What's behind usage-based mobile data pricing?

Phil GoldsteinThe buzz about usage-based mobile data pricing has been growing. T-Mobile USA is rumored to be launching a $10-per-month smartphone plan for 200 MB of data. Likewise, Verizon Wireless (NYSE:VZ) is supposedly revamping its 3G data plan pricing to include more tiers--an assertion backed by several reports including an article today from Dow Jones Newswires.

The actions follow AT&T Mobility's (NYSE:T) decision in June to jettison unlimited smartphone data plans for a two-tiered pricing structure.

What is going on here? I think operators are trying to figure out how to price data in the face of rising traffic. Additionally, the end goal of all of this may not necessarily be to better manage network resources (though that will undoubtedly be a positive side-effect for carriers), but to figure out usage thresholds for 4G networks. Once carriers get a handle on that, they may eventually return to unlimited pricing.

Currently, carriers are trying out new data pricing models because they want to attract more smartphone customers. AT&T CEO Randall Stephenson said last month that the company's new plans have made "a lot of people move into the data market who had not been in the data market before." Carriers may score incremental ARPU by offering an option for occasional data users.

But it's clear that carriers are trying to figure out the sweet spot when it comes to data pricing. T-Mobile's rumored $10 plan is $5 below what AT&T charges for 200 MB. Verizon's lower-tier for smartphones is rumored to be $15 for 150 MB. Importantly, both T-Mobile and Verizon are expected to keep their $30 unlimited data plans, unlike AT&T. 

"I would characterize what you see happening as experimentation," said CCS Insight analyst John Jackson. "It's encouraging nonetheless. It's a reflection of what everyone knows will be true inevitably: We're going to move to a more tiered access model."

Nielsen analyst Roger Entner agreed that carriers are currently engaged in what he called a dance, and are trying not to step on each other's toes as they lower data prices. However, he thinks tiered pricing will only last for four to six years.

Entner compared today's scenario to when 3G networks launched. Before the advent of the iPhone, mobile data usage was unlimited because usage was both minuscule and predictable--5 MB or 10 MB per month per subscriber. Now, although billing system companies  give carriers detailed analyses, it's tougher to predict usage patterns. Usage-based pricing is just a tool carriers will use to mitigate the downside risk of a small subset of subscribers using massive amounts of data, Entner said. By segregating subscribers into tiers, carriers can get a better handle on usage patterns and upper-limit thresholds.

"Once you understand how much people are actually going to use, it becomes predictable again," he said.

It's a hypothesis that I can buy into. Once carriers have a better handle on how usage patterns--particularly in 4G networks--affect their network, they can set a price ceiling and move back to unlimited pricing. It won't happen overnight, but eventually consumers who are bemoaning the loss of unlimited data may once again be back in its warm embrace. In the meantime, carriers have to determine how to make usage-based pricing desirable for subscribers who have grown accustomed to unlimited data. It's not going to be an easy task. --Phil