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Summary:

In the U.S., which has a population of 304 million, there are about 270 million cell phone subscriptions. With a market this saturated, the conventional wisdom is that there’s not much room for growth, especially as the amount paid for voice declines. And this is why […]

In the U.S., which has a population of 304 million, there are about 270 million cell phone subscriptions. With a market this saturated, the conventional wisdom is that there’s not much room for growth, especially as the amount paid for voice declines. And this is why mobile data has loomed so large for carriers in the last few years. According to the CTIA, a cellular industry association, wireless data service revenues for the year 2008 rose to more than $32 billion — a 39 percent increase over 2007, when they totaled $23.2 billion. Wireless data revenues for 2008 amounted to nearly 22 percent of all wireless service revenues.

So now that the market for phones is saturated, carriers are positioning to gain in the next wireless revolution, based on data connections. But selling data plans to people is going to become more expensive in the next 5-10 years as more consumers seek to use them.

Right now, wireless data is booming. Verizon saw wireless data revenue rise 41 percent from 2007 to 2008. In that same time period, operating income on wireless rose 3.5 percent to almost 30 percent. But those profits may come under fire as carriers deal with more people on their networks. Chetan Sharma, a wireless industry analyst, says that carriers will see demand rise for wireless data to the point that even lower-cost networks, such as the next-generation long-term evolution (LTE) network, will not be enough to make delivering wireless broadband profitable without drastic changes in both pricing models and alternative forms of delivering the service.

ericsson1“LTE will help force costs down 60 percent on a per-megabyte basis, but usage might go up by the same amount,” Sharma says. “Most of the gains [for network upgrades] are in the cost savings, but with faster throughput, things will download faster and people will do more of it, and since the price of the service is fixed, the cost of delivering the content will only go up.”

One problem is smartphones such as the iPhone that can access the web and bring wireless networks to their knees. Also becoming a growing nuisance are data cards that allow a laptop to get online. Sharma says that when operators look at data use on their networks, 4 percent of subscribers are using about 68 percent of the bandwidth on a given tower. Those users are surfing from data cards. Ericsson has estimated that data cards comprise 73 percent of traffic on a wireless network, which is amazing, given that they make up 3 percent of the subscriptions.

To manage this, AT&T has turned to Wi-Fi hotspots to dump traffic from its more constrained 3G network. T-Mobile has embraced femtocells, which offload cellular traffic to a home broadband connection when users are inside their home. But Sharma and others in the industry believe it’s only a matter of time until the pricing model will go from a flat fee to pricing based on when people want to surf the web, as well as how much bandwidth they are willing to pay for at a time. Perhaps someone would pay more for a 1.5Mbps connection so she can download a movie, but would settle for 200kbps for downloading her email.

The carriers keep discovering that if you give people access to fat pipes, they’re going to use them. That’s good for innovation, but on the wireless side, it can cause problems for the carriers’ bottom lines.

This article also appeared on BusinessWeek.com.

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  1. This is the real problem with having private companies owning and controlling a key component of our national infrastructure. The best thing for their bottom-line is to basically do nothing, never add capacity, keep bits as scarce as possible, so they can charge more for them. Since the the major carriers don’t feel any real price pressure from one another, we get slammed with 25¢ text messages and $60 broadband, capped at 5GB, from every carrier. Suspicious, isn’t it?

    Last century, after the invention of the automobile, America built a whole lot of roads and highways. That investment, what it meant for commerce and moving goods around, was central to American prosperity. Broadband capacity and ubiquitous internet connectivity are the roads of the 21st century, and should be a major point of public investment.

    Where would we be today if every road in America were privately-owned? What if you had to pay a toll every time you left your driveway? Think about how far behind we’d be as a country. Now, why are we allowing that to happen with the internet? Our internet and wireless infrastructures are already well behind the rest of the developed world in a number of areas. How will we ever catch up if we leave all the control in the hands of very few corporations, making as little investment as possible in the infrastructure that, with each passing decade, will become more and more critical to American competitiveness.

    As with healthcare, broadband (and wireless) is in desperate need of a “public option”. Of course, it really should be treated like a utility, with respectable of service guaranteed for all, and at affordable rates, but I just don’t know how we get there from here. Obviously, the red states – the very same who have the most to gain from such a plan – would never sign on.

  2. Asian countries are pricing based on usage, either through the size of the pipe, or the amount of data per month. I live in Singapore right now; mobile broadband access here is much cheaper (can get unlimited 1mbps for about $15usd per month). Part of the reason why it is so cheap here is because of government subsidies, where the give grants to telecoms building the pipes.. in this case the savings actually make it down to the consumer though (whereas in the US, it seems to go to management and stockholders). Being a US citizen, its very unfortunate to see the state of telecom back home.. I can’t believe how much I miss my ubiquitous internet access when I visit. Its quite a pain to be forced into a starbucks just to get wifi access. The telecom oligopoly and their influence on washington definitely hinders innovation and makes the consumer worse off. As Mike mentions above, perhaps the US gov can push the envelope here.. or perhaps it can come from grassroots/startup innovation as well, perhaps using alternative technologies. Can someone set up wifi based (mesh?) networks that are ubiquitous enough (at least in metro areas for a start) in a low cost enough manner? Some companies may be off to a good start on this problem, such as meraki.

  3. T-Mobile is using Wifi Routers, which you control. The other carriers are using Femtocell, which they control, and requiring you to allow other traffic via your broadband connection.

  4. perhaps a bare bones and even if very slow(say 128kbps) muni wifi networks blanketing the country is what we really need. the slow speed will allow tons of users and the carriers could offer the higher speed option for a price. since massive numbers of people would choose free over high speed this would go a long way towards relieving the congestion on the commercial network.; but for thoose who need the speed it would be there.

    the web hosters would also come up with new engenuis ways of compressing data to allow quality experiences wven through the slow muni connections. if we do build anytype of free muni networks the number one priority should be area covered and number of people served and let the commercial operators take care the speed hungry customers.

  5. I still think that competition is the key to keeping prices in check. If the carriers raise pricing too high, this creates an opportunity for a competing technology to emerge. City-wide wifi may find a resurgence. Plus the cable co’s may have something up their sleeves, especially in markets where their cable lines are overhead. It wouldn’t be that difficult for the cable co’s to lace a wifi network on top of their overhead lines. It’s obvious that the current back-haul and infrastructure of the current cell-tower configuration is not strong enough to support the future growth in wireless data. A complete rethinking of this structure should also accompany how this country decides to rethink our energy and electricity distribution system. A public/private partnership will be required to create a better grid for delivering the utilities of the future.

  6. Sam Schneider Monday, July 13, 2009

    Great article!

    I truly hope that the carriers decide to innovate to retain profits rather than trying to hang on to old business models or profit structures that aren’t sustainable long term.

    @Mike Cerm – I agree with your insight. A little bit of irony for you: the public option has been tried in North Carolina. I followed a story about a nearby township (Wilson, NC) that decided to build its own FTTH network to empower local businesses and then realized they could offer it at a very attractive price to consumers as well.

    You can guess what happened next – the cable company threw a hissy fit and claimed the town was being anti-competitive and moved to block their model from happening again by passing legislature. All I could think about was “man, I’d love to get FTTH in my town at those prices” and “if I could ditch my overpriced, poorly performing cable connection, I’d do it in a heartbeat for fiber!”

  7. Phil Hendrix Monday, July 13, 2009

    We’ve examined consumer interest in dual-mode (cellular + wi-fi) for a number of years, and continue to see significant interest. Operators in the U.S. (other than T-Mobile) have largely resisted wi-fi based solutions, choosing instead to pursue femtocell solutions (see discussion in our forthcoming GigaOm research note). Concerns about battery life have also slowed adoption of dual-mode phones, although that issue is being alleviated with next generation technologies. There is some evidence that operators are beginning to open up to – or at least not resist – wi-fi based solutions (see Networks moving to get WiFi on all handsets – http://mobile.blorge.com/2009/07/10/networks-moving-to-get-wifi-on-all-handsets/). Time will tell whether operators in the U.S. will embrace wi-fi more openly and fully – if not, we suspect that one or more disruptors from outside the mobile industry will.
    Phil Hendrix, PhD
    immr

  8. MobHappy » Blog Archive » Japan’s Porn-Obsessed Highlight The Need For New Content Delivery Models Monday, July 13, 2009

    [...] seen as a savior, wringing more throughput out of available spectrum, but some say that those gains will simply be offset by increased [...]

  9. Nathan Maggard Monday, July 13, 2009

    It seems as though everyone’s looking at this as a hassle. Why? More mobility for consumers is better. This strain on the networks due to data usage should just create new technology.. look at all the new wifi phone startups! Let the big networks figure this out or acquire these new co’s and we should have a sweet deal for consumers soon!

    Nathan Maggard
    MarketmeTennessee.com

  10. As Mike said Wireless access is a utility like POTS and Electricity. Instead of following that model, we have a competitive system where 4 or more wireless networks are working pretty much in similar locations. Think about settting four different electric networks at the same time. It is ironic and a waste of resources.

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