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Beware of pricier mobile Internet data plans

Voice plans are getting cheaper by the day. So how will carriers make up the difference? Don't be surprised if they start charging more for your Internet usage.

Prices for cell phone voice services may be dropping, but consumers are likely to be forced to pay a lot more for mobile Internet data plans in the future.

It's no secret that the price of voice services for cell phones is falling. Just last week Sprint Nextel announced it was offering a new $69.99 a month, Any Mobile, Anytime plan that allows subscribers to call any cell phone in the U.S., regardless of the carrier, in addition to such things as unlimited text messaging and data services.

Analysts are predicting a price war in the mobile market as national wireless carriers will soon be forced to offer more minutes of voice service or unlimited voice services for equal or lower prices to compete with each other.

To make up for the shortfall in revenue, these analysts also predict that wireless operators will start reconfiguring Internet data service plans to make up the difference.

"Voice revenue is declining for the carriers," said Charles Golvin, an analyst with Forrester Research. "And the vision for the future is to use data revenue to make up for the shortfall and to kick ARPU (average revenue per user) into growth mode."

Data usage is already on the rise, and wireless operators are cashing in. For the second quarter of 2009, AT&T reported a 37.2 percent increase in wireless data revenue to $3.4 billion, more than double the total for the same period two years earlier. This usage included messaging, Internet access, access to applications and related services. Verizon Wireless said that its data revenue jumped to over 52 percent to $3.9 billion during the second quarter of 2009.

While text messaging is still a big component of data revenue, which carriers also charge a premium for, Web access is also on the rise. This growth is likely being driven by the sale of more smartphones. Smartphone sales increased 27 percent in the second quarter of 2009, while total handset sales fell 6 percent, according to Gartner. But it's also due to the fact that more people want to do more things with their phones. CCS Insight concluded after a recent survey that the biggest drivers for Web use on mobile devices is accessing social networking sites like Facebook and microblogging sites such as Twitter.

It's standard practice for wireless operators to require smartphone subscribers to sign up for a hefty flat fee for a data usage plan. AT&T, Verizon Wireless, and T-Mobile USA all require customers purchasing a smartphone to also get a data plan that costs $30 a month in addition to a selected voice plan, which typically starts around $40 a month. Sprint Nextel has been bundling its unlimited data service in its new Simply Everything plans. These data services are called unlimited, but each of them has capped usage at 5GB per month. After that, subscribers are usually charged extra fees.

Meanwhile, data packages for non-smartphones have been priced much lower. In addition, wireless operators have not required customers sign up forthese plans for most of the data-capable feature-phones they sell. There are a few

For example, AT&T offers a $15 a month package for unlimited e-mail and mobile Web access for customers who have feature phones. T-Mobile charges $9.99 per month for unlimited Web access and e-mail on most of its non-smartphone devices.

New tiers of data service
But as the price of voice services falls, and more feature phones offer better Web-surfing capabilities, carriers are realizing that they need to create new tiers of service in the high-growth data service segment to make money.

"The trend that is inescapable is that carriers are trying to put more pricing tiers in place to offer a wider range of services," Forrester's Golvin said. "The model of paying a flat $30-a-month rate for data service on a high usage device like the iPhone is likely going away. Carriers are trying to find ways to introduce more tiers and more premium services."

The first indication that this trend is on its way, is Verizon's announcement last week that it is changing pricing on its non-smartphone data plans. The company introduced the new Samsung Rogue, a phone that is not considered a smartphone, but comes equipped with a QWERTY keypad and is able to access 3G data services. As part of the Rogue launch, Verizon changed its data pricing for non-smartphones, and said that customers who buy the Rogue will be required to purchase a $9.99 monthly data plan that provides 25 megabytes worth of data usage per month, or a $19.99 monthly data plan that offers 75MB of data. If customers go over these caps, they will be charged 50 cents per MB if they have the 25MB plan and 30 cents per MB if they subscribe to the 75MB plan.

"The model of paying a flat $30-a-month rate for data service on a high usage device like the iPhone is likely going away. Carriers are trying to find ways to introduce more tiers and more premium services."
--Charles Golvin, analyst, Forrester Research

Previously, Verizon Wireless subscribers who wanted to use a data service with their regular cell phone, would either pay $1.99 per kilobyte of data. Or they could sign up for Verizon's VCast VPak service for $15 extra a month to get access to video clips, sports highlights, news updates, and unlimited e-mail and mobile Web usage.

Now as part of Verizon's change, Rogue customers and all new data customers looking for a data service package for Web use will have to choose between the two offered packages. And if they want VCast video service, they will have to pay an additional $9.99 per month.

What this means is that subscribers will actually be paying more money for less data, since the retired VCast VPak service included unlimited e-mail and Web usage in addition to the video and music offered through VCast. It also means that feature phone users could also pay more for data than smartphone users if they go over their limits. Remember, the smartphone data service costs $30 a month extra for up to 5GB of data usage per month. Verizon is now charging its non-smartphone Rogue customers $10 for 25MB and $20 for only 75MB.

Verizon Wireless spokeswoman Brenda Raney confirmed the change in pricing. She also confirmed that Rogue customers will be required to sign up for one of the two plans. But she emphasized that today the new data plan requirement only applies to Rogue customers, and not to customers using other phones. She also said that the new pricing model would not affect customers already subscribing to the Vcast VPak plan.

But she did say that the data plan requirement along with the new pricing scheme will apply to other new phones that Verizon Wireless introduces in the future. But she declined to provide details as to what types of phones would require data plans.

"We will identify the (phones) that require a data plan," she said in an e-mail. "And we are not making anyone with a similar phone today purchase a plan. Regarding the requirement of a data plan with the Rogue, you have to have a data plan if you get that phone."

Verizon's justification for requiring the new data service plan with the sale of these phones is that it doesn't want customers to be upset if they rack up a big bill from data charges because they didn't realize they were using wireless data service.

What's your data usage?
Golvin admits that the usage cap on the lowest tier of service seems low. He postulates that subscribers of the 25MB plan will be able to check e-mail and access some Web pages each day without going over their limit. But he said that anyone uploading pictures or downloading big e-mail files will likely chew through that bandwidth quickly.

Meanwhile, he thinks the 75MB plan is likely to satisfy the daily needs of subscribers who frequently check e-mail and social-networking sites and use mobile search tools. But heavy users uploading pictures or video will have to be careful.

"The problem is that people know what a minute of voice is like," he said. "But they have no idea how much data they are using. Unless there is a clock that is running or fuel gauge that shows that you are down to half a tank in the first week of the month, users will have no idea they are going over their limit."

But consumer advocates believe that Verizon and other carriers are simply trying to lock subscribers into lengthy data contracts and are over-charging them for services that they may or may not use. For example, there are some smartphone users who say they'd rather forgo the $30-a-month data plan and only use the data services on their phones when they are in a Wi-Fi hot spot.

"This practice highlights once again the complete lack of transparency and the lack of logic that consumers face when they sign up for wireless data plans," Joel Kelsey, a policy analyst for Consumers Union, the nonprofit publisher of Consumer Reports. "Anything that herds consumers into plans or into phones that offers them a lack of choice has been problem for a long time in the wireless market."

Meanwhile, the wireless industry contends that it is trying to offer consumers more choices. But the reality is that even though consumers may soon see lower voice pricing, it's very unlikely their monthly bills will decrease at all. And it's quite likely they will continue to rise.

"Anything that leads to higher bills for consumers is bad in the eye of the consumer," Golvin said. "So I am sure this will largely be perceived as a negative by consumers. But with more tiers of service, there could be more choices. And maybe cost-conscious consumers could find a right-sized plan at the right price for them."