Lowenstein's View: Success of usage-based pricing depends on educating consumers

Mark LowensteinNote from AT&T to its customers: The wireless Internet is different than the wired Internet. There has been ample analysis of the pros and cons of AT&T's recent pricing move (including my Lens piece last week). Other operators will soon follow with their own version of usage-based pricing. AT&T has sent a clear message to customers: If you want to use bandwidth-intensive apps or consume multimedia content, be prepared to pay a premium for it (or find a WiFi hotspot). The message also applies to the broader ecosystem of device OEMs, the development community, and content publishers: Think about how you build.

A key part of the transition to usage-based pricing is going to be educating users and the app development community about what a "megabyte" is, as well as developing more advanced tools and the right early warning systems to ensure wireless operators don't end up testifying before Congress for Bill Shock, Part 2. U.S. consumers are accustomed to flat-rate pricing in all other aspects of their connected life: landline phone, wireless voice (increasingly), cable, broadband and so on.

Some reasonably good tools are already available: AT&T has mapped out a variety of usage scenarios and a pretty nifty "Usage calculator," which shows how moderate usage of anything multimedia gets you to 2 GB pretty fast. There's also an early warning system, notifying customers when they reach a certain threshold of data consumption, and there will surely be apps that will provide a real-time view of usage.

There are some gray areas, however, where it is somewhat difficult to predict what data consumption patterns will look like. One example is apps that use a more "constant connection" model, such as navigation and streaming. I have a great app called RunKeeper, which tracks my running routes and provides all sorts of other data. This is an app that has to use the cellular network, and a persistent connection at that. Few users would know how many MB this type of app might consume.

Another gray area is content where the user is not necessarily in control of their data consumption, for example when someone sends them a large file or attachment. And what's going to happen when advertising becomes more persistent? Will users have to "pay" for that great video ad they are viewing on their iPad?

This is all going to require a comprehensive customer education program and a robust series of early warning tools. Some specific ideas:

1. Add special ratings to apps that are highly consumptive of content. I don't think we need something for every app, but for those that will easily eat up the MB, perhaps we add an asterisk or some sort of other symbol.

2. Provide notification before certain content downloads or heavy usage apps. Want to download the latest episode of "Mad Men" from iTunes using the cellular network (about 2 GB in HD) or download the 10 MB PowerPoint presentation someone sent you? Recommend that the user connect to WiFi or inform them that they are likely pay a premium for this content if using the cellular network.

 3. Provide a view into other family plan users. One of the attractions of AT&T's new pricing is the lower, $14.95 threshold, which makes it more affordable for additional members of the household to add a data plan. But we certainly want to avoid the "text messaging" problem redux, where your teenager starts running up the bill on data use. Operators should make sure that Master Account users have the option to select a view into the usage of other members of the household or receive a notification when they are about to exceed their plan allotment (not what they are doing but just the usage number), with the tools to shut them off at certain levels or require permission before significant overage is incurred or higher price plan is selected.

 4. Provide the option for sponsored content and value exchange. One of the attractions of the Kindle model is that the cost of network consumption is built into the price of the content. This works great for an app that does not consume a lot of data. But we need to develop alternatives for the user always paying for bandwidth. An advertiser or sponsor could pick up some of the network cost. Or the content publisher could bundle the price of data into the app. Users are comfortable with the "choice" model in the TV world: view it for free on broadcast or Hulu, with commercials; pay a monthly fee for the DVR service and skip the ads; or pay a premium to view that content on-demand, commercial-free.

If wireless operators take these pro-active measures, then usage-based pricing will be better received. Also, operators will more insulated from being criticized for excessive pricing or poor communication about their pricing. This is an opportunity for operators to avoid some of the black marks they have received for voice and text messaging "overage."

I also think how usage-based pricing is handled in wireless will be closely watched in the wired broadband world. Consumers have become accustomed to flat-rate pricing for unlimited data from their broadband provider. But with the exponential growth of video consumption, and the notion of more TV and movie programming being downloaded from or streamed via the Internet, usage-based pricing for certain types of content or highly consumptive customers might be coming to a broadband neighborhood near you.

The "unlimited" ride might be coming to an end, but there's an opportunity to implement it in a positive, rather than a punitive, manner.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter.

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