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Is usage-based pricing inevitable?

February 4, 2010 — 6:28am ET | By Phil Goldstein
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Wireless carriers are facing a conundrum: They have invested billions of dollars into improving network capacity, but only a small number of users are responsible for the majority of the network's total data traffic. And while there has been some discussion about usage-based pricing as a solution, there are a range of roadblocks facing operators that chose to travel down that path.

Metered pricing is a simple-sounding solution that has many complex parts. It's technically possible, but how carriers implement the service will depend on their individual business situations.

"I think that it is inevitable for the industry to move toward this, otherwise the business model is not sustainable," said Rafi Kretchmer product marketing manager for revenue management at billing systems vendor Amdocs. He noted that low-volume data users are essentially subsidizing heavy data customers. "In order to address this conflict, they realize that to not leave money on the table, they must differentiate the pricing."

Alastair Hanlon, director of product management at ConvergysOthers agree. "It's a necessary consequence of rising usage of mobile data," said Alastair Hanlon, director of product management at Convergys, another billing vendor. "As usage grows to a level where you're filling all of the available capacity, you're going to see a need to somehow control that usage. And price is a good way of doing that."

Momentum is growing

The introduction of 3G networks in the United States coincided with the widespread use of flat rates for unlimited data use. Carriers sought to entice users by removing the often-confusing per-megabyte pricing of second-generation networks. Today, most wireless carriers offer unlimited data access for around $30 per month for smartphones or $60 per month for laptops.

(Most carriers also impose a usage cap--typically 5 GB per month--in the fine print in order to prevent network overloading, though Sprint Nextel pointed out that its mobile WiMAX service, branded Sprint 4G, currently does not carry a cap.)

However, due to recent, skyrocketing interest in apps and smartphones, carriers' move to simplify the world of data pricing has turned into a liability, rekindling discussions about metered, usage-based pricing.

And carriers seem to be warming to the idea. In January, Verizon Communications CTO Richard Lynch hinted that when Verizon Wireless launches its LTE network later this year, it will introduce a usage-based pricing model, charging customers by how much bandwidth they use.

"The problem we have today with flat-based usage is that you are trying to encourage customers to be efficient in use and applications, but you are getting some people who are bandwidth hogs using gigabytes a month and they are paying something like megabytes a month," Lynch said in an interview with the Washington Post. "That isn't long-term sustainable. Why should customers using an average amount of bandwidth be subsidizing bandwidth hogs?"

ralph de la vega, att ceo and presidentIn December, AT&T Mobility President and CEO Ralph de la Vega confirmed at an analyst conference that about 3 percent of AT&T's smartphone users generate about 40 percent of its data traffic. De la Vega said the carrier would consider ways to educate users on their data usage, with the intention of preventing excessive use. However, AT&T has not come out explicitly in favor of usage-based pricing.

"Given the dramatic increase in mobile broadband data usage, there needs to be a long-term model that best balances the finite amount of available frequency, the disparity in usage patterns among customers, and the investment and innovation required to make it all happen," AT&T spokeswoman Jenny Bridges said. "There are many ways to address this explosion in data usage to ensure that everyone is able to share the benefits delivered by mobile broadband. We'll continue to explore the best path forward."

T-Mobile USA declined to comment on its pricing plans.

Technically possible

Convergys' Hanlon said there are no technical reasons carriers cannot move from a flat-rate pricing model to a usage-based one, explaining that carriers have been metering voice for a long time and are currently charging customers when they exceed soft data caps--usually 5 GB per month. One challenge, he said, is migrating carriers' older legacy billing systems to ones that are more flexible...Continued

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Comments (11) | Post a comment
More stories about Convergys   Mobile Broadband Usage   Billing Systems   Rafi Kretchmer   Alastair Hanlon   Richard Lynch   Wireless Carriers   3G   mobile data   Ralph De La Vega  

Comments

Posted by Harley Katz | February 5, 2010 - 4:52am

The problem is, carriers don't want TRUE usage based pricing, they want to be able to set over-priced minimum packages and then GOUGE when subscribers go over.

I use less that 500MB/month, but will at&t drop my data bill from $30 to $5, which would be TRUE usage-based billing? I don't think so.

Posted by Tyler | February 5, 2010 - 5:00pm

wish verizon would get rid of there 5GB cap and at least upgrade it to a more reasonable lets say 10GB cap...or better yet, not be so broadband hungry and allow 15GB a month because $59.99 is alot of money for how much internet you get

Posted by M. Hunt | February 9, 2010 - 10:47am

Billing system vendors support changes that would increase demands for their products and services. Gee, who'd've guessed?

You guys are *so* on top of things.

Posted by Anonymous | February 9, 2010 - 2:39pm

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Posted by RochesterBusinessman | February 10, 2010 - 9:06pm

This is yet another industry tool telling us that "usage based pricing" is the only way to go. Baloney. You can't tell me it costs VerizonWireless anything NEAR to the $60/month they charge me for internet access - even if I used every last drop of that measly 5gb of bandwidth they give me. I'm betting their costs are more like $.50/gb, making the other 59.50 pure profit. EVERY MONTH. These guys are PRINTING MONEY! Their current stock valuation at the end of 2009 was 183 BILLION DOLLARS. In a DOWN economy. They can afford to offer more bandwidth without imposing either usage caps or more onerous charges than they already do. They just DO NOT. Don't believe a bit of what this industry mouthpiece is trying to spout. The best part is - Time Warner Cable is now citing this statement in support of IT'S proposed caps.

Posted by RochesterBusinessman | February 10, 2010 - 9:08pm

Oh and by the way - the "industry report" this "industry analyst" is citing is a SALES DOCUMENT from Cisco based I'm sure on a highly UNBIASED study that they showed to THEIR shareholders to convince them that companies like Time Warner and VZW would be buying more of THEIR gear.

Posted by Anonymous | March 3, 2010 - 9:14pm

I totally agree with the earlier post... Don't these guys already make an obscene amount of money? When is enough enough. There is no limit to their greed.

Posted by crazy handset | March 11, 2010 - 8:34pm

Frankly speaking, I don't think usage-based pricing is a terrible change. I'm absolutely belong to the low-volume data users, but I should pay equal money as those heavy data customers. I think this is unfair.
But in another way, it strikes me that whatever pring model being adopted is not based on consumer needs, but because of profit considerations. So whether they adpot usage-based pricing mode or not, they just want to earn more money from us.

Posted by crazy handset | March 11, 2010 - 8:38pm

Their greed for money will never stop. This is just their motive force for scientific research.

http://www.sourcinggate.com/mobile-phone-c-4.html

Posted by RDL | April 16, 2010 - 7:19pm

They should not advertise unlimited EVER. I am so tired of that... Say what you mean, not what people like to hear... The government regulators should have stopped that a long time ago if there are actually caps in place then that needs to be in the bold print, not the fine print. Bing search provided these definitions:
1. not restricted: without limits, restrictions, or controls
2. infinite: lacking or appearing to lack a boundary or end
3. complete or total: not subject to qualification or exception

you may say they slip in under def. #2, but that's not true, because if people can actually run up against these limits, then they no longer appear to lack them correct?

I don't think the best way to do this is to end up with a usage bill, or be denied a download from amazon mp3 half way through it because of some cap you didn't think existed. They want to steal market share from land based solutions then they need to compete on those terms so people don't see a difference. I tell you the first time I find out I hit a cap will be the last time I pay a penny for my service. I don't track my usage, I just use it as a natural extension for what I need it for. Sometimes it's music, often its email with attachments (work), sending short video clips...you know the things they've been promoting for the last couple of years... Congratulations, you did a good job of getting people to use your services, now you want to jack prices because we did what you wanted us to. And as others have said, I bet you don't see any decrease if you just use your phone for the occasional W00t! view...

Posted by RDL | April 16, 2010 - 7:22pm

Ah, and I almost forgot, THEY ARE sending us advertisements over that bandwidth! so what happens if you go over your cap by 5 mb but got 50 MB in advertisements from your carrier or google or some other irritating source (I only say irritating because it is costing me part of my "unlimited" limit)

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