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

17 Comments

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 (s t) and Verizon (s vz). 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 (s qcom) 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 (s amzn) 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.

17 Comments

BLYTE

yes !! i can’t wait to stay at work and check what’s in my fridge at home or have my fridge email me and tell me if something is running low or have past the expiry date or time. lOl.

Tom Tunguz

Great article. I agree that carriers have no choice but to increase the cost of data plans for subscribers, much the way that the cable companies increase bill amounts 5% annually.

The M2M market is growing but nascent and with the vast majority of the wireless business (as you point out, constituting 45% of ATT’s revenues) is driven by non-M2M. Plus data ARPUs are increasing less quickly than voice ARPUs are decreasing.

New pricing plans, here we come. My full analysis is at http://expostfacto.posterous.com/the-changing-economics-of-mobile-carrier-busi

Noel

Does Chetan provide any details on how he arrives at the statistics used to create those sexy graphs in his presentation? I could not see any more details on his web site, which leads me to suspect some kind of data massaging to reach his desired conclusion.

About AT&T betting on internet of things, this is nothing new. AT&T believes in investing all technologies that have slightest possibility of becoming the next big thing. AT&T spends more money in researching WiFi, even though that is not their core business.

The title of this blog and Chetan’s report seems positioned to attract more web traffic than to propound an idea or document a trend. Disappointed!

vijaygill

Ok, not sure why they don’t bump up the price? Eg move it to 80/mo for unlimited and by unlimited really means implement the T-mobile model where you can rate limit folks down if there is congestion, because really what you want to do is defer upgrades.

Stacey Higginbotham

Vijay, my understanding is T-Mo will rate limit after a user reaches 5GB regardless of congestion. I think we’re going to see a world of pricing change for cell plans. I doubt carriers are going to give up on profiting off their data plans to consumers, but I also think they’re smart to search for higher margin plans through M2M if they can. We’ll see if it works.

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