Blog Post

Flat-Rate Data Plans Are Dead. Is That a Good Thing?

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

Demand for wireless data around the globe will double each year through 2014 as the population turns to smartphones and data devices for instant information everywhere. To battle this growth, carriers are dropping unlimited plans in favor of tiered data buckets, which research firm iSuppli today says will boost declining carrier margins, while also helping to predict demand for service. That makes sense, but it’s too early to tell if customers will come out the winners.

Indeed, carriers weren’t prepared for the explosive growth in mobile broadband use over recent years. Jump back in time prior to the debut of Apple’s iPhone (s aapl) in 2007, and you’ll see an industry focused on voice and messaging revenues; data was only useful to the mobile enterprise worker and early adopters using smartphones with clunky browsers that made mobile web surfing less appealing than a root canal.

With the first iPhone and credible competitors that followed came a growing appetite for data: first in the browser, later with mobile apps and the desire to use phones as mobile hotspots. Indeed, as noted in a GigaOM Pro report on the data traffic tsunami (subscription required), iPhones were the primary driver behind the 5,000 percent increase in data usage on AT&T’s (s t) network from 2007 to 2010. With the relatively recent addition of 3G tablets and MiFi devices, demand for data will only keep growing, yet the problem remains: How can carriers predict data use and manage the service revenues against operating costs?

Tiered data plans are one answer when compared to the old model. Until this year, consumers generally chose one of two data plans: a low-capacity option at roughly $25 to $30 (200 – 250 MB) or a $50 to $60 “unlimited” plan that typically provided 5 GB of data. The latter plan appears to be a better value on a cost-per-MB basis, but it also introduces a problem for network providers, because the capacity variance between the two plans is very wide and gives little room for operators to predict demand accurately. As a result, AT&T began the shift away from unlimited plans earlier this summer, and others are following.

Industry analyst Chetan Sharma sums up the problem best in his report, Managing Growth and Profits in the Yottabyte Era:

Operators typically have great intelligence on voice usage but for data, the infrastructure and efforts are generally not on par. There is little understanding of what consumers are doing, which applications and services they are tuned to at any given instant, forecasting traffic spikes, etc. As cost of supporting data services exceeds the cost of managing voice services and as the revenues from data services become more prominent than those from voice services, operators will have to pay much more attention to the specifics at a very granular level and design business models and pricing plans per the trends and forecasts.

Consumers may want unlimited plans, but carriers can’t provide them due to limited infrastructure. Increasing demand will outpace fixed supply as carriers invest more to keep up with the growing wave of data demand. The investments to try to do so aren’t outpacing revenues from demand; if you can get past the jumbled look of the iSuppli chart below, it shows a declining trend of network operating margins over the past year. Consumer demand is the one variable that unlimited plans can’t account for.

A “pay for what you use” model might be the second-most desirable data offering on a consumer’s wish list, but like the unlimited model, it does little to help the operators predict demand in advance. Only by looking at prior usage habits can the carrier even try to predict how much data a consumer may use in the future. And all it takes is a new, hit social networking service or popular, must-have bit of software to throw that predictor model out of whack.

This topic of managing network capacity and data demand is particularly timely given that T-Mobile is the latest U.S. carrier to offer tiered data plans. Om recently spoke with Neville Ray, T-Mobile’s CTO, about the plans and Om’s vision of the Gigabyte phone. Ray agreed that it’s just a matter of time, saying, “You’re seeing some of these very capable smart phones emerge, and in several cases, we’re seeing devices where data consumption will be greater than a gigabyte per month.”

It’s good to hear that carriers are thinking forward, both in terms of demand and the best plans to offer and predict usage, so a migration to tiered data could fit the bill for all parties involved with both 3G and 4G networks. (Related: see our mobile broadband guide to understand how data networks are currently migrating to 4G). The only remaining variable is how will consumers take to such limits? Yes, the plans will be marketed as potential cost savers for some, but the heaviest of users will balk at having to refill their data bucket several times a month. Of course, as that happens, we should see a very different margin chart in as little as six months from now, much to the carrier’s delight.

Related GigaOM Pro Content (sub req’d):

21 Responses to “Flat-Rate Data Plans Are Dead. Is That a Good Thing?”

  1. One thing I have noted, and was deeply dreading, was Verizon Wireless’ switch to tiered data plans. Now that it has happened, I don’t even notice, in fact, I don’t even mind that they tiered the data plans. Then again, I believe that is because the data plans remained the same. I still get unlimited data for the same $30.00 U.S. I have paid since 2006/7 and if I wan’t, I can select a lower priced data plan. However, that would be ridiculous as I used about 16gigs a month!

    I feel for my fellow peoples on ATT. When they tiered their data plans, they really got the bone.

  2. This article said nothing relevant to its title. I hate to be one of those commenter’s who complains about the article but thats what this is, deal with it. One of the first things we learned in English class when writing a paper is that opening with a question peaks reader interest. However, we also learned that its important TO ANSWER THE QUESTION. Obviously a question as ambiguous as this one can’t really be answered at this point, BUT you need to cater to both sides of the question and that is where this article fails. This was obviously written by someone deeply entrenched in the ‘industry’ as they barely discussed the consumer’s perspective and focused completely on what they read in Sharma’s report and generally the carrier’s side of the story. My point is, who cares about the carriers side? Surely not consumers who hear words like ‘margin’ and think of the space between folds of leather that are the giant corporation’s wallet. Consumer demand is what keeps businesses open and failing to meet that demand means consumers will go elsewhere and businesses will close while new ones flourish. Obviously putting limits on what appears to have unlimited demand is never going to be a good model for those who demand it. Giant telco’s failure to spend their money where it needs to be spent (expanding their data service, obviously) and making their customers pay for their mistakes is what put our country in its current economic situation. Being 26, I’m just barely older than the ‘can’t function w/o my phone’ generation but that doesn’t mean i haven’t strongly considered moving to Europe simply b/c they have a competitive mobile industry (competitive in terms of lots of company’s, not 4) which yields more consumer friendly pricing, flexibility and increased innovation in products and services. So if i’m willing to do it, i’m sure a sizable percentage of the younger generation is also willing as well, for that reason and dozens of others, namely public transportation. The 18-25 generation values public transportation not b/c its ‘green’ or cheaper but b/c it allows them to multi-task, as in read the news on the train on the way to work or work on the way to work. All of that is done on their mobile phones which are more affordable/accessible in Europe, alongside public transportation and healthcare.. You say “It’s good to hear that carriers are thinking forward..” but i say they can’t see their own hand about to slap them in the face.

    • Nurlip, never worry about hating “to be one of those commenter’s who complains about the article” — we’re not a print journal that writes a story and then ending our responsibility. We promote conversation, which means comments will be all across the scale. No worries on that! :)

      There’s merit in your thoughts because, yes, I did take a business-view of the situation. For years I’ve taken consumer views in my writing, and as a consumer, I try not to lose sight of that background. I’ve also paid for and used multiple data devices continuously since 2005: at one point, my monthly cellular bill topped $350 due to several phones, USB data sticks and such. So from that perspective, I hear you.

      But the flipside for the consumer is to understand the challenges the carrier networks are facing. Could the carriers be throwing more money at the situation: yup, I won’t argue with you on that. However, I wanted to help consumers understand some of the reasons why they can’t simply offer the unlimited plans to everyone who wants them.

      The intent wasn’t to take the carrier’s side here, but explain to those who might not understand the constraints due to explosive growth in data demand, the unpredictability of it and the approach to managing it from a capacity standpoint.

      Indeed, the landscape is different in Europe with more competitors, which certainly helps. It’s also beneficial that most regions there are smaller (making it easier to provide coverage to more people for less infrastructure expansion costs) – unfortunately, we’re a spread out population here in the U.S. so national networks aren’t cheap. We also are outgrowing our networks faster than many other regions: smartphone adoption is quite high, by comparison, in the U.S., which further widens the gap between supply and demand.

      Hope that helps explain my perspective for this piece, even if you don’t agree with it — which of course, I totally respect. Thx!

      • i am not sure why but it seems to me this ‘look at from the business prospective’ is unique to technology.

        i am not sure whats up with it but when it comes to technology it seems lots of people believe even the consumers should see things from the side of the business. i do not know of any other business area where this opinion is so prevalent.

  3. I think carriers better have a good idea of how much traffic they get and have breakdowns to so many different levels. So they can effectively price the cost per GB so they can have a healthy profit and provide robust service. The networks are able to handle situations where everyone wants to use data at once just like they can’t handle when everyone wants to make a call at once. That’s not their intention or their goal.

    Someone using Netflix on their phone is going to consume a lot more bandwith than someone sending text messages. Many mobile OS platforms have mastered in-app adds but it would also be nice to have in-app statistics so you know how much data your app is consuming.

  4. Metered “bucket” plans are horrible deals for consumers. If a consumer is to get any value for a metered plan, it needs to be truly metered, you only pay for what you use.

    If you use nothing, you pay nothing, as they provided no service.

    Not the you pay for a fixed 2GB whether you use it or not.

    The other thing is America Cellular and Broadband are both among the most expensive and lowest performing networks in the world. Our companies charge consumers exorbitant rates for the slowest service.

    There’s no such thing as “too much data usage”, there is such a thing as a lack of investment and infrastructure. They need to spend those massive profits they’ve been reaping on the backs of mandatory $30+/mo data plans and put it back into Fiber and 4G/LTE Cell Towers. Then bring back proper unlimited data plans and reasonable terms of service.

    • Yes, but why would they do that? Seeing as how each carrier uses the same business model with only scant competition, they are free to treat their lack of infrastructure investment as akin to a limited resource in high demand. The only way to change that practice would be for a major player to change their practices and invest in infrastructure while at the same time providing consumers with a different pricing model that served as enticement for them to switch to the far sighted company. Alas, what would be the incentive to switch to a capital intensive business model when profits can be taken so easily though artificial limitation of the resource?

  5. The problem is that Carriers chargig/bundle design are completly random at best. They are “app aware”.
    Litterally, every app has a data consumption profile ( data used by typical user , bandwidth requirement etc …) wether you are using twitter app or netflix provides two different profiles.

    Given carriers are not connected to Apps Store and have no relation with App providers …they just “guess”.
    A technology was created 10 years call DPI ( deep packet inspection) where basically carriers try to spy every data packet going through their network to figure out what type of traffic is flowing and potentially block or charge. After many years …this has proven to be unrealistic in practice.
    Today, apps are really explicit pieces of content…and there is no need to guess. Yet, nobody has tried to align the apps that you are using and their consumption profile with your real bundle.
    Select your preferred bundle is an overkill …if carriers do not know, how can the subscriber know ?

    At the end, i think carriers should just find best ways to help developers distribute more and better at larger audiences/countries …instead of trying to pick more money over the same subscribers.
    App aware bundles, i think will appear in the near future …but that is not enough if carriers are not doing more (sales & distribution ) on the apps.

  6. i find there are two pricing model i can tolerate. flat rate/unlimited or or truly metered. by truly metered i mean i pay nothing when i use nothing and my bill is directly proportional to my usage.

    but the one pricing model i can absolutely not stand is the ‘choose your bucket size’

  7. THIS IS THE WORST THING EVER FOR THE CONSUMER! I bough an iPhone since day 1 launch and when i changed my contract for the iPhone 4 i wasn’t grandfathered in and thus leaving me with 2 shitty ass gigabytes. I used 9 gigabytes a month when I was curving my usage. As for tethering FORGET ABOUT IT! At&t can now suck more money out of peoples wallets for the same usage people were getting a year or two before. F*CK AT&T and the relationship it has with APPLE!

  8. Carriers understand that the future there will be no “voice” or “messages” as it will all just be data. And they will have to realize that people just want to pay for data and not be restricted as to how they use it. They are basically “dumb pipes” but trying to make money on value added services will get increasingly hard as they let others control the “app markets” and phones will be able to do many of the things they once charged for. If they don’t realize how things have shifted they will see ever decreasing profit margins.