AT&T's new pricing takes smartphones to the masses

Pennywise consumers will soon be able to join the smartphone craze without digging too deep into their wallets.

AT&T, the second largest wireless carrier and the only operator offering the iPhone, has cracked. It may not be long before Verizon Wireless, the nation's largest wireless operator, follows suit. The goal for these carriers, and the slew of smaller players already competing on price, is to entice average consumers to sign up for smartphone data services.

"With voice ARPU (average revenue per user) declining, operators need more of their customers to opt for data plans in order to hold the revenue line," Charles Golvin, an analyst with Forrester Research, wrote in a blog post.

The best way to add more subscribers for a service is to lower the price. That's exactly what AT&T is doing. On Wednesday AT&T announced that it will do away with its unlimited data plan for smartphones. Instead, starting June 7, it will offer customers two choices of mobile data service plans, one of which is half the price of the original $30 all-you-can-eat plan.

For $15 a month, the DataPlus plan offers smartphone customers 200 megabytes of data. If customers exceed 200MB in a monthly billing cycle, they receive an additional 200MB of data for $15 until the end of that billing cycle. For $25 a month, consumers get 2 gigabytes of data. And if subscribers exceed 2GB during a billing cycle, they will be charged $10 for an additional 1GB of data.

The new pricing plan, while meant to lure new customers, is sure to enrage hardcore data users. That goes double for those who see new 4G networks opening up new streaming opportunities.

Verizon Wireless, the largest wireless operator in the U.S. and AT&T's chief rival, wouldn't comment on AT&T's new pricing plans. But if history is any indication, it won't take long before Verizon begins offering tiered service for its smartphones, as well.

In January, within weeks of each other, AT&T and Verizon Wireless separately revised pricing on voice and data services for mid-tier phones. The price cuts followed new aggressive pricing from Sprint Nextel, which last year introduced plans that allow customers to call any cell phone in the U.S. for free. As part of the new pricing models, both AT&T and Verizon Wireless extended data plans to a whole slew of customers who formerly were not subscribing to any data plans. Specifically, these new plans, which are almost identical in price, were designed to get more customers signing up for data services.

"It's a very competitive market," said Roger Entner, senior vice president and head of research and insights for the Telecom Practice of Nielsen. "And if the largest competitor gives customers the option to cut data by half, you have to seriously look at that."

Good news for consumers
The tiered service offering will achieve two main goals for AT&T. First, it will offer average consumers a more affordable entry point into the smartphone market. This should help AT&T win more customers switching from a basic feature phone to a smartphone for the first time. Second, it will finally allow AT&T to charge the 3 percent of data subscribers it claims are using 40 percent of its network resources for the inordinate amount of bandwidth they are consuming.

In either case, the vast majority of consumers will benefit. AT&T says that on average, 65 percent of its customers use less than 200MB per month, which means that more than half its customers should be fine with the $15 a month plan. The company also claims that 98 percent of its smartphone customers use on average less than 2GB of data per month. So even for customers who use a lot of data, they'll still pay $5 less than what they were paying with the old $30 a month unlimited plan.

"This is good news for most consumers," Entner said. "It makes the data plans for smartphones with AT&T much more affordable. And it allows more people to take advantage of it."

Since most smartphone subscribers have no idea how much data they are using each month, AT&T says it plans to make it easy for customers to know how much data they are consuming. The company plans to send text messages to users as they reach 65 percent, 90 percent, and 100 percent of their monthly cap.

By offering its customers more options at different prices, AT&T can attract new customers who are likely more price sensitive than the early adopters who first signed up for the iPhone.

"The primary motivation for making the switch to tiered pricing is that the one-size-fits-all approach to smartphones doesn't make sense anymore," said Mark Siegel, a spokesman for AT&T. "We wanted to give people a choice. People will use these devices differently, and we needed to give them different options."

AT&T is also facing a great deal of competition. While it is still the only U.S. wireless carrier offering the popular Apple iPhone, the iPhone is no longer the only cool smartphone on the market. Google Android phones, which are now offered by every major U.S. carrier, have been gaining traction. In fact, Google's Android operating system edged out Apple's iPhone operating system for the No. 2 spot in the U.S. consumer smartphone market in the first quarter, research firm NPD Group reported.

According to NPD, devices running Android accounted for 28 percent of the units sold to U.S. consumers in the first quarter of 2010. BlackBerry devices made by Research In Motion, which use RIM's homegrown operating system, took the top spot with 36 percent of the U.S. market. Apple's iPhone, which had been in the No. 2 spot previously, fell to third place with 21 percent of the market.

Verizon Wireless, AT&T's biggest rival, has seen strong uptick in sales due to its Android phones. First, last year it launched the Motorola Droid. And now it has the Android-based HTC Incredible. This phone, which looks very similar to an iPhone, has only been on the market a short time, and it's already considered one of the hottest phones in Verizon's lineup.

AT&T is also facing intense pricing pressure from its smaller competitors. Sprint Nextel and T-Mobile USA have been aggressively pricing their services, bundling unlimited data and text messaging in packages at prices that undercut AT&T's and Verizon Wireless' pricing.

Prepaid wireless operators, such as Boost Mobile, Virgin Mobile USA, MetroPCS and Leap Wireless, are also starting to offer low-cost smartphone plans. Virgin Mobile, which is owned by Sprint Nextel, offers a prepaid smartphone plan for as low as $35 a month. It includes 300 voice minutes and unlimited data and text messaging.

A win for AT&T, too
Offering different levels of service will also allow wireless operators, such as AT&T and Verizon Wireless, to make more money over the long term from their wireless subscribers.

"As operators prepare to launch next-generation networks that will deliver much faster data rates and enable users to consume significantly more data in a month than today's networks can deliver, they need a pricing strategy that will allow them to charge a premium and extract greater value from these networks," Golvin said in his blog. "Flat-rate pricing will prevent them from realizing that value and limits their future data revenue. This is the real underlying rationale for these changes."

Lowell McAdam, CEO of Verizon Wireless, seems to recognize this. During a Barclays Capital conference in late May, he said that users who sign up for Verizon's 4G LTE services should expect to pay for "buckets" of data rather than pay a flat monthly fee for unlimited use.

Since the iPhone first launched in 2007, AT&T has been struggling to keep up with demand for wireless-data usage on its network. The iPhone, which was built more for accessing the Net than making calls, can access more than 100,000 applications, many of which use the mobile Internet. iPhone users on average consume five to seven times more data per month than average wireless subscribers, according to analyst firm Sanford Bernstein. And all this usage is clogging the network, causing many iPhone users, especially in large cities such as New York and San Francisco, to experience dropped calls, slow 3G service, and issues connecting to the network at all.

AT&T has been upgrading its network, but Ralph de la Vega and other top executives at the company have admitted that AT&T needed to change its pricing to provide incentives to curb extreme network use. The company has also tried to make it easier for smartphone customers to offload Web activity on Wi-Fi hotspots. The company now offers free access to its more than 20,000 public Wi-Fi hotspots around the country to all smartphone subscribers.

As Apple prepares to launch yet another version of the iPhone, which is expected to shoot and play high-definition video, it makes sense that AT&T would try to curb heavy data usage. Pricing for the new tethering option is another sign that AT&T is trying to limit extreme data usage. Tethering will be offered, but subscribers must pay an additional $20 a month and sign up for the $25 2GB plan. Even with the $20 extra fee, subscribers still only get 2GB worth of data for the month.

But adding such a low-cost plan could potentially put even more strain on AT&T's network since part of the rationale for revising the pricing plan is to attract more customers. But Entner said that this should not present a problem to AT&T.

"They are banking on the fact that high data users are already with them," he said. "So the users they are likely adding will use less data. Plus, they will continue to upgrade their network. They're simply bringing revenue in line with the cost."