increased data consumption from a liability into automatic revenue growth.

In any pricing system you can raise prices, but when you raise prices on unlimited customers they are naturally unhappy to pay more for the same service. And that sort of price hike provides your competitors with a golden opportunity to keep their prices low (even if only temporarily) to try and woo your customers away. Even if raising prices turns out to be the best way to go, you’ve signed a contract with your existing customer base – those new prices only go into effect when customers renew, or when you attract new customers.

But with tiered data plans you don’t have to raise your prices to increase your revenue, it happens automatically over time as data usage increases. Right now on AT&T 3GB of tiered data is the pricing equivalent of an unlimited 3G data plan, while 5GB is positioned as a premium offering. But what about when consuming 5GB becomes the norm? Or 10 GB? Even though the vast majority of users today use less than 3GB a month, at the rate at which mobile data usage is growing it won’t be long until customers start to clamor for more bandwidth.

No one can blame a carrier for charging more for that 5GB plan. By then they’ll probably have to introduce 7 and 10GB plans for power users. Every time a customer decides he or she (or their family) needs more data, it becomes a revenue growth opportunity. Even better, as the pace of data growth picks up, people will voluntarily choose to upgrade before their two year cycle is up. Rather than have to wait twenty-four months before a pricing change impacts all of their customers, with tiered data customers chose to raise their own prices as their demand for data grows.

And if your costs drop in between infrastructure investment cycles? You can always lower prices to try and draw customers. The network gets to look like the good guy, but the built-in revenue increase cycle is still there, as long as Moore's Law helps propel ever greater consumption rates for mobile data.

The new reality

Tiered data isn’t really about network congestion. It’s a solution to the revenue trap the carriers got themselves into while competing for 3G customers.  It’s a way to harness natural market forces to create an ever-increasing revenue model for the carriers, without the burden of having to raise rates.

But the carriers will need to get people moved to tiered pricing before customers change their views on what the “normal” amount of data is. Already AT&T is letting their unlimited LTE customers use 5 GB of data per month for the price of the 3GB tiered data plan. Verizon also has deals to encourage tiered customers to move to LTE. Speeding up the adoption of LTE is ultimately good for their bottom line, so the companies are willing to treat this as a loss leader in order drive growth in overall data consumption.

This will backfire if customers feel that 5GB should be expected, rather than a short-term marketing scheme.  Customers on tiered plans will wonder why they have to spend more to get 5GB of data if a large number of unlimited customers are getting it for the price of a 3GB tiered plan.

Expect action in the coming 12-18 months to move all of the grandfathered unlimited customers to tiered data plans. With the upcoming shared data plans there will be enticements – adding a tablet to your data plan without incurring a higher cost (providing you’re frugal with your tablet data usage), or having more smartphones in a family at a savings.

Expect the savings to be compelling in at least some use cases. The carriers need to move everyone to some form of tiered data pricing, and they’d prefer that customers move for positive reasons. And honestly, if you see a deal that suits you, it’s probably in your interest to take it, as sooner or later the networks will simply start converting all unlimited customers to an equivalently priced tiered plan.

Forcing customers to change will surely be the last step; there will most likely be offers to try and entice long-term customers to switch on their own (perhaps a discount for voluntarily switching before your contract renewal). But sooner or later it’s going to happen. The underlying dynamics of corporate financing, along with the basic math that turns a potential liability into a huge revenue asset, are just too tempting.