AT&T & Verizon's Future Is in Your Fridge

Carriers’ data revenue rose 22 percent to $12.5 billion in the first quarter of 2010 over the same period a year ago, according to the latest data from Chetan Sharma, a wireless analyst. However, while data now contributes slightly more than 30 percent to the total average revenue per user (ARPU), it also uses 70 percent of network capacity. Sharma estimates that by the end of 2010, data will contribute more than 35 percent to ARPU and devour 85 percent of network capacity.

So even as data revenue and traffic rises, carriers face two key challenges: One, the handset market is saturated; and two, users on smartphones are boosting their consumption of data at a far faster rate than carriers are boosting their data revenue. The answer to these challenges is selling data plans for your car. Your kitchen. And even your electric meter.

Wireless providers are recognizing that the smartphone isn’t where the profits are going to lie, especially if they don’t reign in all-you-can-eat mobile data plans as Kevin laid out last week. Sharma’s data around how deeply voice subsidizes data is grim, but he predicts that it will only last through 2013, at which point things will even out. Then carriers will have to deal with a decline in overall ARPU.

Obviously ARPU isn’t the only metric that carriers pay attention to, and selling data by the megabyte isn’t the only option available to carriers. For example, texts are a low-data, high-dollar and high-margin service, a trifecta that leads to profits without overburdening the network. Carriers are hoping to find other data services (GigaOM Pro sub req’d) that offer these characteristics.

That’s why the promise of machine-to-machine communications is so important to the likes of AT&T and Verizon. Sharma notes that U.S. subscription penetration was at about 94 percent at the end of the first quarter, and if one eliminates children 5 or younger, past 100 percent. He writes that AT&T and Verizon added more connected devices than postpaid subs in the January through March time frame. Postpaid cell plans (even with data) just aren’t a growth area — unless we’re talking about using up network resources.

That’s why AT&T is betting big on the Internet of things, providing service for the Kindle, pill bottles and dog collars. It’s why Verizon has a joint venture with Qualcomm for machine-to-machine connectivity. For industry watchers the question to ask is not why carriers are rushing to provide connectivity, but how it will happen.

I think the business model questions have to be addressed before my fridge gets a wireless connection from one of the top carriers. For example, does the manufacturer of the appliance pay for the connection as Amazon does with its Kindle? Plus, bigger issues are at stake, such as why use cellular when Wi-Fi might suffice? For example, a connected appliance in the home doesn’t need to use a cellular network since it’s likely going to be part of a Wi-Fi network. As consumer electronics makers and automotive executives choose which cellular connection to put in a product, what attributes matter in terms of coverage, cost and contracts? Ironically, as carriers pursue this strategy they may find themselves at the mercy of their customers, providing the dumb pipe.

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