Alexander Krasnitsky loves all the cool things he can do on the Web with his new Apple iPhone 3G. But he hates the 75% surge in the monthly bills he pays his wireless service provider. 'I definitely have no love for AT&T,' says Krasnitsky, a lawyer who resides in Philadelphia.
It shouldn't come as a surprise that consumers who do more with their phones"”Krasnitsky has downloaded some 40 applications from Apple's (AAPL) online software store"”will face higher monthly service fees.
But there's growing concern among analysts, lawmakers, and wireless industry experts that swiftly rising data rates are only the first drop of what may become a deluge of efforts by mobile-phone service providers to moderate data use by consumers and get ahead of the strain placed on their networks. 'They are struggling to keep up,' says John Celentano, president of Skyline Marketing Group, a research and analysis firm that tracks telecom spending. In some cases, mobile-phone service providers 'didn't quite anticipate' how quickly data demand would skyrocket, he says.
Dream come true‾
For years, as the price of wireless voice calls plummeted, mobile-phone service providers longed for the day when consumers en masse would use their handsets for more than sending calls and the occasional text message. The industry is finally getting what it wished for.
Use of mobile e-mail, browsing, and downloads is on the rise as Americans snap up smartphones like the Apple iPhone 3G. An average owner of the new iPhone uses three times more data than a holder of even an older iPhone version, according to AT&T (T). And the phenomenon is much larger than Apple. People are buying Research In Motion's (RIMM) BlackBerry devices, snapping up special cards that connect laptops to the mobile Web, and purchasing specialized mobile data-only devices like the Kindle, an e-reader from Amazon (AMZN) that wirelessly downloads books.
In the 12 months through June 2008, the number of Americans who had access to media-rich social networking sites via a mobile phone rose 93%, according to a survey of more than 30,500 U.S. consumers by research firm comScore (SCOR). About 58% more people sent photos with a phone than in the year before, and the number of Americans with an unlimited data plan rose 58%. 'We've seen a significant acceleration [in data use] in the past year,' says Mark Donovan, a comScore senior analyst.
The question is whether the mobile-phone networks blanketing the country are up to the task of handling all that added data use. Wireless carriers deny capacity constraints. 'Wireless data continue to grow quarter after quarter, year after year, and we continue to add capacity to stay ahead of that growth,' says Mark Siegel, a spokesman for AT&T, the largest U.S. carrier. 'We will continue to do so in the future.' Verizon Wireless and Sprint Nextel (S), the second- and third-largest carriers, echo that sentiment.
Straining at the seams
But regularly dropped signals and spotty Web connections paint a different picture of the reliability of data networks, analysts say. Celentano estimates that as much as one-quarter of some carriers' coverage is straining at the seams. And even if the equipment is capable of handling today's demand, what happens when customers are doing more and spending longer stretches on the mobile Web‾
For one, the industry will need to step up capital spending, Celentano says.
Unless the economy slides into a recession, overall wireless spending could rise by as much as 3% in 2009, to about $17.5 billion, the biggest jump in three years among the U.S.'s four national carriers, according to Skyline. A reputation for a lack of network reliability can be a growth killer. 'End users are getting a taste of mobile data, and looking to get a similar experience as on the PC,' says Danny Locklear, a vice-president at Nortel (NT), a maker of wireless network equipment.
Costs for network maintenance and upgrades are already being passed on to consumers. Some legislators say expenses are rising too quickly. Senator Herb Kohl, chairman of the Senate's antitrust panel, voiced his concerns in a Sept. 9 letter to AT&T, Verizon Wireless, Sprint Nextel, and T-Mobile USA. Kohl, a Democrat from Wisconsin, demanded an explanation for why rates for individual text messages have doubled to 20¢ a message since 2005, while costs of providing the data service have dropped. 'This conduct is hardly consistent with the vigorous price competition we hope to see in a competitive marketplace,' Kohl wrote.
Rising data charges
Revenue from data has more than doubled since 2005 and this year is expected to be $27.5 billion, according to CTIA-The Wireless Association. Craig Mathias, founder of consultancy Farpoint Group, believes that, in the coming months, data charges could rise by another $15 to $20 a month.
Beyond charging more, carriers are also placing limits on data use. In the past six months, the largest carriers have effectively begun capping monthly unlimited data plans at 5GB of data"”roughly the same as watching 10 short YouTube videos a day. Currently, only about 2% to 5% of wireless users exceed that limit, but the number may double in the next year, Mathias reckons.
Carriers are also starting to encourage developers to create applications that use less bandwidth. T-Mobile USA, owned by Deutsche Telekom (DT), will demand a higher minimum payment from developers whose paid applications use up more of the carrier's network capacity. 'We've aligned a set of incentives for our partners to do what we believe is right for the consumer while being mindful of constraints of the mobile world,' says Ian McKerlich, director of mobile Web and content services at T-Mobile. The carrier will also prohibit developers from offering free applications that use up more than 15MB per user per month.
Some developers fret the policies may hamper mobile innovation. 'All of the interesting mobile applications use a lot of bandwidth,' says Craig Hockenberry, who develops applications for the iPhone.
That"”along with higher fees"”may be the price that wireless customers have to pay as they step up demand for mobile data.
Kharif is a senior writer for BusinessWeek.com in Portland, Ore.
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