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Summary:

Are you enjoying an all-you-can eat 3G data plan on Verizon Wireless? The buffet is over when Verizon’s 4G LTE network arrives later this year. At that point, the menu will change to one of tiered pricing, shifting the usage forecasting burden to consumers.

Verizon Wireless customers can expect tiered pricing when the carrier implements its LTE mobile broadband network later this year, the carrier’s CEO confirmed this week. Gone will be the monthly plans that Verizon currently offers — instead, customers will pay for pre-determined buckets of wireless data each month. It’s currently unclear if those buckets can be altered to higher or lower data amounts during a customer contract, but one thing is clear: Offering various pay-per-use plans allows Verizon to insure high margins.

In today’s 3G world, one could argue that carriers already provide tiered data plans, typically in two tiers: roughly 200-250 MB for one price, and an “unlimited” plan at a higher price — though the so-called unlimited plans are typically capped at 5 GB and can include overage charges (T-Mobile recently eliminated such fees and may reduce bandwidth after 5 GB of data is used). The smaller buckets work just fine for basic daily web activities such as email, light browsing and social networking updates. But add in video content, music streaming or other bandwidth intensive uses and you’ll quickly see the bucket overflow. The same applies to the unlimited 3G plans — you can burn through a monthly 5 GB plan with just 5.68 hours of video. The issue with today’s pricing is that carriers like Verizon have no idea how customers will use the network, so they can’t plan for demand, which varies by activity and device type.

With tiered pricing, however, the burden of forecasting demand shifts to the consumer. I suspect that Verizon will allow customers to routinely modify the size of their data bucket for this reason — multiple tiered choices with no room to change won’t help the demand forecasting problem. In this case, if you expect to be on the road for a few weeks and plan to stream a season of “Heroes” on Netflix, for example, you can plan to purchase enough data throughput in order to watch it from start to finish. Whereas if your travels are confined to the home office or the local Starbucks where you can use Wi-Fi, the purchase of a smaller data bucket makes more sense — both for you and for the carrier providing the network. The carriers’ argument to the consumer is that she will benefit from less network congestion — and that you don’t expect an all-you-can-eat buffet experience at an à la carte restaurant, so why expect it from a mobile broadband network?

The benefit to carriers, of course, is in the form of fatter margins. As Chetan Sharma, a wireless industry consultant and GigaOM Pro analyst explains:

“LTE will help force costs down 60 percent on a per-megabyte basis, but usage might go up by the same amount. 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.”

Indeed, tiered pricing offsets the cost of delivering content because all customers will pay for what they’re truly using, which helps moderate the delivery costs while also hedging the profit margin for Verizon. Stacey expands on that point in her GigaOM Pro report, “Metered Mobile: Pricing for Profits” (subscription required). She also underscores the expected Verizon pricing model, noting the carrier is “trying to figure out how to encourage usage and keep margins for mobile broadband high without overloading their networks or driving users back to the bad old days when everyone was too afraid to open the web browser on their phone for fear of exorbitant data fees.”

While we don’t yet know the details of the LTE pricing buckets, we shouldn’t have long to wait. McAdam expects three to five LTE handsets to launch in the first half of 2011 as Verizon plans to bringLTE to nearly 30 U.S. markets before the end of 2010.

This article also appeared on BusinessWeek.com

  1. The carriers need to realize that the future is a unlimited data only plan. Internet, text, phone… it’s all data. This will happen so get with the program!

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    1. Kent, indeed it is — or will be — all data; Verizon expects to offer voice over LTE in 2012. But I’m wondering how you expect the carriers to provide unlimited data to anyone and everyone. In a sense, mobile broadband is consumable utility — do you expect your electricity to be unlimited at a single price?

      Believe me, I’d like nothing more than unlimited data for all at a reasonable price. I just don’t see it possible in the near future, given the growth of demand outpacing that of supply.

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      1. Couldn’t the exact same thing be said about DSL or cable? We’ve moved to the point where the average in-home internet service charges based on speed rather than time spent online or amount downloaded. Why is it unreasonable to expect the same from a mobile provider?

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  2. I bet they’ll price it like they do with the text-messaging add on. You have tiers of 250, 500, 1500, and 5000 messages. If you go over your threshold within the billing cycle, you’ll get charged per message -OR- you can upgrade your plan mid-cycle.
    You are prorated for the starting and the ending plan. However, the over-threshold messages, before you upgraded, are still charged at the over threshold rate.

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  3. Comcast and Verizon internet seem to have little issues offering an ‘unlimited’ plan. I already have to constantly check my minutes to make sure I am within my bounds and adjust my plan accordinly… they want me to do the same with my data? I love verizons network, but they are already one of the more expensive carriers. When this gets implemented I am pretty sure it will be time to call it quits with Verizon. I would rather have a worse unlimited connection at a reasonable rate.

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  4. I could definitely agree with both of you. As great as LTE would be from a corporate and margin standpoint, I feel that there will be some backlash from consumers. I know from my own consumer perspective, I feel that at the rates I’m going to be paying for data to begin with, why should I be capped? so to speak. Verizon offers “tiered” data, with there 250mb plan or unlimited, but theres no usability with the 250mb plan. When you really break it down, that comes to a 9.99 service fee plus 1.99 per mb used, last I checked? But besides the point, we’re a data world, and the further things progress, the more data that will be consumed. Consumers aren’t going to want the need to tier their data, but instead have the luxury of unlimited. Buttt, at the same time, your point is completely valid Kevin. These are consumable resources like anything else. I think that until we can produce new technologies to boost both speeds and network bandwidth to exponential figures then they are now, there’s going to be a large grey area between the companies and consumer.

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    1. After reading your post I realize that I would rather have my speed capped, then my data amount… that seems like a much more reasonable way to go for both consumer and corporation… and basically is how they run their home internet service.

      How would this even work? If I am under this plan and don’t know the exact data transfer of something that I am about to access, I won’t access it. That will kill Google maps for me, Does google earth transfer data continuously, will I be notified when it is and be able to stop it? Google wave, Mobile IM, Pandora radio, Weather apps, Google calendar, Outlook, Facebook, Web Browsing in general and of course watching any video. Does my phone synch its time with a time server… if so what is the data cost of that?

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      1. I completely agree with you here. If operators are going to start charging based on data amounts they better start building in a function ON THE PHONE, not one that uses data bandwidth over the network, that is like the real-time meter outside your house counting your kilowatt usage for your monthly heating bill, or I will straight up just stop using mobile data services. I find them convenient, but not necessary. I imagine many people would go the same way. Charging based on speed has a lot of benefits. The operator knows the maximum amount of bandwidth to allot each customer so they don’t have to worry about congestion. The customer learns to expect a certain experience and as long as they get it they won’t complain. My home broadband connection works exactly like this. There are issues of physical limitations with radio frequencies of course, but, I don’t know, I have to believe there’s still enough to go around.

        I’d rather pay for a guaranteed speed with unlimited access than a fixed amount of access that could come at a really slow pace.

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  5. Carriers may not have an idea how customers will use the network, but one thing is clear. They will consume more uplink bandwidth because they will generate content with their mobile devices. So the carriers better take that into consideration when they develop their pricing plans.

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  6. “Indeed, tiered pricing offsets the cost of delivering content because all customers will pay for what they’re truly using, which helps moderate the delivery costs while also hedging the profit margin for Verizon.”

    There’s just not enough detail in this article to verify the truth of this statement. If Verizon’s plans charged for number of bytes actually used (and why not throw in voice, text, etc., i.e., everything into a single “bucket” since it’s all bytes now anyway) then I could see it, no buckets required.

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  7. [...] move comes less than a week after Verizon said it would move to a tiered pricing model for its next-generation LTE network. But AT&T isn’t waiting for a new 4G network to make the pricing changes. Instead, the [...]

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  8. [...] fees on smartphones and unveiled plans to implement tiered pricing. While the details of Verizon’s tiers aren’t published yet, its CEO said last week that Big Red would offer buckets of data that a customer could use to [...]

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  9. [...] GigaOM – Verizon to Shift Usage Forecasting to Consumers With Tiered LTE [...]

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