The tiered-pricing dilemma on smartphones: Overage charges or throttling?

Sue Marek
I suspect 2011 will be remembered as the year that tiered data pricing for smartphones finally took hold in the United States. It's been nearly a year since AT&T Mobility (NYSE:T) launched this trend when it eliminated its unlimited data price plan and moved to a tiered model, offering 200 MB of data for $15 per month and 2 GB of data for $25 per month. If customers go over their allotted usage, the carrier charges them more. The company announced in March that it had 10 million subscribers on its tiered data price plans.

Earlier this week, T-Mobile USA followed AT&T's lead and unveiled three new, tiered data plans for smartphones in addition to its existing $30 per month plan for 5 GB of data. The new plans offer the following: $10 for 200 MB per month; $20 for 2 GB of data; and $60 for 10 GB of data.

And even though Verizon Wireless (NYSE:VZ) is still offering unlimited smartphone data for $30 per month, company executives have hinted that tiered data price plans will debut this summer, and that the carrier's current unlimited smartphone data price plan (conveniently left in place during Verizon's launch of the iPhone) will quickly become a thing of the past. Verizon also has hinted that, when it introduces tiered data pricing, it will charge customers more if they go over their data allotment.

That leaves Sprint Nextel (NYSE:S) as the only remaining Tier 1 U.S. operator committed to unlimited data for smartphones. The company's Simply Everything and Everything Data plans still offer unlimited data over the company's EV-DO network and Clearwire's (NASDAQ:CLWR) mobile WiMAX network. (To be clear, most carriers handle smartphone billing differently from their mobile broadband offerings. Most mobile broadband services--including tablets and USB modems--are already tiered or throttled in some way.)

Sprint is currently using its unlimited data price plan as a differentiator from its competitors and will likely continue to do so. Perhaps the bigger question is how will those operators that are migrating to tiered data price structures differentiate their offers from each other?  

Some, like T-Mobile, will try to undercut on price. T-Mobile appears to be trying to lure customers away from AT&T by offering a less expensive alternative--its 200 MB plan is $5 per month cheaper than AT&T's plan. Does that mean that T-Mobile's offer is a better deal than AT&T's offer?

The answer may depend on how consumers respond to T-Mobile's plans to throttle their data if they go over their designated allotment. According to T-Mobile, customers will receive a text notifying them they have hit their data limit. Afterward, their speeds will be throttled down to EDGE, which is around 100 Kbps or less.

Is throttling more appealing to customers than overage charges? It's hard to say. Perhaps it depends on what the consumer is doing with their mobile data and whether dropping to an EDGE-like data experience will make their experience too sluggish.

If I'm watching video over my smartphone, dropping to an EDGE-like experience will be painful. But will it be painful enough to make me upgrade to the next tier at $20 per month? Perhaps.

However, I suspect that by throttling instead of charging overage fees, T-Mobile may be incenting customers to stay in their existing tiers rather than move up. And for price-conscious consumers, throttling may be more appealing than overage fees.

So what appears to be happening in this new tiered data price plan landscape is that throttling data will appeal to certain customer segments while overage charges will appeal to others. Operators will just have to decide which model works best for the majority of their consumers. And it appears Verizon has chosen to impose overage fees, despite its stated ability to throttle users' speeds. --Sue

Suggested Articles

AT&T is finally opening up 5G service to consumers, announcing Tuesday the first cities for its upcoming 5G launch using low-band spectrum.

It's a long and winding road, but there is a connection between the C-band proceedings and spectrum held by Dish Network.

Charter is also considering the use of its distributed wireline assets to help with small cell placements.