Is usage-based pricing inevitable?

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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