Barcelona, home of the Mobile World Congress

The world’s biggest telecommunications show is occurring right now in Barcelona, with telecom vendors, carriers and other gear makers showing off devices, boxes and new industry standards. But amid the latest phones and technological breakthroughs there is a burgeoning class of services that show some operators and gear sellers understand how the connected world will play out and how they hope to derive value from it.

There are several trends working against the telecommunications industry depending on where in the stack you sit. Overall, there are a growing number of players developing low-cost equipment to undercut the big vendors. On the operator side, the rise of IP communications has threatened to undercut their revenue from specialized voice and texting services. Meanwhile operators are struggling to rebuild their networks to handle the challenges of providing a lot of data to truly mobile consumers who are using a variety of different devices. That’s a real shift in mindset and equipment for them.

So, gear makers are finding their margins under attack, and operators are dealing with the same pressures as well as trying to invest in a new type of flexible and scalable network architecture that will cost less to operate and buy. Services may be the best way to solve these problems for both gear makers and for operators, and two news items from MWC show that AT&T and Ericsson are willing to try.

Ericsson: From data center to data deluge, it will take care of it

Ericsson in the last few weeks has launched an array of products, including a data center on Sunday, that show how far beyond “gear” it plans to move. As my colleague Kevin Fitchard detailed, Ericsson certainly has the technical know-how to build gear to handle the needs of the next generation network, but gear isn’t enough these days.

Enter Ericsson’s new products tied to Wi-Fi offload, IP communicaitons and a new antenna concept for microwave backhaul. But wrapped around all of this were services. As Daryl Schoolar, a principal analyst at Ovum said:

The ‘boxes’ (picocell with integrated Wi-Fi, high-capacity gateway and golfball shaped casing) were delivered simply as a part of the story – rather than as the whole story. The bulk of CEO Hans Vestberg’s time was taken up announcing services and solutions that go far beyond hardware – a partnership in mobile commerce with Western Union, data centres and results of an Akamai trial in Indonesia.

AT&T’s global network for connected machines

Track your machines wherever they may go.

Likewise a machine-to-machine partnership between AT&T and Jasper Wireless from 2009 is now bearing fruit. AT&T said it had released a global SIM card that will provide connectivity for connected machines across the globe. As nice as this might be for smartphones, this is aimed at tracking inventory, vehicles and other items that might log thousands of miles in their lifetime.

So instead of a multinational corporation tracking dozens of contracts with operators , they can call AT&T and manage their portfolio of tracked items. Aside from the SIM hardware, AT&T is providing software and consulting around the business, which should help it keep its lead in the M2M space and potentially grow it worldwide. Again, the hardware here is less important than the expertise and partnerships AT&T already has in place to make such a service easy for enterprise customers to use.

Now, instead of a low-revenue (high margin) data subscription for tracking a car, AT&T sells a business service that enables a company to track its entire global vehicle fleet. At that point the enterprise isn’t looking at the per-vehicle cost of a connection; it’s thinking in terms of the overall value that such tracking can bring to its organization. And that value can move AT&T out of the commodity playing field.

The transitions from providing hardware or even individual connectivity, to enabling a business with a seamless technology package aren’t always easy. There has to be real value delivered as opposed to just fancy packaging, and the folks paying for those services have to have a reason to avoid doing the packaging and services level integration themselves. But like any homeowner who hires a cleaning service as opposed to doing it themselves, a well-done service can provide value.

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According to a story in the Wall Street Journal, which quotes AT&T exec John Donovan, the company is looking at charging app developers for the data consumers use while playing with their apps. Donovan likened it to a 1-800-style service where users could download the app without the data usage being charged on the consumer’s bill. Instead, an app developer would pay for the downloaded bits. From the WSJ story:

What they’re saying is, why don’t we go create new revenue streams that don’t exist today and find a way to split them,” Mr. Donovan said. A customer nearing his data limit for the month could be more likely to download a movie if the content provider covered the price of the data transmission.

Haven’t we been here before?

The stated thinking from AT&T is that the pricing would encourage customers worried about their bandwidth caps to still try new services, but the reality is this is a brilliant way to implement the double-sided pricing model ISPs have coveted for years. And without net-neutrality rules protecting wireless applications that don’t deliver voice or video-conferencing style services, this could affect Facebook, Spotify, maybe Netflix and any startup considering a hot new bandwidth-using mobile application.

I have asked AT&T several questions about the service, and haven’t heard back. But at its heart, the toll-free numbers Donovan likened this plan to in the WSJ story may offer a “free” service to consumers in terms of not counting against their data limits, but it implicitly provides a toll on the participant providing the app. In the telephone world that generally was a company or a call center operated on behalf of a company. But in the data and app world, the proposed toll could hit small and large providers alike, and thus stymie innovation.

This fear of halting innovation by making small providers pay to transmit their bits across carrier networks was one of the bigger arguments for network neutrality — or the idea that service providers couldn’t discriminate against packets moving across their networks. But with this plan AT&T may have found a means to discriminate using pricing, and possibly could halt innovation by companies that can’t pay to offset their users’ data.

What a lovely app you’re building! It would be a shame if data-strapped consumers won’t download it

Full-on net neutrality doesn’t apply in wireless networks, unless an operator is trying to block a competitive voice or video services such as Skype. As I wrote last year, that lack of wide scale protection could still cause problems for chatting within social networks, online games and other services, meaning companies such as Facebook, group texting apps or popular games may be affected. I’ve reached out to the FCC and several startups to see what people think. The FCC had no comment.

It’s also unclear if such pricing would run afoul of net neutrality rules but the big opening here for AT&T is the rollback of its unlimited plans. Give consumers a $10 per GB overage fee and you’ve given them something to fear when downloading a mobile application. So if someone hesitates before playing Pandora or watching a YouTube clip, then half of AT&T’s job is done when it comes to coercing developers to sign up for this toll 1-800 plan. If some applications sign up to pay this fee, then consumers will become acclimated to their app habits getting paid for by their dealer, making the cost of delivering a successful app a lot higher.

And if those apps choose to pay that cost, then AT&T has managed to do what it has tried to do since Ed Whitacre famously put forth the idea in 2005 — force those pesky web companies to pay to use AT&T’s pipes. Way to play the long game, Ma Bell.

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AT&T has already started exploring such offerings. In November it began offering a smartphone app called Call International that allows customers to make cheap overseas calls. Verizon partnered with its biggest OTT threat, Skype, in hopes of attracting more customers to its data plans (though the service oddly uses its CDMA circuit-switched voice network).

But in both those cases, operators put limits on how the services could be used so customers couldn’t simply move all of their voice minutes over to unlimited or big-bucket data plans. Kineto VP of marketing Steve Shaw said there is still plenty of opportunity for operators to test the boundaries of an OTT services without threatening their traditional voice revenues. In fact, operators have done it once before, he said in an email interview:

To some extent, it’s a little like the calling card phenomenon in the fixed line market 10+ years ago. At the time, it cost quite a bit to make international calls from a fixed line at home. “Over the top” calling cards providers offered a way for people to access their service (via the [plain old telephone service] line) to get cheaper international calls.

In response, the [Bell operating companies]/incumbents could have simply lowered their rates, but instead decided to offer their own calling card service.

People who are price-insensitive or not tech savvy will continue to pay full fare. But for those who are willing to jump through a couple hoops, an over-the-top VoIP app from their own operator may offer a nicely integrated solution with better prices.

By that logic, embracing OTT in half measures may be a way for operators to stave off pricing pressures from VoIP competitors. Rather than lower all of their rates, they just target the segments of their customer base that are jumping ship to lower-priced platforms.

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For example, voice-over-IP and texting services are up 114 percent from the first half of the year, presaging a future when the line items of texting and voice plans could disappear. Already companies are declining to buy texting plans for their employees, rightly recognizing that they can communicate via text without going through the carrier’s SMS system. It is a phenomenon already cutting into revenues at European carriers, and it will be felt soon here in the U.S.

Meanwhile, VoIP calling services, whether they are via Skype or Viber, are on the rise as well. And while carriers that are transitioning to LTE networks will eventually move their voice calling over to IP calls, it is unclear if the price paid for voice plans will see a subsequent drop. But data plans will only represent almost 40 percent of the average revenue per user (ARPU) by the end of the first quarter this year, according to Chetan Sharma, an industry consultant. This is a problem for two reasons, the first being that if people stop buying voice or texting plans, operators have a large hole to fill in ARPU. Second, the per-gigabyte price of VoIP calls or IM would not fill that hole but would also replace a higher-margin service with a lower-margin one.

So is compromise in the air?

In the wake of these losses in revenue, Allot’s recommendation to carriers is now compromise. A few years ago Allot was selling new types of pricing plans to help carriers cut down on bandwidth-hogging video applications while some carriers were trying to curb usage of new service by changing their terms of service to forbid users from streaming video to their phones. Allot called it. A backlash to the terms of service changes and carrier’s realizing that pricing was a better and more profitable carrot to use has reshaped the industry. It is becoming difficult to find someone with an unlimited mobile broadband plan.

I will take Allot’s recommendation that carriers should work with over-the-top providers pretty seriously. Already Skype, whose business comprises 79 percent of the VoIP traffic that Allot notes is rising, has a deal with Verizon that could represent the new breed of compromise. Unfortunately, details of their arrangement are hard to ferret out, but it seems to benefit Verizon over the consumer.

Also, we still waste a lot of time on YouTube

Aside from predicting the future for mobile operators, Allot’s data shows how much of our present we spend surfing YouTube on mobile networks. Globally, almost one out of every four packets (24 percent) traversing the mobile network was from YouTube, and it also accounts for 62 percent of all streaming traffic.

It appears from the report that the next big worry on the horizon will be HD video streaming traffic. YouTube’s HD-streaming traffic has increased by 300 percent from the first half to the second half of the year. Better and bigger screens are to blame for this boost, according to Allot, but I think faster LTE networks that are rolling out around the country play a role. Faster networks mean we can stream higher-def content, although we may end up paying for it in overage charges later.

And in those faster networks, along with our tendency to guzzle video content, may lie the secret to mobile operators’ success. Customers are already used to paying a set amount for voice, texting and data, but right now more than half of that amount is voice and texting. The challenge for carriers will be in shifting their pricing so customers pay about the same amount per month but “see” more of that going to data and less to voice or texting plans. Perhaps consumers would pay a bit for a VoIP plan that exempts Skype from counting against their data plan or ensures they could make a call.

For carriers, the worst thing that could happen from a pricing perspective is that consumers begin dumping voice and texting plans and acclimatizing to paying them less overall. But if operators cooperate with VoIP, IM and even video-calling services to offer an easier on-ramp to IP communications as well as plans that shift more of the costs paid by a consumer over to data, they may win. Companies like AT&T might be able to keep the same amount of consumer wallet share, co-opt their competition and probably eke out a few quarters of higher margins.

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By my calculations the 12-year-old company, based in Jackson, Miss., raised its first venture capital rounds from Nth Power, Siemens Venture Capital and Kinetic Ventures back in its first couple of years of existence, and by 2003, had raised $35 million in venture funds. Then more recently, the company followed up with $20 million in 2008, another $11 million in debt and options two years ago, and another $25.67 million in debt and options a year ago. So at least $90 million in funding.

Beyond its cellular smart grid network tech, SmartSynch in recent years has created a developer program with Qualcomm, worked on a prepaid electric meter service with startup PayGo, and launched its universal smart grid router in late 2009.

While SmartSynch has a lot of meters installed at commercial and industrial sites, its residential deployments have been fairly sparse to date. Those include a 10,000-home trial with AT&T and Texas New Mexico Power set to expand to 231,000 meters in the next five years, as well as partnerships with Verizon and Sprint.

It’s clear by now that cellular networks will make up a significant portion of utilities’ smart grid plans. In recent weeks Silver Spring Networks and Cisco also said they will be using cellular for a portion of the grid. Itron competes with Silver Spring Networks and others for smart grid networking, as well as being a giant smart meter maker. Itron’s shares shot up 6.5 percent in afterhours trading.

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AT&T Senior EVP John Donovan

AT&T is now claiming on its Innovation Space blog that its mobile data traffic is doubling every year, rather than increasing by the more modest 40 percent annual rate it detailed in recent investor and analyst calls. The distinction is important because the faster AT&T’s HSPA and LTE networks become overloaded, the more pressure it faces to use its reserve spectrum and find new sources of airwaves.

AT&T Senior EVP of technology and network operations John Donovan wrote:

But when the year-end numbers show a doubling of wireless data traffic from 2010 to 2011 – and you’ve seen at least a doubling every year since 2007 – the implications are profound.

Over the past five years, AT&T’s wireless data traffic has grown 20,000%.

The growth is now driven primarily by smartphones.  Add to that new customer additions and the continuing trend of upgrades from feature phones to smartphones, and you have a wireless data tsunami.

So is AT&T contradicting itself? No, it’s just looking at different sets of numbers. According to the Wall Street Journal, AT&T confirmed that the 40 percent number cited by AT&T executives cited only factored in increases from existing users, not traffic produced from new subscribers, i.e., the typical AT&T smartphone customer increased his mobile data consumption by 40 percent over the last 12 months. The 100 percent number is for overall mobile data traffic on its network, factoring in the increased usage of its existing subscriber base along with the burden millions of new smartphones brought to its network.

Now AT&T’s numbers make much more sense

Why would AT&T use the 40 percent number, rather than 100 percent number, when it’s trying to convince the public it’s running out of capacity? You have to remember whom AT&T was talking to. Investors and analysts aren’t so much interested in overall traffic increases on AT&T’s network, but in traffic increases AT&T can’t monetize.

The 40 percent increase, in most cases, represents traffic AT&T has to absorb without collecting any incremental revenue. A customer on a 2 GB plan who increases his monthly usage from 1 GB to 1.4 GB doesn’t pay AT&T an additional dime. But a new subscriber represents an entirely new monthly revenue stream. If AT&T’s traffic grows from new subscribers, it has more money with which to add network capacity. That’s not the case with existing customers unless it raises prices (which AT&T basically did).

Despite those huge gains, AT&T’s data traffic is growing at a slower pace than the rest of the U.S. wireless industry. Cisco Systems’ new Visual Networking Index projections, released Tuesday, found that mobile data traffic throughout the U.S. increased by 172 percent in 2011, meaning other operators made up more ground. That probably has a lot to do with AT&T’s early lead in smartphones thanks to its years of iPhone exclusivity. As of the fourth quarter, AT&T had an industry leading 56.8 percent smartphone penetration, which means it has far less headroom than its competitors to grow its traffic through new subscribers.

What’s more, AT&T’s efforts to restrict data usage among its customers seem to be working, reining in its hungriest data users. It introduced throttling on its grandfathered unlimited plans in the fall, which is now kicking in at usage levels as low as 2 GB a month. AT&T has also moved most of its subscriber base over to tiered data plans, which places caps on monthly usage. Consequently, AT&T’s customers are only increasing their consumption by 40 percent each year, compared to the U.S. average of 156 percent annually estimated by Cisco.

iPhone image courtesy of Flickr user mark sebastian

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Alcatel-Lucent’s one-two punch

Alcatel-Lucent is adding Wi-Fi to its new lightRadio small cell architecture, acknowledging that the small cell networks of the future won’t just be composed of miniature versions of the big macro cells looming from towers. They will also make use of cheap Wi-Fi access points using free unlicensed spectrum.

Rather than come out with its own line of dedicated access points, Alcatel-Lucent is incorporating Wi-Fi radios directly into lightRadio’s unique Cube design. The idea is for operators to deploy hybrid Wi-Fi and cellular networks as part of the same network, leaning on Wi-Fi to offload heavy volumes of Internet-bound traffic while using traditional 2G, 3G and 4G radios to provide the operator’s core voice and data connectivity. Alcatel-Lucent is incorporating the tech, which it simply calls lightRadio Wi-Fi, into the femtocell and metrocell configurations of lightRadio’s modular Cube architecture.

LightRadio is still a year or two away from commercial deployments, but in the interim Alcatel-Lucent is working with outside Wi-Fi vendors — so far unnamed — to incorporate their access points into its existing 3G and 4G networks. The Franco-American vendor’s service gateway will be the glue holding those components together, managing the disparate Wi-Fi and cellular connections as part of a single network. As customers pass between its Wi-Fi and cellular pools, the gateway recognizes and tracks them, eliminating the need for their devices to constantly log back into either data network.

Ericsson tying the knot with BelAir

Ericsson, the world’s largest wireless infrastructure supplier, aims to break into Wi-Fi through acquisition. Last month, I reported that Ericsson is in the process of buying metro-Wi-Fi vendor BelAir Networks, and at MWC we may witness the official announcement.

BelAir will give Ericsson instant access to not only an outdoor high-performance Wi-Fi product line that can scale to hundreds of thousands of hotspots but also a hybrid small cell technology similar to lightRadio Wi-Fi.

While waiting for the final acquisition details to emerge, BelAir is continuing to build on its technology. Ahead of MWC, it announced enhancements to its GigXone platform to optimize it for its new role in the mobile data network. In particular, it is building buffering technologies to cut down on jitter and latency and video streams, filters that block out interference from nearby cellular radios, and beamforming techniques designed to boost its access points range and capacity.

Smaller vendors get in on the action

Cellular technology pioneer InterDigital has turned its attention to the next generation of Wi-Fi, exploring how the technology can be expanded into emerging unlicensed bands like the white spaces between TV broadcasts (that is, if Congress actually allows white spaces for unlicensed use). InterDigital is debuting a technology at MWC called Integrated Dynamic Spectrum Management (pdf), which detects and harvests unused spectrum in the white space bands and bonds them to regular Wi-Fi signals, creating an ultra-high-capacity connection between the device and the hotspot.

This week Stoke introduced a new “clientless” network gateway, which allows Wi-Fi network to identify subscribers by their operators and automatically connect authorized users, without requiring any specialized software on the device. That may sound like a small thing, but one of the biggest obstacles carriers face in embracing Wi-Fi is that there is no easy way to sort out which devices have permission to access their access points and which don’t.

Today operators get around that obstacle by requiring customers to log into their access points — which many subscribers aren’t willing to do — or by installing clients on their customers’ handsets that automatically recognize authorized hotspots and seamlessly link to them. The holy grail for carrier-grade Wi-Fi, though, is for hotspots to recognize devices by their SIM cards, just like cellular networks.

Are we on the verge of a mobile Wi-Fi revolution?

It depends on whom you ask. Cisco Systems is very bullish on overall mobile data growth, but in the latest Visual Networking Index report, released on Tuesday, it heavily downplays the role of Wi-Fi in future networks. Cisco estimated that 11 percent of all mobile data traffic was offloaded onto Wi-Fi networks and private femtocells in 2011, which is significant, considering only a handful of global operators embraced Wi-Fi. But what is shocking is Cisco’s projecting that only 22 percent of that traffic will traverse Wi-Fi connections in 2016.

Cisco tends to be conservative with its numbers — for the past several years it has had to retroactively revise its data traffic estimates upward — but it seems to be particularly cautious on its Wi-Fi projections, assuming only lackluster support from operators for Wi-Fi. It is easy to get that impression today here in the U.S., since carriers like Verizon Wireless tend to dismiss Wi-Fi and even the operators that back the technology like AT&T haven’t exactly gone gangbusters with deployments.

But in other regions of the world operators are diving in whole hog. Japan’s KDDI is building a network of 100,000 access points, while French mobile upstart Free Mobile is churning up the competitive market in France with a cheap wireless service built on a 5 million residential hotspot backbone.

A lot of vendor activity around a new technology doesn’t necessarily reflect a strong operator demand (look at WiMAX), but in this case infrastructure suppliers probably aren’t generating meaningless buzz: They have little incentive to. If operators weren’t interested in Wi-Fi, vendors like Ericsson and Alcatel-Lucent wouldn’t get anywhere near the technology, because they stand to make little money from it. When it comes to selling network capacity, cellular technologies are a far more profitable enterprise.

My guess is that operators are applying enormous pressure on their vendors to integrate Wi-Fi in their networks and to do it quick. That is why MWC this year may look more like a Wi-Fi networking event than a cellular networking one.

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Don’t call off the data deluge yet

That represents a 78 percent compound annual growth rate in mobile data traffic over the next five years, which in 2011 topped out at 0.6 exabytes. According to Cisco, we ain’t seen nuthin’ yet. Just the incremental data traffic added to mobile networks in 2015 and 2016 will be three times larger than the entirety of the mobile Internet this year, Cisco predicts. The total number of global connections will top 10 billion, far exceeding the world’s projected population of 7.3 billion. Average connection speeds to mobile devices will increase by a factor of nine, from 1.3 Mbps sent down to a smartphone in 2011 to 5.2 Mbps in 2016. By that year, 71 percent of all traffic will be dominated by a single application: video.

Last year, Cisco predicted an annual growth rate of 92 percent between 2010 and 2015, and at first glance it might appear that Cisco is adjusting its numbers downward. But director of service provider marketing Douglas Webster said that is not the case. The phenomenal growth in 2010 is now factored in to this year’s projections, he explained: As global mobile data use swells, each year’s percentage growth will be smaller than the previous. In fact, Cisco has bumped up its projections for global consumption this year over last, revising the projected monthly run rate in 2015 from 6.3 exabytes to 6.9 exabytes.

“It’s very much a matter of large numbers,” Webster said. “If history is a guide then overall growth is likely to be greater than what we’re estimating.”

What’s AT&T got to do with it?

Cisco’s VNI numbers have become one of the industry’s standard measurements for projecting future mobile data demands, and they have been cited by carriers, infrastructure vendors and even the U.S. government as justification for clearing massive amounts of new spectrum for mobile broadband use.

But in the past month, AT&T revealed that its data growth rate is now running at about 40 percent, far smaller than you would expect in an exploding mobile broadband market. That has led several critics, including GigaOM contributor Tim Farrar, to question whether the spectrum crisis the industry supposedly faces is a myth.

AT&T’s current growth rate, however, isn’t the best snapshot of the industry as a whole. Cisco’s figures are a global average, not just for the U.S., which experienced the smartphone boom far before other regions. Meanwhile, AT&T, by virtue of its years of iPhone exclusivity, is well ahead of the U.S. curve, with an industry-leading 56.8 percent smartphone penetration. Unlike its competitors, AT&T can no longer double its smartphone base. Its future mobile data growth will increasingly depend more on its existing subscribers than on new ones.

The next big growth spurt is from the 99 percent

Cisco is projecting a 74 percent annual growth rate in the U.S., only slightly less than the overall global growth rate. But mobile data growth hardly slowed down in the U.S. last year. Using real network data to validate its numbers, Cisco found that traffic over cellular networks increased by 172 percent in 2011, compared with a 171 percent increase in 2010. AT&T may be slowing down, but the rest of the wireless industry is not.

The biggest check on U.S. growth that Cisco found was among the top 1 percent of users, which traditionally consume the lion’s share of mobile network capacity. In 2010, the top 1 percent of mobile data users were responsible for an astounding 51 percent of all traffic. This year that top 1 percent consumed only 24 percent of traffic, a likely result of tiered data plans and throttling by all the major operators save Sprint, Webster said. Still, that didn’t stop the remaining 99 percent from boosting their overall consumption:

• The average mobile connection in the U.S. generated 319 MB of traffic per month in 2011, up 156 percent from 125 MB per month in 2010.
• The average smartphone generated 201 MB of traffic, up 152 percent from 80 MB per month in 2010.
• Laptops are still by far the biggest mobile broadband hogs, generating 2,507 MB of traffic per month in 2011, up 88 percent from 1,336 MB per month in 2010.
• While still not the most prevalent devices connected to the cellular network, tablets generated an average of 382 MB of traffic per month in 2011, up from 198 MB per month in 2010.

Cellular-connected tablets already consume nearly twice what the typical smartphone does, and their average consumption is increasing at a faster pace. As the smartphone data boom starts to taper off, it is easy to envision how the tablet could kick off the next big data growth spurt in the U.S. — that is, when consumers finally start connecting them to mobile broadband networks.

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As Dave Burstein of Fast Net News first highlighted in late January, AT&T’s senior management told investors on two separate occasions last month that “The base increase of data consumption right now is growing 40 percent a year,” and “LTE does give us a 30 percent to 40 percent lift in network efficiency, but at current growth rates, that equates to only about a year’s increase in traffic”. Remarkably that 40 percent figure is not only far less than the growth rates projected by Cisco and assumed in the FCC’s October 2010 working paper (which argued that 300MHz of additional spectrum was needed by 2014), but it also contrasts dramatically with the figures AT&T itself presented when it announced the planned takeover of T-Mobile in March last year.

In that March 2011 presentation AT&T projected that data volumes would grow by 8 to 10 times between the end of 2010 and the end of 2015, based on an expectation that volumes would roughly double in 2011 and then increase by a further 65 percent in 2012. However, if we instead project out the current 40 percent increase in data consumption that AT&T is seeing then volumes would only increase by 5-6 times by 2015. Ironically, if that rate of growth was applied to the FCC’s October 2010 model, all of this data traffic would easily be accommodated for the rest of this decade by existing spectrum allocations under the FCC’s own assumptions of new cell site deployments and spectrum efficiency gains from new technologies.

Why might AT&T’s data volumes have fallen so far short of the growth expected less than a year ago? Two obvious explanations stand out: it seems that offload to Wi-Fi is becoming far more successful than many expected, and AT&T is now cracking down on the top 5 percent of users of its unlimited iPhone data plans.

With those “power users” consuming on average 12 times more data than other customers, and doing bizarre things like turning off Wi-Fi to save battery life while watching Netflix movies, it’s pretty easy to see how even a modest effort should reduce AT&T’s network loading significantly.

Of course, going forward AT&T would still find it much easier to increase the capacity of its LTE network by using additional spectrum rather than going through the messy process of refarming PCS or 800MHz spectrum from GSM to LTE. Now that AT&T has handed over much of its AWS holdings to T-Mobile as part of the break fee for that deal, AT&T would need look elsewhere for this spectrum.

So it’s hardly surprising that AT&T has been vocally proclaiming its opposition to the FCC placing any restrictions on participation in future auctions or on other potential acquisitions. However, with plenty of near term headroom on its new LTE network, the primary focus is likely to be on AT&T’s spectrum needs in 2015 and beyond. A time frame that will include its potential build out of an LTE-Advanced network.

Ultimately, as many (including myself) have been speculating, it therefore probably does make most sense for AT&T to end up in bed with DISH Network and use its relatively clean 2x20MHz of satellite spectrum for LTE Advanced. This assumes the FCC allows this spectrum to be repurposed for terrestrial services in the near future.

It could be argued that if demand growth is slower than previously expected, then AT&T might hold off on a decision for another year or more to see what happens with other spectrum bands (such as broadcast TV and AWS-3). On the other hand, if DISH’s alternative plan could potentially bring together other players like MetroPCS and even perhaps DirecTV to create a rival 4G network, AT&T may believe that now is the time to cement its dominant position alongside Verizon in the wireless industry. Thus ensuring that no-one else will ever be able to come close to the spectrum holdings and network coverage of these two players.

Tim Farrar is President of Telecom, Media and Finance Associates, a consulting and research firm in Menlo Park, CA, which specializes in technical and financial analysis across the satellite and telecom sectors.

Image courtesy of Flickr user Jeff Kubina.

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