The age of freemium 4G data is here. Will the big carriers survive it?

Mike Dano

Earlier this week NetZero launched a completely free tier of wireless data service. After buying a $49 USB modem, NetZero users can get 200 MB of Clearwire's (NASDAQ:CLWR) WiMAX service per month for free. No service contracts, no commitments, no nothing.

It's the nation's first example of the "freemium" business model moving into the wireless data industry. And it's clearly not going to be the last.

Just yesterday, FreedomPop confirmed to FierceWireless plans that are even more aggressive than those of NetZero. FreedomPop will offer an iPhone case that can connect to Clearwire's WiMAX network. The case will cost around $75, but users can reclaim that cash if they return the case in working order. The case will give iPhone users access to 1 GB of WiMAX data for free, via a Wi-Fi connection between the case and the phone. Each additional GB of WiMAX data will cost $10.

(It's not really surprising that Clearwire is powering the free offerings from both NetZero and FreedomPop--Clearwire has long struggled with excess capacity and sluggish revenues. It appears Clearwire's per-GB basis wholesale prices have entered into the realm where its customers can attempt freemium business models.)

Both NetZero and FreedomPop are working under the assumption that users will consume the free data and then purchase more. Of course, this freemium business model is nothing new. Cloud storage company Dropbox offers 2 GB of storage for free but charges for more. The same goes for online video company Hulu, which allows users to watch television for free online but charges for access to a wider variety of older programs. Indeed, the freemium model has become the dominant business strategy in the mobile gaming market--according to Flurry, freemium mobile games generated 65 percent of gaming revenues in Apple's (NASDAQ:AAPL) App Store in July 2011.

But what exactly will that freemium model look like in the wireless data industry? And what percentage of users will opt to move from the companies' free tiers and into the paid ones?

According to some estimates, the average conversion rate in a freemium business model is around 3 percent. Meaning, only three people out of 100 will upgrade to a paid tier. "Our data shows that around 3% of consumers will spend money in freemium games," confirmed Flurry in a recent blog post.

I suspect that the freemium conversion rate at NetZero and FreedomPop will be higher than 3 percent, at least initially, due to the companies' upfront fees to users (the $49 USB modem for NetZero and the $75 iPhone case for FreedomPop). But even if the companies manage a 10 or 20 percent freemium conversion rate, they still will need to rope in lots of customers to make their investments pay off--a difficult proposition considering they are limited to Clearwire's WiMAX network that covers 80 major cities. Clearwire has never publicly said how much it charges its wholesale customers for 1 GB of data. 

Now, here's where it gets interesting: What if NetZero and FreedomPop are successful? What if the freemium model does catch fire, and is introduced by other players with even more generous offerings? How will that impact the data revenues for major carriers like Verizon Wireless (NYSE:VZ)?

Let's look at AT&T Mobility (NYSE:T), specifically. The carrier currently charges smartphone users $20 a month for 300 MB of data and $30 a month for 3 GB of data. According to Chetan Sharma Consulting, roughly 30 percent of smartphone users consume around 1 GB of data per month. So an AT&T subscriber could buy the required $20 AT&T plan and use FreedomPop's free tier for additional data. Thus, after a $75 FreedomPop iPhone case, AT&T subscribers could potentially save themselves roughly $165 over the course of their two-year AT&T contract--and thereby deprive AT&T of $240 in revenues.

The same kind of calculations would apply to Verizon Wireless, but not to Sprint Nextel (NYSE:S). Sprint requires its iPhone subscribers to purchase an unlimited data plan, thus giving users little reason to seek out FreedomPop's free 1 GB. Interestingly, Sprint is also the majority owner of Clearwire, which is powering the FreedomPop offering that could potentially undercut Sprint's rivals AT&T and Verizon.

More immediately, though, the freemium offers from NetZero and FreedomPop probably will affect other low-cost data providers first, rather than the big guys. "The free 200 MB per month NetZero mobile broadband offering will threaten low-end mobile broadband offerings from providers such as T-Mobile and Virgin Mobile," wrote Current Analysis analyst Weston Henderek. "Both providers currently have $10/100 MB data offerings that provide service for seven to 10 days at a time."

I'm assuming these are the kinds of calculations that FreedomPop, NetZero and other companies are making when considering freemium business models in the wireless data space. And I expect more experimentation in this area in the months ahead. +Mike Dano