GigaOM » congestion pricing

Why Verizon killed its unlimited plans

Stacey Higginbotham — Thu, 07 Jul 2011 15:37:19 +0000

Verizon stops offering unlimited plans on Thursday for new customers, and much like when AT&T halted its unlimited plans last June, the world will not end. However, it will get more confusing as customers try to figure out how much data they need to buy and developers wait to see what happens to their businesses. No matter what Verizon says, though, this pricing shift isn’t about supply or a lack of mobile capacity but rather about demand. In short, because we want mobile connectivity wherever we go, Verizon is willing to bet we will pay for it.

Why this pricing? Why now?

Verizon will now charge new customers $30 for 2 GB of data at the low end and $80 for 10 GB of data on the high end. The ability to buy different buckets of data is familiar to the telcos, which offered the same sort of pricing in the form of minutes for years. It is also a good way to milk profits, since consumers will generally pick a bucket that offers more capacity than what they need so they don’t go over the limit.

But unlike minutes, a gigabyte isn’t something consumers are familiar with, because it can be used for various web activities that vary in how much data is used. That means there is both a greater opportunity to capitalize on ignorance but also a chance to stifle innovation and mobile app use. Suddenly consumers will wonder if uploading that photo or watching that YouTube stream is really worth it. Heck, I do that today when it comes to streaming music using Pandora, and I never even come close to using more than 2 GB on my phone. Suddenly, instead of feeling free to experiment with silly apps that could become the next Foursquare, consumers may decide to forego an app.

A better option

So if gigabyte buckets are less than ideal, what would be better? If carriers are so worried about network congestion, then one option would be congestion-based pricing, where carriers charge more for using their networks during peak traffic. Another option would be to slow the data rate after a set amount of data is used, like T-Mobile does.

If this is more about making profits as opposed to congestion management (these are businesses after all), then I think plans that use more familiar metrics and that can be changed easily are better. So instead of buying a bucket of gigabytes, perhaps a heavy Instagram user might choose a photo-sharing plan that allows for unlimited uploads and only 5 hours of streaming video a month. Orange does this in several European countries and is even experimenting with personalized pricing plans for customers.

What about usage-based plans?

Whenever I cover pricing, a lot of people ask why we can’t just move to straight usage-based plans, where carriers charge per gigabyte or megabyte, much like people are charged for electricity. It’s a reasonable option, except that most people forget or ignore the fact that electricity is a regulated industry with the government involved in price setting, something I’d hate to see happen in the wireless industry. And the reason the government is involved? Electricity is a monopoly or duopoly in most places.

Now, AT&T is all about trying to prove competition in the wireless industry as it seeks to gobble up T-Mobile, but most people realize that the wireless industry is about as competitive as my challenging my four-year-old to a race. AT&T tends to move in lockstep on pricing changes and on issues such as ETF fees. Sure, there was a year before Verizon followed AT&T by cutting off unlimited plans, but it happened. And there was about half a year between AT&T following Verizon in charging high early-termination fees. And when the two largest carriers decided they had to somewhat match Sprint’s moves after it offered unlimited voice and data, they pretty much came out with similar and more-expensive “everything” plans.

Competitive? Maybe in the race to be less consumer-friendly, but not really when it comes to driving down prices. And since no one knows how much Verizon and AT&T pay to shuffle bits around the mobile web, it would be hard to keep them honest as it were in terms of charging a reasonable rate for a gigabyte. For those who love the free market, just look at how fast texting grew in Europe, where it was cheaper than some voice minutes, as opposed to here in America, where the carriers charged an arm and a leg for each SMS. Twitter couldn’t have flourished in that environment. Neither could ChaCha or any other service that shoots an SMS.

Could Wi-Fi help keep the flat-rate plan viable?

In general the loss of the flat-rate plan is inevitable, given the limitations of the wireless networks. But what if the wireless networks weren’t all cellular? Weaving Wi-Fi into a carrier network, as KDDI is, could change the load on the network in a way that allows for both capacity and profits. Wi-Fi networks are cheaper to deploy and are becoming carrier-grade. What if someone purchases an unlimited plan with the understanding that the carrier could shunt them to a Wi-Fi network whenever one is available?

As carriers pursue their new pricing strategies around mobile broadband ahead of faster Long Term Evolution networks and more-capable devices, they’re clearly keeping an eye on the bottom line, not pushing for American innovation in wireless. And that’s really a shame, because that kind of thinking slows the industry’s potential. Instead of becoming a platform for new ideas, mobile broadband has become a platform for squeezing easy profits.

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Mobile data: We’re using more but it costs less

Stacey Higginbotham — Fri, 17 Jun 2011 14:10:20 +0000

On average, smartphone users are consuming 89 percent more data than they did a year ago, but the cost paid per megabyte has dropped nearly half, to 8 cents, according to data out this morning from Nielsen. The stats company has provided a blog post detailing how those using data plans have really embraced the mobile broadband lifestyle; those already using the most data have increased their usage by 109 percent. The blog post paints this as worrisome, noting that only 37 percent of U.S. subscribers have a smartphone, which means the likelihood of the usage continuing to rise is pretty high, even as the costs (and revenue for the carriers) fall.

However, the folks at Nielsen may be missing a few subtle details in the economics of running a network, and its data may not have yet caught up with pricing changes filtering through the mobile ecosystem. For example, the last time it released this data, AT&T had just changed its pricing to eliminate the unlimited plan for its iPhone and other smartphones, which means iPhone users may have started using less data on the network as they worried about overshooting their caps. The Nielsen data tracking iPhone data usage shows a nominal slowing in the percent of growth, but in that same time frame, Verizon released the iPhone with unlimited data pricing, making a correlation hard to draw.

However, this summer Verizon has promised to change the way it charges for mobile data pricing, suggesting some type of tiered plan is in the works. Thus, in another year, we may see the cost per MB rise and data usage to slow. What happens to the data tsunami in that scenario? Does it peter out to become a normal and predictable wave? If so, then we get to the subtleties of network economics that operators don’t want to talk about.

A lot of traffic isn’t always a problem; in fact, it’s a nice way to ensure the network capacity, which is a fixed investment, is used and ultimately paid for. The real problem is peak traffic, because that’s where congestion sets in. It’s during rush hour when everyone on your train is trying to commute home and watch YouTube clips. Thus, as a recent report from Strategy Analytics pointed out, operators might not have the crisis on their hands that they think they have. The report noted that while overall traffic was increasing, building out the network infrastructure to manage peak traffic wouldn’t cost operators more as a percentage of revenue than it does today.

Additionally, if operators really want to limit peak traffic, they have an incredible tool at their disposal in the form of congestion pricing — or charging people more based on the time of day as opposed to the total number of megabytes consumed. This isn’t something carriers want to do, as charging per MB controls consumption and means every bit that transfers across their networks generates the most profits. Wall Street will like this, but consumers — and even app developers — may not (GigaOM Pro report; subscription required).

So while Nielsen’s data so far looks good for consumers, carriers and app developers, we may see the picture shift in six months or a year as carriers move to adjust their pricing and we possibly see one less player in the mobile ecosystem as AT&T gobbles up T-Mobile. I wonder if the prices indicated in the chart below will continue to go down. I hope so.

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Mobile Operators Want Netflix to Pay for Their Networks

Stacey Higginbotham — Thu, 10 Mar 2011 16:37:26 +0000

Mobile operators once again have their hands out looking for alms from the content producers; this time, it appears they want over-the-top providers to help fund the cost of building out their networks. When asked in an interview if the operators alone should bear the burden of building out next generation networks to meet the demand for mobile broadband, Franco Bernabe, the new head of the GSM Association and the CEO of Telecom Italia replied, “If the over the top players want to serve their customers with high quality services, I think they have to be part of the equation in serving our customers … our common customers.”

However, his most salient point, and one that may be glossed over is more reasonable — the idea of efficient applications. He says the industry and content providers need to address the issue of “inefficient uses of the networks,” which could mean anything from chatty apps to folks who are frivolously downloading YouTube videos. Remember, telecommunications folks really want people to start counting gigabytes. However, designing applications to make the most efficient use of the bytes that need to be transferred is a good thing for operators, and for customers who tend to pay for their mobile downloads by the byte. But I expect for the call to charge content companies to continue with the role of the bandwidth hogging villain passing from Google to Netflix in the coming year.

Which brings us back to the idea of data demand and the self-proclaimed woes of the wireless operators. To be sure, operators are walking a tightrope as the revenue from their voice calls fall while the revenue from mobile broadband services hasn’t and maybe won’t rise to the previous levels. For example, a research report out today from Wireless Intelligence notes that European operators have seen average revenue per user go from €25 ($34.75 USD) in the last three years to hit €20 — a 20-percent drop.

EU27: Average Revenue Per User (ARPU) 2007-2010

The crux of the report is how mobile data services aren’t making up for the lost revenue and those services are using up more of the network resources. It is a worrying trend, but operators know what they need to do. They must boost the use of smartphones and encourage subscribers to sign up for more data plans, while also making sure they don’t go crazy while using them. To that end, I’ve written about personalized pricing plans being introduced in Europe as well as the promise of congestion-based pricing plans.

Additionally, operators are opening up new lines of business by going after the machine-to-machine market, which can offer higher margins as well as provide connectivity to many more devices. Plus, the same network upgrades caused by the increase in demand are also helping lower the cost per bit for operators by a considerable amount. And operators in developed countries have fairly high operating margins in the 20 percent range, so while no business wants to see those margins drop, there is room for operators to work without jumping into a loss.

Of course, absent wireless network neutrality, it’s possible mobile operators will convince consumers and regulators that charging over the top providers such as Google or Netflix is the best way to meet the onslaught of demand. Personally, I’d bet on more Wi-Fi offload, congestion pricing and high-margin, machine-to-machine services going a long way toward helping operators keep going, but I can’t blame operators for trying. No one likes to see margins drop.

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It's Captastic! Cable One Embraces Congestion Pricing

Stacey Higginbotham — Thu, 08 Oct 2009 16:10:18 +0000

[qi:004] Cable One, a cable provider serving 720,000 customers in 19 states, has apparently brought congestion pricing for broadband access to the U.S., according to a post over at DSLReports. Such pricing plans limit speeds at certain times based on the assumption that the network will have more traffic during specific hours of the day. It’s similar to the traffic management plans in various cities that require commuters to pay more to enter a locale during certain times.

A few European ISPs have played around with congestion pricing, offering certain services or speeds based on the time of day, and most in the wireless industry think congestion pricing is the way to go, but it’s still relatively rare. BT recently got in trouble with subscribers for slowing its speeds on video between the hours of 5 p.m. and midnight. Overall, these pricing changes and caps are both a way to manage traffic and increase revenue for ISPs. Last year, I talked about the use of different tiers, caps and usage policies in determining pricing with Kurt Dobbins, the chief technology officer of IP services at Arbor Networks, and he said:

Carriers are all seeing a fundamental growth in traffic, and very few of them are seeing the equivalent growth in subscriber acquisition, so they’re spending billions more on bandwidth capacity but are seeing no new revenue…This is an answer to how they will grow revenue.

Cable One’s charts show that the provider is both throttling speeds between 4 p.m. and midnight (offering “standard” speeds that are about half of the advertised “extended” speeds) and is limiting the amount of data a user can download between noon and midnight. Basically, the all-you-can eat broadband buffer is only open at advertised speeds between midnight and noon. After that, you’re stuck watching what you download — and for eight hours, surfing at half speed.

There are two problems with this plan, beyond the main issue that it is consumption-based and a threat to innovation. First, instead of throttling back speeds when the network is actually congested as Comcast does, it assumes congestion all the time. If that’s the case, then a network upgrade or at least a few node splits may be in order.

Second, it’s terrible marketing. This is a confusing plan for any consumer. I would say it’s a revenue grab, but instead of charging overage fees when users download more than they are supposed to, Cable One says it will terminate the account. If it wants to implement a plan like this it should take a page from wireless carriers, and create packages with easy-to-understand names that help consumers figure out what they can and can’t do on their broadband connection. My suggestions include, “I Can’t Believe It’s Broadband” and “Get One-Half the Speeds, One-Third of the Day!” Readers, feel free to submit your own.

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