What does AT&T's usage-based pricing adoption mean for Verizon?

Phil Goldstein
AT&T Mobility (NYSE:T) confirmed Thursday that it now counts 15 million subscribers using usage-based data pricing. That's up from 7 million subscribers on such plans in December 2010, and 10 million in March. The plans were first introduced in June 2010.

What does this growth trend mean for Verizon Wireless (NYSE:VZ), which began offering usage-based data pricing to new smartphone customers July 7?

First, AT&T executives have repeatedly said that the new plans have encouraged customers to switch from a feature or quick messaging phone to a smartphone. AT&T said that in the second quarter 70 percent of its postpaid sales were smartphones and 50 percent of its 68.4 million postpaid subscribers now use smartphones. Clearly, the strategy of getting more customers to switch to smartphones is working for AT&T.

AT&T offers 200 MB for $15 and 2 GB for $25. The $15 plan, coupled with a $49.99 Apple (NASDAQ:AAPL) iPhone 3GS with a two-year contract, likely helped grease the usage-based numbers for AT&T--Current Analysis analyst William Ho called the offering AT&T's "secret sauce." What also likely helped was AT&T's decision to broaden its smartphone portfolio to include more smartphones running Google's (NASDAQ:GOOG) Android, Microsoft's (NASDAQ:MSFT) Windows Phone 7 and Research In Motion's (NASDAQ:RIMM) BlackBerry to counteract the loss of its iPhone exclusivity to Verizon.

Further, AT&T's entry tier--$15 for 200 MB--allows customers to test the waters without significant investment.

What does all of this mean for Verizon? Recon Analytics analyst (and FierceWireless contributor) Roger Entner said he expects the usage-based pricing adoption trajectory at Verizon to follow the same path, just more slowly, "because there is no incentive whatsoever for someone to go from a $30 unlimited [plan] to 2 GB for $30." (New Verizon smartphone customers can choose from one of three options: $30 for 2 GB, $50 for 5 GB or $80 for 10 GB. Existing customers with the $30 unlimited smartphone data plans can keep those plans.)

Verizon spokeswoman Brenda Raney said Verizon decided to forgo a 200 MB/$15 plan for a specific reason. "The plans were chosen based upon the usage patterns of our customers and we felt like those would the best ones to meet our customers' needs," she said.

Ho said he also expects Verizon to sell metered plans slowly because the carrier does not have an entry-level 200 MB plan to lure in new smartphone customers. However, analysts generally expect smartphone users to use more than 200 MB per month--particularly those on faster LTE networks. In long run, Verizon will likely use its pricing structure to its advantage and bring in more revenue as average usage creeps up past 2 GB, and customers opt for higher usage tiers. Verizon's plans could also bring the carrier more revenue if it encourages customers to go for the higher-priced tiers with family data plans that allow subscribers to share a bucket of data between multiple devices. Verizon has indicated it plans to go this way, but had not said when it will do so.   

AT&T still hasn't revealed its LTE pricing. It's likely it will mimic Verizon's pricing, but AT&T has an opportunity to differentiate itself from its closest competitor. Indeed, there have been rumors that AT&T will offer customers the opportunity to add more data to their bucket or boost their speed for an additional fee during a billing cycle. Such add-ons might give AT&T a leg up in the usage-based pricing battle, despite trailing Verizon significantly in LTE coverage.

However, for right now, AT&T's usage-based pricing will probably win it more converts than Verizon, especially because of the entry-level tier. "From a growth curve standpoint, AT&T, with a lower price point for smartphone plans, is in a better position in converting the base," to smartphones, Ho said. How long that advantage lasts will likely be determined by what AT&T decides to do with its LTE pricing. --Phil