Verizon to Shift Usage Forecasting to Consumers With Tiered LTE Pricing

Verizon Wireless customers can expect tiered pricing when the carrier implements its LTE mobile broadband network later this year, the carrier’s CEO confirmed this week. Gone will be the monthly plans that Verizon currently offers — instead, customers will pay for pre-determined buckets of wireless data each month. It’s currently unclear if those buckets can be altered to higher or lower data amounts during a customer contract, but one thing is clear: Offering various pay-per-use plans allows Verizon to insure high margins.

In today’s 3G world, one could argue that carriers already provide tiered data plans, typically in two tiers: roughly 200-250 MB for one price, and an “unlimited” plan at a higher price — though the so-called unlimited plans are typically capped at 5 GB and can include overage charges (T-Mobile recently eliminated such fees and may reduce bandwidth after 5 GB of data is used). The smaller buckets work just fine for basic daily web activities such as email, light browsing and social networking updates. But add in video content, music streaming or other bandwidth intensive uses and you’ll quickly see the bucket overflow. The same applies to the unlimited 3G plans — you can burn through a monthly 5 GB plan with just 5.68 hours of video. The issue with today’s pricing is that carriers like Verizon have no idea how customers will use the network, so they can’t plan for demand, which varies by activity and device type.

With tiered pricing, however, the burden of forecasting demand shifts to the consumer. I suspect that Verizon will allow customers to routinely modify the size of their data bucket for this reason — multiple tiered choices with no room to change won’t help the demand forecasting problem. In this case, if you expect to be on the road for a few weeks and plan to stream a season of “Heroes” on Netflix, for example, you can plan to purchase enough data throughput in order to watch it from start to finish. Whereas if your travels are confined to the home office or the local Starbucks where you can use Wi-Fi, the purchase of a smaller data bucket makes more sense — both for you and for the carrier providing the network. The carriers’ argument to the consumer is that she will benefit from less network congestion — and that you don’t expect an all-you-can-eat buffet experience at an à la carte restaurant, so why expect it from a mobile broadband network?

The benefit to carriers, of course, is in the form of fatter margins. As Chetan Sharma, a wireless industry consultant and GigaOM Pro analyst explains:

“LTE will help force costs down 60 percent on a per-megabyte basis, but usage might go up by the same amount. Most of the gains [for network upgrades] are in the cost savings, but with faster throughput, things will download faster and people will do more of it, and since the price of the service is fixed, the cost of delivering the content will only go up.”

Indeed, tiered pricing offsets the cost of delivering content because all customers will pay for what they’re truly using, which helps moderate the delivery costs while also hedging the profit margin for Verizon. Stacey expands on that point in her GigaOM Pro report, “Metered Mobile: Pricing for Profits” (subscription required). She also underscores the expected Verizon pricing model, noting the carrier is “trying to figure out how to encourage usage and keep margins for mobile broadband high without overloading their networks or driving users back to the bad old days when everyone was too afraid to open the web browser on their phone for fear of exorbitant data fees.”

While we don’t yet know the details of the LTE pricing buckets, we shouldn’t have long to wait. McAdam expects three to five LTE handsets to launch in the first half of 2011 as Verizon plans to bringLTE to nearly 30 U.S. markets before the end of 2010.

This article also appeared on BusinessWeek.com

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