It may sound like another arcane bit of telco gear, but you’re likely much more familiar with policy engines than you might think. The policy server or manager is what throttles back your mobile broadband speeds when you exceed your monthly data quota, it tells your operator when you’ve been using your phone as a mobile hotspot on the sly, and it charges fees for services that some operators restrict like VoIP.

So what does a machine-to-machine (M2M) communications specialist like Jasper need with a high-powered policy engine? I put that question to Tekelec when we discussed the Jasper deal, and it turns out that policy is much more crucial to M2M and running vast networks of connected appliances and gadgets than I thought.

What it comes down to is that not all “things” in the internet of things are created equal, Tekelec Director of Strategic Marketing Joanne Steinberg said in an email interview. In the world of consumer applications, we chafe at the thought of one service or app being prioritized over another. But when we start talking about prioritizing devices, that all changes.

“For example, if I have a smartphone, a diabetes monitor, an alarm system and my child’s gaming device on a shared data plan, I may want my smartphone to have priority at certain times, and I would want my diabetes monitor and alarm system to always have a higher priority,” Steinberg said. “If I am an enterprise customer tracking multiple machines around the world, I may want my security cameras, safety and inventory tracking devices to have a higher priority than my vending machines.”

You don’t want your medical alert device to wait for a soda machine to finish uploading its inventory data before it transmits its emergency alert. Policy servers will assume the role of traffic cop not just over these millions of different connections, but the applications riding over them. A device like a security camera might normally have a low priority when it uploads its daily feeds to a video server, but when a crime is in progress the authorities need to see those video packets in real time.

What’s more, policy will pay a key role in billing for those different kinds of connections. In a world where millions of devices are always connected but only transmit intermittently, the concept of the monthly data plan goes out the window.

An individual customer could have millions of devices – for instance Amazon and its Kindles – sharing the same “quota pool,” Steinberg said, but in the case of M2M the value of a megabyte of data can vary greatly depending on the application. The amount of data an entire grid of smart utility meters could consume might be miniscule compared to the data a single tablet could eat up each month, but the utility would wind up paying far more due to the sheer number of connections supported.

“You can think of policy as the brain of the ‘Internet of Things’ because it intelligently defines the rules for all the ‘things’ that are and will be connected to the Internet based on network conditions, application and device priority, speed and bandwidth requirements, time of day and so on,” Steinberg said. “It will determine, when different devices and applications will have priority, what bandwidth and speed will be assigned, when to send alerts or new service and software updates – the list is endless!”

We’re going to see these kind of policy rules set not just in the internet of things, but in the plain old internet of phones and phones. Carriers are already weighing a new type of tiered plan, in which the tiers aren’t determined by monthly data allowances, but by service quality. It might not be much longer before we have the option to pay higher rates each month to ensure our traffic is sent via network fast lanes. Of course, if we opt not to play those higher rates, we might just get stuck in the on-ramp.

Feature image courtesy of Shutterstock user Lightspring

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The Verge confirmed with store representatives that the policy change will start Monday, and in fact, AT&T’s $35/3 GB contract tablet plan has disappeared from its website. AT&T only subsidized Android slates, not the iPad, so the impact won’t be huge. AT&T also isn’t the only operator to dump tablet subsidies. Verizon did so in June when it launched its shared data plans. But these policy changes are significant.

As my colleague Tom Krazit points out smartphones are fundamentally different devices than tablets. While mobile data connectivity is the smartphone’s primary reason for existing, cellular broadband is a secondary consideration for customers investing in a coffee-table computer. Consumers have shown they’re willing to pay the tablet’s steep price tag, but they’ve shown less willingness to invest in expensive mobile data plans and long-term contracts when Wi-Fi is so readily available.

By eliminating tablet subsidies, AT&T is discarding the $5 a month surcharge on tablets and pretty much normalizes data pricing across individual smartphone and tablet plans. AT&T customers will soon offer customers two choices: sign up for an individual no-contract plan (250 MB/$15, 3 GB/$30, or 5 GB/$50), or for one of its forthcoming shared data plans, which allows customers to add a tablet to pooled data bucket for an additional $10 a month.

But AT&T should go one step further. Now that customers are paying the full costs of their slates, Ma Bell should charge less for tablet data than it does for smartphone data. Here’s why: Subsidies aren’t traditional discounts or sale; they work much more like mortgages. Carriers give you an expensive device at a low up-front cost, but recover the subsidy through premiums factored into your plans over the next two years. If there’s no subsidy then it stands to reason customers shouldn’t pay those higher rates. T-Mobile has already adopted this approach, charging much cheaper data and voice rates to customers who bring their own devices.

I won’t pick on AT&T too much. Ma Bell is actually the most progressive (or least regressive) operator when it comes to tablet data plan pricing. In a recent analysis of U.S. carrier data plans, we found that AT&T had the cheapest per-gigabyte rates for tablets and mobile broadband than any carrier. Even T-Mobile’s new discounted value plans are in some cases more expensive than AT&T’s regular rates. For the same $30 price AT&T charges for 3 GB a month, T-Mobile only gives you 2 GB.

Operators are beginning to realize that tablet subsidies aren’t the way to go. Now they need to eliminate legacy subsidy pricing models. AT&T and Verizon’s shared data will solve the problem in part by allowing customers to draw tablet and smartphone data from a common pool – though they have other problems. But operators really want the tablet revolution to occur over their networks and not over Wi-Fi, they need to make tablet data cheaper.

Approved photo courtesy of Shutterstock user Stuart Miles

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Verizon’s structure is pretty simple. Pay a per-device monthly fee ranging from $10 for a tablet to $40 for a smartphone and then buy a bucket of data starting at $50 for 1 GB and going up to $100 for 10 GB. AT&T, however, is using a sliding scale to determine the amount your charged for each smartphone. For instance a family buying a 1 GB plan would pay $45 per smartphone connected, while the same family would pay only $40 per phone if they signed up for a 4 GB plan.

In general, the prices AT&T charges for the actual data buckets start off cheaper than Verizon’s equivalents, but as you get into the upper tiers, Verizon starts offering better volume discounts. For instance at 6 GB, Verizon charges $80 while AT&T charges $90. But at that tier AT&T is charging a $35 per-device fee. So four smartphones sharing 6 GB plans costs roughly $230 a month, while the same setup on Verizon costs $240. If you move down to two smartphones sharing 6 GB though, both carriers’ prices wind up being the same, $160.

Both carriers are charging the same rates for connecting non-smartphone devices and customer overages are being billed at the same rate: $15 per gigabyte. The new Mobile Share plans will be available in late August.

The biggest shocker is that AT&T is making these plans strictly optional – and not just for existing customers. New customers can still sign up for the revised individual data plans AT&T implemented in January – which in the case of individual customers could wind up being the cheaper option by far. And don’t worry, unlimited customers, your plans remained grandfathered.

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With more and more customers moving off carriers’ old unlimited data plans to tiered data buckets, streaming any reasonable quantity of video is all but impossible without incurring major overage charges. In its latest update to its iPhone and iPad apps, though, customers can toggle on and off 3G/4G connectivity. It may mean sacrificing Netflix access everywhere, but it could help them avoid rather unpleasant phone bills at the end of the month.

There are still a few unlimited options out there for iPhone users. You can stream to your heart’s content on Sprint’s 3G network. There are still millions of customers grandfathered into Verizon and AT&Ts’ old unlimited plans, but both operators have begun throttling back speeds once customers hit unspecified – and seemingly arbitrary – thresholds, making video streaming all but useless.

What’s more, Verizon is doing everything it can to coax, cajole and boot customers off their unlimited plans this summer. Unless the carriers firm up some kind of revenue sharing pact with Netflix – which Verizon may well be in the process of cementing – it looks like streaming movies is going to be primarily a Wi-Fi affair.

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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?

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