The data tsunami, and why Sprint increased its data charges

Roger Entner Recon AnalyticsWireless carriers are increasingly impacted by the continuing data tsunami. In order to stimulate demand and make it easy for consumers to dare to use this new medium called data flat rate pricing--typically an end game move, not an opening gambit--was introduced. With adoption being tepid in the beginning--and how can you be surprised considering the experience of using data on a stamp size screen with mediocre applications on device that was just not built for application usage. Then one innocent Jan. 9 morning four years ago something called the iPhone came along and changed our collective lives. A few years later its spiritual offspring with names like Android, Pre and others appeared. Data usage exploded, first here, then there, then everywhere. The data below illustrates the point, comparing Q3 2009 and Q3 2010 data usage.

I am grateful to my friends at Nielsen who have provided me the data below from their Customer Value Metrics product, which collect the bills of more than 50,000 wireless customers.

Year over year data usage among smartphone owners has just exploded. The median smartphone user data consumption has increased from 40 MB per month to 137 MB per month--an almost three and a half fold increase. The 80th percentile is still using more than double a year ago. What makes it even more impactful is that smartphone ownership has roughly doubled in the same time period. So you are looking at a four- to seven-fold increase in data usage. The carriers collectively are faced with the age old sorcerer's apprentice problem that they have problems controlling of the sprits that they have summoned. Data usage is significantly increasing faster than the cost of providing a megabyte is coming down, especially in 3G. Something has to give.

How they are approaching and attempting to solve their problem is different: AT&T who has lead and still leads in smartphone adoption was the first to move. In June 2010, it changed its data pricing model from unlimited to a tiered usage model while lowering prices. AT&T was subsequently vilified for a move that reduced prices for its customers, making it possible for people to have a data plan on a smartphone for $15 instead of $30 and only impacted 1 percent of their smartphone customer base. As you can see from the data above, at worst, now 2 percent of their customer base are affected by the 2G cap.

Today, Sprint introduced a change to their smartphone price plans. Sprint customers who get a new smartphone will have to pay $10 more for their data plan. Sprint had to face the economic reality of success. Data usage and hence costs have increased substantially since it introduced its Simply Everything plan and it had to adjust prices to respond to this reality. Sprint chose to go a different route than AT&T, opting for simplicity but a uniform increase for new smartphone owners. Even with the new pricing, Sprint's price plans are below AT&T's and Verizon's for a comparable plan, but above T-Mobile's.

It is only a matter of time until success will force the T-Mobile and Verizon to adjust their pricing as well--and if they don't they have a whole set of different problems, considerably more difficult to solve than coping with demand. All of the carriers are subject to the same economic rules and laws of physics. The last several years has shown us impressively that nobody can spend more than they make and get away with it in the long run. The same rules that apply to buying groceries in the supermarket are also applying to telecom. If your usage goes up faster than the costs of what you consume goes down, you have to pay more--it's as simple as that.

As I alluded to in the beginning, unlimited usage pricing only works economically as an end game move. The reason is that what is unlimited to the consumer is actually something quite predictable for the service provider. For example, "unlimited voice calling" is an appealing option for consumers for the obvious reasons. For the service provider, "unlimited voice calling" is actually a voice plan with around 1,500 minutes of usage a month, because roughly speaking that's what an unlimited voice customer actually uses. Way back when voice usage was increasing, nobody knew how many minutes a customer would ultimately use. If the service provider gets it wrong, it will lose its shirt and maybe even their pants--either way not an enviable experience. Leap and Metro as late entrants to the wireless industry had to differentiate and went down the unlimited route from day one and found out the hard way, in Leap's case it was Chapter 11, how many minutes an unlimited customer actually uses. With minutes of use growth slowing down and a good idea of a ceiling, the Big Four carriers began entering the unlimited game--first at $99, then at $69, some are now at $49. We saw the same process in messaging, first by the message, then buckets, then unlimited when they knew how many messages actually were "unlimited." The problem is that huge investments and understandable impatience led the service providers to put the cart before the horse by starting with unlimited data. The guessing game of how much data a consumer ultimately will use continues. When we find out how much unlimited data really is and growth slows down, the unlimited packages will uniformly come back and prices will come down again.

It is almost inevitable that the same vitriol that hounded AT&T will be now heaped upon Sprint. Consumers have choices among wireless service providers that are offering their services in different packages so that consumers can pick what they want and need. Different providers find different solutions to the same problems each of them are facing, which is a sign of a healthy, vibrant and competitive industry. Only fools deny the economic realities and any reprieve is only temporary, followed by a lethal backlash. Once upon a time, nobody wanted wireless data so carriers could give it away... these days are over now.

Roger Entner is the founder of Recon Analytics and is responsible for all aspects of Recon Analytics' research, consulting and operations.