How iPhones And Androids Ushered In A Smartphone Pricing Revolution
What’s a “fair” price for a month’s worth of wireless data service? Like any pricing debate, it’s a subjective matter, but many smart phone users will likely protest new tiered pricing plans currently being rolled out by major wireless carriers.
They shouldn’t. Tiered and metered pricing schemes are a sensible way to price demand for bandwidth-intensive users and applications and, in the process, alleviate network congestion, encourage new investment, and ensure that average costs for consumers are more reasonable over time.
Wireless data plans have traditionally been offered on a flat-rate, unlimited basis. That model created unsustainable network traffic burdens and it’s surprising unlimited plans have lasted this long. With smartphone users increasingly using their mobile devices to access the Internet and consume more cloud-based services and mobile video than ever, the “all you can eat” data buffet eventually had to end.
It will soon. Verizon recently announced tiered data pricing for wireless plans that will see smartphone users paying $30 per month for 2GB of service, $50 for 5GB, or $80 for 10GB. Busting any tier will result in an overage charge of $10 per GB of data. AT&T announced a similar plan last year starting at $15 per month for 200MB, $25 for 2GB, and $10 for each gigabyte over that. T-Mobile also has a tiered scheme with $10 for 200 MG, $20 for 2GB, $30 for 5GB, and $60 for 10GB. (Users of more basic “feature” phones pay far less.)
This isn’t exactly pure metering, but these announcements make it clear that the era of “all you can eat” data is likely dead and that usage-based data pricing will soon become the new industry norm (although Sprint and some smaller carriers continue to offer unlimited plans).
Some critics are already howling. For example, following the Verizon announcement last week, Gigi Sohn, president of Public Knowledge, a D.C.-based regulatory activist group, complained about “Verizon and the other wireless companies see[ing] the need to ration bits of data for their customers. While the new 4G technologies hold great promise, the truth is that most consumers could reach or exceed their caps if they watch two or three movies in a month,” she said.
Critics like Sohn assume that usage-based pricing is a nefarious scheme to fleece consumers and unjustly enrich carriers. In reality, usage-based pricing more fairly allocates costs according to actual demand: those who graze more, pay more. Critics also forget that high-speed communications and data networks don’t just fall to Earth like manna from heaven. They are extremely expensive and new investment has to come from somewhere.
Nielsen reports that from early 2010 to 2011, average smartphone data consumption grew by 89%, from 230MB to 435MB. Importantly, “data usage for the top 10% of smartphone users (90thpercentile) is up 109% while the top 1 percent (99th percentile) has grown its usage by an astonishing 155% from 1.8GB in Q1 2010 to over 4.6GB in Q1 2011.”
These numbers illustrate the dramatic traffic growth that carriers are struggling to deal with, but they also show how most average consumers will do better under the new tiered plans. With the average smartphone user using less than 500MB, they’ll easily qualify for the 2GB entry tier that most carriers offer for $20-$30/month. Verizon spokeswoman Brenda Raney told CNet News that 95% of current Verizon Wireless customers use less than 2GB a month.
Even the average iPhone and Android user will be under the 2GB cap. Nielsen notes that the average Android users consume 582 MBs per month while iPhone users consume 492 MBs. So they will actually save money under the new plans.
It’s only the most rapacious mobile data consumers who’ll pay the higher tier prices. Doesn’t it make more sense that the most intensive network users pay more instead of raising average costs for all consumers? Why should minimal data users subsidize the big eaters? Moreover, if one assumes that the most aggressive data consumers also likely have higher incomes, then critics on the Left like Sohn should love these new tiered pricing plans. It’s income redistribution for mobile phones!
Sohn is right about one thing, however: These price changes are partially a response to increased mobile video consumption, and some consumers could quickly eat up their monthly data allotment if they continue to download massive amounts of video while browsing wirelessly.
Those users impose a significant burden on wireless networks, so to some extent encouraging aggressive video downloaders to curtail their consumption by making them pay for it makes sense. Tiered pricing might incentivize some of them to delay video consumption until they can access the Internet at home or work. Consumers might also learn to avoid high-definition videos and stick with standard-def content while watching on phones or tablets.
Alternatively, some smartphone users will opt to increasingly connect to wi-fi networks since they will be faster and cheaper on a per GB basis. Many smartphone and tablet users already switch to wi-fi hot spots when they are in range.
With a spectrum crunch limiting future network expansion, these pricing changes become even more essential. Most of the best spectrum has already been snatched up, and federal policymakers are struggling to open up new spectrum or incentivize existing incumbents to reallocate their holdings to wireless broadband. But that could take years to accomplish.
Meanwhile, carriers can’t rely on traditional revenue generators like voice or texting anymore because of rising competition from other services offered by Skype, Twitter, Apple iMessage, and others.
No one can be certain which pricing schemes will best calibrate supply and demand while also ensuring optimal network investment. Policymakers need to allow network operators the freedom to innovate and employ creative business models so market experimentation can solve that riddle.
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