Verizon Wireless, the nation's largest wireless provider, is reportedly revamping its existing wireless data prices and is considering implementing a usage-based billing model for its upcoming 4G wireless services as it tries to squeeze out more revenue from wireless data services.
Starting January 18, Verizon is expected to tweak its wireless data plan for what it considers its "3G multimedia" phones so that subscribers will pay the same price as customers using a smartphone. The news of the new pricing rates was reported Wednesday by the blog Broadband Reports, which obtained internal documents about the changes from a Verizon employee.
A Verizon Wireless spokeswoman declined to comment on the new pricing plan.
The news comes just a few days after Verizon Wireless' chief technology officer Dick Lynch was quoted by The Washington Post saying that the wireless operator is also considering implementing usage-based billing for services it will soon introduce on its upcoming 4G wireless network.
These two pieces of news suggest that Verizon Wireless is looking to find the sweet spot in wireless data pricing. As the company's revenue base shifts toward data and away from voice services, Verizon and other wireless operators are looking carefully at how best to maximize their profitability.
It's no secret that prices for mobile voice services are dropping. And as a result, phone companies are competing more aggressively on price. A few months ago Sprint Nextelthat allows subscribers to call any cell phone in the U.S. regardless of carrier for $69.99 a month.
Earlier this week, MetroPCS, a smaller regional operator targeting the prepaid phone market, lowered the price of its service, undercutting similar plans from other prepaid providers, such as Sprint's Boost Mobile. This new offering will include all taxes and fees for plans that range between $40 and $60 a month.
Clearly, a price war is emerging on voice services.
Meanwhile, operators are. This is likely why Verizon is looking at increasing the price of its data plans for mid-tier, non-smartphone devices and why it is thinking hard about going with a usage-based model for its 4G wireless network, rather than offering an all-you-can-eat plan.
According to Broadband Reports, Verizon Wireless is planning to force nearly every subscriber to sign up for a data plan. Even customers using its basic "simple feature" phones will be required to have a data plan. And soon all subscribers signing up for a multimedia device will be required to sign up for a data plan. Up to this point, only certain multimedia phones, such as the Samsung Rogue, have required a data plan. And customers with smartphones have already been required to get data plans.
Starting January 18, the data plans for all non-smartphones will change, Broadband Reports said.
Last year, Verizon changed its non-smartphone data plans to offer multimedia phone subscribers two options for data service. They could either subscribe to a $9.99 that offered 25 megabtyes of data with a charge of $0.50 charged for each additional megabyte over the maximum, or they could subscribe to a $19.99 per month plan that offered 75MB with a $0.30 charge for each MB over the cap.
Broadband Reports says the new pricing model will increase the price of the top plan to $29.99 a month. In exchange for the higher price, subscribers will reportedly be given unlimited access to data. This tier of service will also include mobile e-mail service.
Meanwhile, customers opting for the $9.99 plan will still get the 25MB usage cap, but they will be charged $0.20 for each megabyte over the cap instead of $0.30 per megabyte, the blog said.
This change essentially offers the same all-you-can-eat plan for multimedia phone subscribers that it requires its smartphone customers to buy.
For some heavy-data users this will be a great deal. But for most consumers, it's likely overkill. Most multimedia phone subscribers only use between 25MB and 100MB of data per month, according to Broadband Reports. The 25MB plan may be too little for these customers, but an unlimited plan offers much more than what many consumers need.
And this excess capacity costs consumers.
The business strategy is very similar to how gyms, like the New York Sports Club, make money. For $89 a month, someone can get a full membership to the gym with access day or night at any location. Some people will use their memberships to the fullest, working out seven days a week and using multiple gym locations throughout the week.
But many will go to the gym much less regularly, and they will never go to a facility other than the one where they originally joined as a member. And yet each member pays the same amount every month, regardless of how much they use their membership.
This billing method works out well for companies when many customers use a fraction of the resources available. But when the majority actually go to the gym regularly or access wireless data services, in the case of wireless operators, then these businesses start to lose money, because they have to invest more in infrastructure.
When this happens, a usage-based billing model is more advantageous to the business.
The switch to usage-based billing
This is exactly the model that Verizon plans to switch to when it completes its 4G wireless network. Lynch told the Washington Post last week that it's very likely that Verizon will do away with flat rate pricing when it rolls out its 4G wireless and will instead charge customers based on how much bandwidth they use.
"The problem we have today with flat-based usage is that you are trying to encourage customers to be efficient in use and applications but you are getting some people who are bandwidth hogs using gigabytes a month and they are paying something like megabytes a month," Lynch told the Post. "That isn't long-term sustainable. Why should customers using an average amount of bandwidth be subsidizing bandwidth hogs?"
AT&T is seeing the effects of this problem with the popular Apple iPhone. AT&T reports that its iPhone users consume more data than other 3G wireless customers. This has resulted in strains on the network. And now iPhone users are complaining about poor service, especially in urban areas where iPhone usage is high.
AT&T's head of wireless Ralph de la Vega said last year that AT&T needs to come up with a different way to price its service to.
Usage-based billing, or asking subscribers to pay for what they use, has increasingly been seen by executives as the answer to this problem. And now the idea has support from the two Republican Federal Communications Commission commissioners, Robert McDowell and Meredith Attwell Baker.
McDowell said during a public appearance at the CES tradeshow last weekend that wireless companies should be able to experiment with different pricing models, according to the The Hill, a blog covering Capitol Hill. He said that allowing an all-you-can eat model to persist will lead to gridlock on the wireless Internet.
Baker agreed and even suggested that people may soon have to pay for "roaming."
So what does all this mean for consumers? Well, in the short term, it means many Verizon Wireless customers are likely to pay more for more service than they actually need. And in the future, 4G wireless subscribers are likely to pay more for services they actually use. Don't expect any great bargains in wireless data now or in the future. In either case, Verizon and other wireless operators will make sure they can get as much money as they can from the increasing number of people who subscribe to their data services.