From the blog post:

“While we have not yet seen the final Order, we anticipate that the service rules adopted today will permit deployment of LTE technologies in the WCS band while ensuring that satellite radio services are protected from unreasonable interference.  AT&T took real risks to develop this under-utilized band and is committed to devoting the resources necessary to unlock its full potential.  We expect to commence deployment of LTE infrastructure in the band in as early as three years, allowing us to enhance our wireless broadband services.  Our customers will also win, as additional spectrum capacity becomes available to support surging mobile Internet usage.”

In the fast-paced world of tech three years may seem like an eternity, but in the plodding world of telecom, three years is the flap of a hummingbird’s wings. AT&T has to get the Wireless Communications Services (WCS) band approved for LTE use by the standards bodies, it has to buy up many of the remaining WCS licenses it doesn’t already own, and it has to secure commitments from equipment vendors and handset makers to build gear and phones for the new band. After that it presumably has to test that gear to ensure that it doesn’t interfere with Sirius XM’s satellite radio signals – problems that have prevented AT&T from using those airwaves for more than a decade.

To be honest, AT&T can probably take care of all of that in a year or two, but carriers don’t like to be pinned down to specific timelines. For instance, when the FCC tried to impose on Dish Network a three-year deadline launching LTE in its satellite spectrum, Dish insisted it couldn’t get even a modest network up in fewer than four years, and it fabricated all kinds of technical excuses to support its claims. You’ll notice by AT&T’s wording it isn’t guaranteeing a new network in 2015, but by even suggesting it could move that quickly, AT&T is behaving distinctly un-carrier-like.

Of course, AT&T has plenty of strategic and political reasons for targeting a relatively quick rollout over its new airwaves. AT&T has been lobbying Washington hard for new airwaves, claiming it faces a looming spectrum crisis. If it were to simply sit on its newly 4G-ified airwaves, it would not go over well with regulators and lawmakers, to say nothing of the public policy and consumer advocacy groups that dog the carrier’s every move. Ma Bell at least has to go through the motions.

But AT&T may have legitimate need of this WCS spectrum sooner rather than later. Its current LTE network in the 700 MHz band is constrained in some key markets. While it has backup spectrum in the Advanced Wireless Services (AWS) airwaves, it was forced to part with a lot of those airwaves after its failed merger with T-Mobile. It doesn’t have near enough AWS licenses to double down on 4G capacity nationwide. But as we’ve pointed out in the past, these rejiggered WCS airwaves are AT&T’s best bet for building a consistent, high-capacity 4G network coast to coast — something it’s never had the luxury of doing until now.

Image courtesy of Flickr user kaibara87.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• A look back at mobile in Q1
• 2012: Data, spectrum and the race to LTE
• A look back at mobile in the third quarter

Performing a few mental calculations during his keynote at CTIA Wireless on Tuesday, Federal Communications Commission Chairman Julius Genachowski quickly concluded that the same amount of mobile spectrum exists in the U.S. today as existed before the FCC slapped down AT&T’s merger with T-Mobile. Given that the sums are the same, where did this sudden capacity crisis come from that somehow forced AT&T to hike mobile data prices?

“Some have argued that transactions, let’s be frank — one transaction — is somehow causing a shortage and causing a price change,” Genachowski said, according to the Washington Post. “But the overall amount of spectrum hasn’t changed, except for the amount we’ve added to it.”

Ever since the merger died, AT&T has been battering regulators, trying to pin the blame on the Commission for its recent consumer data plan rate hike. As I have pointed out before, AT&T is simply scapegoating the FCC for it’s own decision to raise prices. It still has plenty of spectrum it can use to add capacity before it faces a mobile data crisis. And while it may have raised prices, it’s actually selling bigger buckets of data at lower rates, encouraging its customers to consume more, not less, bandwidth. But it’s good to see that Genachowski and the FCC are fighting back.

AT&T, however, is still sticking to its math, saying that the merger would have somehow magically created additional capacity for the wireless industry. “Basic economics, and the law of supply and demand, apply to the wireless industry as to all others,” Jim Cicconi, AT&T Senior EVP of External and Legislative Affairs, wrote on AT&T’s blog after the speech. “In the case of wireless, without additional capacity, which would have been created by our transaction, prices rise.”

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• 2012: Data, spectrum and the race to LTE
• A look back at mobile in Q1
• A look back at mobile in the third quarter

Stephenson chose an apt pulpit. He delivered his speech before the Milken Institute, founded and named after junk-bond trader Michael Milken, who was convicted of felony securities violations in 1990 and sentenced to 10 years in the federal pen. Neither Milken nor Stephenson have any great love for regulators.

We have heard Stephenson’s refrain before. He tried to make the same case to analysts and investors in the fourth-quarter earnings call, claiming the FCC was picking winners and losers in the mobile industry. Without T-Mobile’s 4G airwaves, AT&T doesn’t have enough capacity to meet the enormous mobile data deluge generated by millions of new smartphones, which in turn is forcing AT&T to raise data prices — or so Stephenson’s argument goes.

The truth is no one forced AT&T to raise prices. AT&T just raised prices because it wanted to. It’s just scapegoating the FCC, whether to make some petty point or to deflect attention away from a good old-fashioned money grab. AT&T had, and still has, plenty of head room to grow its network capacity. Let’s break down why.

• While it’s true AT&T raised prices on its low- and mid-tier data plans, it also raised its data caps significantly. A $30 per month customer now gets 3 GB per month rather than 2 GB for $25. If AT&T is so hard up for capacity, why is it inviting its customers to consume more gigabytes for less cash? AT&T is actually gaming the system here a bit, because it knows few customers can conceivably consume 3 GB per month on a smartphone. Still, AT&T effectively lowered its per-megabyte rates for mobile data, which is not something a carrier strapped for capacity would do.

• AT&T still has plenty of networks it can build. AT&T’s initial 700 MHz LTE rollout is only a third complete. It’s also sitting on a bunch of Advanced Wireless Services (AWS) spectrum that it hasn’t even touched yet. Ma Bell could also follow T-Mobile’s and Sprint’s examples and refarm the spectrum used by its inefficient GSM networks for HSPA and LTE. Eventually AT&T will need to go out and get more spectrum — there’s no denying that — but today it’s nowhere near exhausting its airwaves. There’s nothing stopping it from building its networks more quickly. It has the money: $39 billion to be exact.

• AT&T’s problem isn’t that mobile data traffic is growing too quickly; it’s that mobile data revenues aren’t keeping pace. AT&T’s mobile data traffic is doubling every year, but it’s only adding an incremental number of new smartphone customers every year. What gives? AT&T’s existing customers are consuming more megabytes, but since they’re nowhere near their caps, they’re not paying anything more. This is AT&T’s own fault, though, because of the way it structured its original smartphone plans. AT&T sold customers big buckets that very few people could consume each month. Now that customers are actually eating the gigabytes they have paid for, AT&T is complaining it’s running out of capacity. It’s hard to be sympathetic.

This isn’t the last we’ve heard from Stephenson on the issue. Much of AT&T’s public communications since the merger’s failure have been direct or indirect assaults on regulators. Ma Bell even used the Super Bowl as an excuse to decry its so-called capacity problems. And as long as AT&T keeps making these claims, we’ll continue to dispute them.

Feature image courtesy of Flickr user Simone Lovati

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• CES 2012: a recap and analysis
• 2012: Data, spectrum and the race to LTE
• A look back at mobile in the third quarter

AT&T’s first-quarter earnings numbers show that new smartphone customers aren’t the ones straining its data networks. Rather AT&T’s chickens have come home to roost. Customers are finally starting to consume the big buckets of data AT&T is selling them, taking their fair share of network capacity while not paying more for the privilege. Consequently AT&T is seeing a massive increase in data traffic without a corresponding jump in data revenues.

Revenge of the tiered pricing plan

During AT&T’s Tuesday earnings call, Mobility CEO Ralph de la Vega revealed that AT&T had added a net total of 10 million new smartphones over the past year. The devices now account for nearly 60 percent of its postpaid subscriber base. De la Vega also revealed that AT&T’s wireless data revenues are tracking about $24 billion per year, growing at steady rate of more than 20 percent per year.

But AT&T has pointed out before that data traffic on its mobile networks is actually doubling each year. So that means a 100 percent annual increase in mobile gigabytes shipped is being driven by a mere 32 percent increase in smartphones. What’s more, AT&T is only collecting a few billion dollars more in revenue to handle that deluge of new data.

The lion’s share of AT&T’s data traffic growth isn’t being driven by new smartphone customers; it’s coming from its existing subscribers, and for the most part they’re not paying more for that extra consumption. AT&T’s numbers would indicate that many customers are getting a lot a closer to their data caps without exceeding them. Basically they’re consuming more data while still paying the same amount on their monthly bills.

Some of those customers are AT&T’s grandfathered unlimited customers, but they’re a shrinking minority, accounting for 39 percent of smartphone customers in the first quarter. Plus, AT&T has begun throttling back speeds on those customers once they exceed 3 GB on HSPA+ and 5 GB on LTE. That means most of AT&T’s data traffic explosion is coming from tiered plans, which makes sense if you look at AT&T’s pricing structure.

Of the 25 million smartphone customers on tiered plans, 70 percent subscribe to an upper-tier plan, which means a 2 GB plan under the old pricing scheme and a 3 GB plan under the new one. But in a recent study, wireless analyst Chetan Sharma found that 70 percent of smartphone users in the U.S. consume less than 1 GB per month, which is one-half to two-thirds less than the amount of data most of AT&T’s customers are actually paying for. There’s been a huge disconnect between the amount of data customers buy and the amount they actually use, but that gap is finally starting to close.

Capacity crunch or poetic justice?

As you have probably figured out by now, AT&T’s capacity crunch seems to be a problem largely of its own making. Customers are finally growing into the data plans, and they’re eating up all of AT&T’s mobile data network capacity in the process. I should also point out that AT&T’s networks have also become far more efficient than they used to be, allowing it to deliver more bandwidth over the same infrastructure and spectrum. When the iPhone 3G first launched in 2008, the typical AT&T HSPA cell could support a theoretical limit of 3.6 Mbps. That number is now 14.4 Mbps. An LTE cell using the same amount of spectrum can theoretically support 37.5 Mbps.

So I wouldn’t feel too sorry for AT&T, despite all of its claims of being broadsided by traffic demand. When it set up its current tiered pricing structures, it knew its customers would eventually scale their usage to match their monthly allowances, and they’re still a long way from even getting close to those caps. If AT&T didn’t know this, then it never should have offered 2 GB and 3 GB tiers in the first place.

This is what infuriates me about the way the operators price data. The per-megabyte cost we pay for mobile data has actually fallen considerably in the past few years, but we wouldn’t know that by looking at our bills. If carriers from the beginning had set reasonable plan tiers that actually reflected how customers consumed data, operators could have gradually lowered prices as their networks became more efficient. It’s probably a stretch to say they would have come off as heroes, but their mobile data policies probably wouldn’t be vilified the way they are today.

Instead, they chose to gouge customers by selling them far more gigabytes than they could possibly use. Now that customers are starting to actually use up those gigs, carriers are claiming they’re running out of capacity. Didn’t you guys see this coming?

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• 2012: Data, spectrum and the race to LTE
• A look back at mobile in the third quarter
• New solutions for the evolving mobile network

The licenses in question aren’t the airwaves Verizon is using in its current nationwide LTE rollout. Verizon has a nationwide 20 MHz chunk of 700 MHz, which is forming the backbone of its 4G network. Instead, Verizon plans to sell regional and metro-area licenses it picked up to supplement is capacity in high-demand urban markets. Once it picks up the Comcast, Time Warner Cable, Bright House Networks and Cox Communications’ advanced wireless services licenses (AWS) in the 1700 MHz/2100 MHz band, Verizon will no longer need those extra 700 MHz licenses to provide that additional metro capacity – or so its logic goes.

It’s an almost certainty that the cable spectrum sale will go through, but the Justice Department may have something to say about the joint marketing agreement that Verizon has brokered with the cable operators.

You can bet AT&T will be first in line to pick up whatever Verizon doesn’t want. These aren’t piddly little chunks of spectrum. We’re talking 10 MHz and 20 MHz swathes in New York City, Chicago, Los Angeles and dozens of other major markets. What’s more while those licenses — known as the lower “A”and “B” 700 MHz block — don’t gel with Verizon’s 4G deployment plans, they fit perfectly with AT&T’s own LTE network schemes.

AT&T’s LTE network is being built on those A and B lower 700 MHz blocks all over the country, but in many places it only owns a one or the other of those limited numbers of licenses, which severely limits its ability to scale 4G capacity in key cities. For instance in Chicago, AT&T has only deployed an LTE network with 10 MHz of capacity compared to the 20 MHz systems it has launched in most other markets. If AT&T were to scoop up all of those licenses it would have 30 MHz or more to devote to LTE in country’s largest cities, and it could build on the capacity further after it folds the 700 MHz it just acquired from Qualcomm into its network.

AT&T certainly wouldn’t be the only bidder. Regional carriers are building LTE networks as well. You can expect U.S. Cellular to compete with AT&T for Verizon’s Chicago license, which would allow it to extend its new LTE network to its flagship market. Leap Wireless, MetroPCS and numerous smaller operators may look to pick up licenses within their territories as well.

The sale may make sense from an operational standpoint. The 700 MHz band isn’t a unified block, and to support those A and B frequency bands means Verizon has to procure more expensive devices, which would be interoperable with other carriers’ LTE networks. By discarding the extra spectrum, Verizon essentially creates its own unique LTE band, which utilizes its own unique devices.

But Verizon is sure to face enormous criticism for the sale. Big Red has maintained that the U.S. wireless industry is in the midst of a spectrum crisis and that it will begin running out of LTE capacity in many markets as soon as 2013. If the spectrum situation is so dire, than why is Verizon giving up such valuable airwaves?

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Who and what to watch in the new era of the living room
• A look back at mobile in Q1
• Mobile 2012 and beyond

Though StarHub’s competitors SingTel and M1 have both launched LTE networks on the Island nation using 1800 MHz, StarHub claims to be the first operator in Southeast Asia to “refarm” currently utilized 2G frequencies for 4G, instead of just launching over unused airwaves. StarHub probably had little choice if it wanted to keep pace with its rivals, as Singapore still hasn’t revealed an date for the auctioning of new 4G spectrum.

Though the 2600 GHz and 800 MHz ‘digital dividend’ bands have been identified as the the primary 4G bands around the world, auction delays and the fact that many of those frequencies already have broadcaster tenants have kept many operators from rolling out their new networks. Many of them have begun looking to their old digital voice airwaves (1800 MHz is the international equivalent of the U.S. PCS band) to get LTE to market faster.

Eastern European operators were among the first to use 1800 MHz as a 4G launch pad, while in Western Europe, Deutsche Telekom and TeliaSonera have also tapped into their 2G frequencies to augment their designated 4G licenses. In the U.K. Everything Everywhere – a tie-up between France Telecom and Deutsche Telekom – is trying to pool its 2G airwaves to build LTE well ahead of the U.K.’s 4G auctions. And in Italy, Hutchison Whampoa’s 3 is using the band to get a jump on competitors Wind and Vodafone. In the Asia-Pacific region, Telstra in Australia and Korea Telecom are also reaping their old 2G spectrum.

Many of those operators are tapping into unused 1800 MHz frequencies, but few have taken the radical step of actually shutting down existing network capacity to get at those airwaves. We’re starting to see the same thing happen in the U.S. but on different frequencies.  While Sprint has designated an unused block of its PCS airwaves for its initial LTE rollout, it plans to refarm its old Nextel frequencies for 4G, after it sunsets its iDEN network. T-Mobile is being even more aggressive, compacting its 2G networks into a small portion of its PCS airwaves, to make room for more HSPA+ and a new LTE network.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• 2012: Data, spectrum and the race to LTE
• Mobile 2012 and beyond
• CES 2012: a recap and analysis

I’ll give Verizon this: it’s very meticulous. The filing, submitted late last week, is meant to justify Verizon’s $3.6 billion acquisition of the cable operators’ Advanced Wireless Service (AWS) spectrum, which would give Big Red a lot of room to grow its LTE network. But just to hammer the point home, Verizon ticked off all of the technologies and techniques that could boost network capacity without new spectrum – Wi-Fi, small cells, spectrum re-farming, cell-splitting – and explained exactly why each wouldn’t work. According to Bill Stone, executive director of network strategy, those technologies are either unavailable to Verizon or insufficient to provide the capacity it needs to feed its data-hungry customers.

What happens in 2013? In areas where Verizon only has 700 MHz, spectrum congestion will reach a point where customers’ data speeds will suffer, and it may no longer be able to maintain the 5-Mbps threshold it defines as 4G, Stone said. In areas where Verizon already owns AWS licenses, primarily in the eastern U.S., Verizon will have built more capacity, but even in those regions customers will see their service start to suffer by 2015, he said. Stone paints a pretty bleak picture:

As traffic volumes exceed the data threshold, some customers will experience decreases in speed and quality, depending on the mix of use occurring at that point. Most affected will be services like video streaming and real-time two-way video conferencing. For example, a customer who is streaming video or downloading a large file is more likely to notice increased jitter or longer buffering times, while a customer on a static web site may not notice a slower speed. The further data traffic exceeds the threshold, the more widespread and substantial the degradation in customers’ experience becomes. Even those customers who are not downloading information or otherwise not using speed -intensive services could experience slower speeds. Real-time applications will be impacted to a greater and greater extent as available bandwidth per user continues to decrease.

Let us at the airwaves

The answer to Verizon’s capacity ills has now become a common refrain among all U.S. wireless operators: give us more spectrum. Verizon isn’t wrong – all carriers will need more spectrum if we expect them to provide the big bandwidth-plentiful data networks of the future. But Verizon’s predictions on mobile data use seem particularly dire. While it claimed to have used detailed models to calculate those projections, all of that information has been redacted in the filing.

Verizon also appears to be hard-selling the FCC and its critics about the limitations of the technology to meet its capacity needs. Admittedly, some technologies, like small cells, are just emerging and will be difficult to deploy. But Wi-Fi is sitting there staring Verizon in the face, and it refuses to acknowledge its potential. In its filing, Verizon seems to conflate free public Wi-Fi available at Starbucks with the carrier-grade, high-performance Wi-Fi that AT&T and cable operators are using in outdoor capacity hotspots solely for the use of their customers.

But my biggest question is, if the capacity crunch is so bad, why is Verizon even bothering? With the SpectrumCo and Cox Communications deals, Verizon will get about 20 MHz of spectrum in major markets – that’s only enough to double its spectrum holdings out west and increase it by about 50 percent in the east. What happens in 2014 and 2016 when its customers suck up that capacity as well? Why is Verizon bothering to talk about connecting cars and karaoke machines? Why did it just start selling LTE as a home-broadband-replacement service? These aren’t the actions of an operator that will be squeezed for capacity in a year.

Why new technology isn’t good enough

In its filing, Verizon didn’t just dismiss the technical alternatives out of hand. The carrier spelled out all of the details:

• Verizon is deploying small cells and believes in the heterogeneous network of the future. The idea behind hetnet is to create an underlay of high-capacity miniature cells under the big macro umbrella, which would enormously boost capacity in high-traffic areas. But Stone said small cells won’t be the antidote to future congestion problems. “This is because our projected growth in data LTE usage from YE 2013 to YE 2015 will far outstrip the added capacity made available by small cells,” Stone said in the filing.
• Stone insisted that Wi-Fi as an offload technology simply wouldn’t work, despite its growing popularity among wireless operators. Verizon has deployed its own Wi-Fi access points in stadiums and other venues, but it has never embraced the idea of a large-scale hotspot rollout to augment its cellular network. “Given the company’s commitment to providing the highest possible quality and reliability of its services, Verizon Wireless has determined not to force customers onto Wi-Fi networks,” Stone said.
• Splitting cells is the long-time practice of building denser networks, putting new towers up to boost the capacity of the network. But Stone claimed this was a highly inefficient means to add capacity. Locating and launching a new cell is expensive and adds little to the overall capacity of the network, while launching LTE over new spectrum effectively creates a new layer of capacity network-wide, Stone said.
•  T-Mobile and possibly AT&T aim to harvest their current 2G networks for frequencies over which they can deploy new HSPA and LTE networks. But Verizon said it simply doesn’t have that option. Traffic on its 3G EV-DO network is simply too high (a lot of which might be explained by the 3G-only iPhone), and it will continue to increase even as Verizon moves more customers over to its new LTE networks, Stone said.

Launching new networks over new spectrum may be the cheapest and easiest way for Verizon to add new capacity, but it can’t be the only way. Otherwise mobile broadband is doomed. There’s only a finite amount of frequencies usable for the type of big cell macro-networks that Verizon is so fond of, and we’re quickly plowing through them. While AT&T claimed that spectrum was the only answer when it tried to buy T-Mobile, I at least give Verizon credit for actually exploring the technology alternatives. But it can’t truly be that pessimistic about the role of those network technologies in solving its capacity problems. Otherwise, what’s the point?

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• A look back at mobile in Q1
• 2012: Data, spectrum and the race to LTE
• Mobile 2012 and beyond

T-Mobile CTO Neville Ray

T-Mobile isn’t just launching a sizable LTE network in 2013, it’s becoming the Grim Reaper for 2G technology as we know it. In an analyst conference call on Thursday, T-Mobile unveiled a plan to radically reshape its networks, shutting down the majority of its 2G GSM capacity so it can focus almost entirely on 4G. As a result T-Mobile will get a bigger, badder mobile broadband network and, to boot, will almost certainly land the iPhone.

With this new network configuration, T-Mobile is pulling a technological coup. Though it is spectrum-poorest operator of the Big 4, it will wind up with a higher-capacity LTE network than Sprint and one with comparable capacity to AT&T, while still being able to milk a massive HSPA+ network for years to come. In the process, T-Mobile is calling into question the so-called spectrum crisis. While other operators are desperately searching for new airwaves, T-Mobile found its future growth spectrum sitting right under its nose. Consumer groups and regulators are almost certainly going to ask why AT&T and Verizon Wireless don’t do the same.

The network numbers T-Mobile CTO Neville Ray revealed at the call were surprising: 90 percent of the carrier’s data traffic and 50 percent of its voice traffic are running over T-Mobile’s HSPA+ networks. That means its GSM networks are languishing even though they occupy half of T-Mobile’s average 54 MHz of spectrum per market. T-Mobile’s answer is to shut them down, clearing the way for LTE and more HSPA+.

T-Mobile plans to sunset between two-thirds and three-quarters of its GSM channels in the PCS bands leaving, only a modicum of 2G bandwidth left for older phones that don’t sport 3G or 4G radios and to support basic data services for its machine-to-machine communications business. All of that capacity would then be turned over to HSPA+, creating a mobile broadband network on PCS almost as large as the one it currently runs on its advanced wireless service (AWS) frequencies. Moving HSPA+ to PCS opens up many doors for T-Mobile, most notably the ability to support any iPhone Apple makes for the U.S. market.

But T-Mobile won’t shut down HSPA+ at AWS completely. It will turn off some of that capacity and combine the remnant airwaves with the AWS licenses it took from AT&T as a consolation prize for their merger’s failure. It would then use that capacity to build a 10MHz-by-10MHz LTE network over 50 percent of its mobile broadband footprint. That would give it the same capacity as Verizon’s LTE network today and double that of the LTE network Sprint plans to launch this summer. In the remaining half of its network T-Mobile can only support a 5MHz-by-5MHz carrier, which would make its capacity configuration similar to AT&T’s. But keep in mind, T-Mobile has a fraction of the customers of Ma Bell and Verizon – it can make 5×5 go a long way.

Ray and CEO Phillip Humm said T-Mobile USA is still on the hunt for more spectrum, and ideally it would like to lock down more AWS airwaves to create a massive 20MHz-by-20MHz LTE network. That seems unlikely considering that its competitors are quickly scooping up what unused airwaves remain in the market, but T-Mobile is also challenging those deals.

Though Humm and Ray didn’t discuss it in the call, there’s always the possibility of repeating its network cannibalization feat at a later date to capture even more mobile broadband capacity. As more voice traffic moves to HSPA+, and more data traffic moves to LTE, T-Mobile could shut down its GSM network almost entirely and continue the HSPA’s shift down to PCS, which would in turn clear more AWS airwaves for LTE.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• U.S. Wireless Data Market: Q4 and Year-End 2008
• Mobile 2012 and beyond
• CES 2012: a recap and analysis

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

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• LTE changes everything; LTE changes nothing
• Confused about the wireless markets? Here’s a breakdown
• The future of Wi-Fi in the enterprise

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.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Carrier IQ and the continued erosion of operator trust
• The future of mobile: a segment analysis by GigaOM Pro
• New solutions for the evolving mobile network