Follow the Money - Why is AT&T changing their price

On June 7th, AT&T announced that they are removing the unlimited data plans option for new iPhone subscribers, which forces subscribers to choose a tiered pricing plan. There are some discrepancies in the published information on why AT&T is doing this.

To review AT&T’s decision to change to tiered data plans, let's follow the money. For simplicity, let's take a sample of 100 iPhone subscribers. Today AT&T makes $30 for unlimited data or $3000 per 100 subscribers. According to AT&T, approximately 60% of iPhone users use under 200 megs per month. With the new data plans in place, users will pay $15 per month for this tier. AT&T claims only 3% of smartphone users use more then 2gigs, which would cost those users $25 per month with the new tiered data pricing. These numbers include all of AT&T’s smartphones. I wonder how different the numbers would be if they were applied to iPhone customers specifically.

To further the example, let’s say these 3% end up using 5 gigs or $25 for 2 gigs plus $10 per gig overage charge or $55 per month. With the new pricing per 100 subscribers, AT&T would make $1,990, which is just over $1,000 less than the current unlimited pricing plan.

($15/month for 200 megs * 60 users) + ($25/month for 2 gigs * 37 users) + ($55/ month for 5 gigs * 3 users) 165 = $1,990

This example doesn't take into account overage charges, increased subscriptions because of a lower price point, or people paying for a higher level plan than they need due to fear. Even with these potential additional costs, it seems unlikely that AT&T will make up the lost revenue from the unlimited plan. So why is AT&T making this change?

My theory is two-fold.

First, iPhone users use significantly more data then any other smartphone which means AT&T's network is being hit hard. How much is it costing AT&T to upgrade their network? If network upgrades would cost more than the lost revenue, the entire expense is justified.

Second, what is the rate of increase of traffic? My guess, although AT&T hasn't affirmed, is that the rate of iPhone users data usage has increased significantly. I would assume that the longer a user has their iPhone, the more their data usage increases. In theory, AT&T is willing to loose a little short-term revenue to save money on building out their network. As a result, they are responsible for setting the precedent of data costing per usage so they don't have the average iPhone user using 2 gigs instead of 200 megs. Having every phone user watching Netflix on their phones must worry AT&T a lot.

So what does this mean? AT&T benefits from tiered data plan pricing because they will not have to upgrade their network as fast to accommodate new iPhone subscribers. Overall, this will negatively impact innovation. Users behavior will change. When data usage is limited, people spend less out of fear of hitting or exceeding the limit. As a result, users will be hesitant to download the latest app, use Pandora or browse the web. This will hurt the growth of new services and expanded choice for every member of the mobile community. My fear is that this change will delay the explosion of mobile as a real platform by a few years or more. I hope Verizon doesn't follow suit and remove unlimited data plans.

I would have loved to have been a fly on the wall when AT&T told Steve Jobs, CEO of Apple, about the new data plans. I believe that Steve Jobs is very much against this rate change. Apple makes money on people using the network - apps, music, etc. Increasing the cost to gather more data will undoubtedly decrease use, which will negatively impact Apple’s bottom line. Perhaps, this will drive Apple to escape their current exclusive contract with AT&T.

Finally, last year in my home town of Rochester, NY, Time Warner Cable attempted to institute rate caps. The community petitioned the change and strongly encouraged Time Warner to rethink their decision. Why are these same people not complaining about AT&T doing what in essence is the same thing? Instead, the same people are saying, “wow I will save $5 or $15 per month depending on the plan I choose.” Overall, AT&T is willing to take the long-term view and consumers aren't. AT&T wins?