Wireless data caps: Are usage based pricing schemes here to stay?

Wireless data caps: Are usage based pricing schemes here to stay?

Summary: Wireless data providers--notably AT&T and Verizon--have capped their wireless data plans at 5GB per month. In the billing statements that cap is pretty clear, but the ramifications of exceeding them aren't as obvious.

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Wireless data providers--notably AT&T and Verizon--have capped their wireless data plans at 5GB per month. In the billing statements that cap is pretty clear, but the ramifications of exceeding them aren't as obvious.

In a research note dubbed “Free” Just Ain’t What it Used to Be, the Bernstein Research team explored wireless data plan caps. I've became quite familiar with those caps after I renewed my contract with Verizon Wireless. The company makes it clear that you are capped at 5GB a month and I'm on the highest tier plan. If you're not on that highest tier, the cap is just 50MB a month.

I haven't come close to the cap yet, but have wondered what would happen if I did. Luckily Bernstein analyst Craig Moffett recapped some of the ramifications via the Chicago Sun Times:

On a Sunday afternoon last December, while on a cruise ship docked in Miami, Wayne Burdick got a tantalizing taste of our  bright  wireless future.  He flipped open his  laptop, slipped  in  his  AT&T  wireless data  card,  connected to  the Slingbox in his  home  in  far  off  Chicago… and  voila, in seconds he was watching his beloved Chicago Bears. The Bears went on to defeat the hapless Detroit Lions that day by the score of 27 to 23. For his little display of techno-wizardry, AT&T sent Burdick a bill of $27,788.93. Burdick's experience  is  a reminder that "free"  isn't always what it's cracked up to be.  And that unlimited  usage  is often… well,  limited.  AT&T caps wireless data usage at 5 gigabytes per month. After that, each gigabyte will set you back a cool $503.

Two points about that tale. First, I'm not sure why anyone would tune in from afar to watch the Lions play anybody--even your favorite team. In addition, Burdick probably had no clue about those excess charges for blowing past the wireless bandwidth cap. I wouldn't have known. Would you? For what it's worth, AT&T dropped the charge after the Chicago Sun Times intervened on Burdick's behalf.

Moffett notes that the excess charges shouldn't be all that surprising:

Wireless data networks, after all, aren't free to build. The prevalence of Usage Based Pricing  (UBP)  among wireless  providers is a reminder that infrastructure  providers will price their services in order to make an acceptable return on investment for their networks, even if that limits the mass adoption of certain services and applications.

Streaming data  applications like video place a particularly heavy strain on network resources.  Indeed, underlying  the prevalence of Usage-Based Pricing among wireless carriers is a crucial and fundamental  paradox that  governs the economics of all wireless  Telecommunications networks. The services that users are most willing to pay for are connectivity services – voice,  text messages, or email, for example.  As it happens, these  services consume low bandwidth and are therefore relatively low cost to provide. Conversely,  the services that demand the most network resources – entertainment services – are far (very, very far) more costly to  deliver.  Paradoxically,  however,  these are precisely  the  services for which customers have shown the least willingness to pay.

Moffett is right. That conundrum makes no sense. Why are we paying for text messages? Wouldn't it make more sense to bundle the text messaging and keep the excess bandwidth charges? What works out better for the wireless provider?

Clearly, the revenue is in the text messaging. The video and entertainment wireless service networks are expensive to build and most mobile users don't fancy them anyway. Moffett aggregated the following charts to tell the tale:

Also see Odlyzko's paper full paper on the Net neutrality subject.

And.

Lesson: Don't watch an HD movie on your wireless card.

As a customer though, I can live with the video caps, but definitely want some giveback on the texting charges, which border on ridiculous.

Moffett indicates that something has to break:

Recent studies indicate that despite billions of dollars and years of investment, penetration of mobile video services remains at only 1% of mobile users, and that interest among users is now lower than it was in 2006. There are now more former users of wireless video services in Europe than there are current ones.  It's not that customers don't want to watch video on their mobile devices.  It's just that they don't want to pay for it.  Faced with these very "real  world" economics,  wireless operators have rationally responded by keeping unlimited usage… well, limited.  Verizon Wireless's data plans charge an overage fee of $0.25 per MB, equivalent to a staggering $256  per GB  of overage. And their plans explicitly prohibit activities like P2P file-sharing, which could "denigrate network capacity or functionality."  AT&T's overage charge is even higher than Verizon's,  at $0.49/MB (or $503/GB).  Sprint's is lower, at $0.05/MB, but is still an astronomical $51/GB.

All are set too high to allow for unfettered consumption of high bandwidth applications like video.  Only T-Mobile's "Total Internet for Data Cards” plan does not  impose any usage cap…but then again, their plan is limited to low-bandwidth e-mail and web browsing, so good luck trying to run up 5 GB of usage.  And  like Verizon, all these wireless data plans routinely include usage limitations  which  prohibit  a  wide  range of  bandwidth intensive applications, further limiting even the potential maximum usage of an individual subscriber. AT&T Mobility, for example, prohibits the use of P2P applications on their wireless network.

Add it up and I conclude that the concept of turning wireless phones into TVs--a concept pushed by Google CEO Eric Schmidt--isn't feasible given the current economics. Moffett notes that customers will think twice about watching any video on their wireless devices given the overage charges. A standard definition movie eats up 1GB. A high-def movie blows your cap. Forget about Slingbox. And you'll also think twice about watching that cute baby video of your 1 year old nephew.

So what's it going to be: Usage based pricing for telecom providers--the norm in Europe and almost all of the rest of the world? Or some sort of rejiggering of the economic model? My hunch is that usage based pricing is here to stay. Memo to self: Read those billing footnotes.

Topics: Mobility, Networking, Wi-Fi

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69 comments
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  • Paying (through the nose) For It...

    The reason nobody wants to "pay for video" is they equate this service
    with television. And television does not cost $700+ dollars to watch a
    frikken movie!!! Or, $27,000 to watch a sporting event. What a
    ridiculous prospect! What do these companies think, that everyone is a
    millionaire??

    Also, people generally don't know about the costs of infrastructure,
    etc., nor do they (nor should they) care. They see online video as
    another technology to view their favorite shows, movies, and other
    assorted U-Tubery.

    Just like long distance minute charges becoming flat-rate pricing
    schemes due to intense competition, i believe the telcos are going to
    have to come to the same pricing structure for online (wireless or
    otherwise) services to their customers.

    If this cannot be accomplished by the telcos, then government is the
    only other entity that can do it.

    i look forward to the day when I can just access whatever I want
    online, using any connectivity technology, without artificial limitations,
    for a reasonable flat monthly fee.

    CosmicOz
    • These limitations are not artificial

      They are the result of economics. Government-mandated pricing and
      limits would be artificial and would eventually cause a mess similar to
      the current housing crisis.
      frgough
    • Government will fix it ALL!!

      Put down the crack pipe, buster.

      These limits are driven by economics, and if the government tries to stick their spoon in the mix they will only make it worse.

      Furthermore, this crap is a luxury, so if don't want to pay for it DON'T USE IT.
      tikigawd
      • On crack and crap

        "These limits are driven by economics, and if the government tries to
        stick their spoon in the mix hey will only make it worse."

        Says who? You make this statement as if it should be accepted as fact.
        Like some silly, capitalist mantra that government is always inefficient
        and bad and private enterprise is always good and efficient.
        Well, I do not accept your contention. In fact, I would challenge you to
        point to a single empirical study that backs up this claim. It is all well
        and good to make bogus philosophical arguments based on tired
        dogma, but when push comes to shove, if your theory does not match
        the data, it is wrong. Period.
        First, if free market capitalism always wrought maximum efficiency at
        any given time point, there would be no way for major downsizing to
        occur and CEOs wouldn't be being chastised for arriving for
        congressional hearings on private jets.
        Second, most actual studies done to investigate this matter certainly
        do NOT support this contention. Case in point. The former local
        Republican county commissioner, upon first arriving in office,
        commissioned a study to determine how much money would be
        saved, both by the tax payers, as well as the customers of a number of
        public programs and facilities, if those programs and facilities were
        privatized. This study was supervised by hand-picked associates of
        the arch-conservative commissioner, and was publicized with great
        fanfare. What was NOT publicized at all was when the study results
        came in indicating that these public programs and institutions were
        being efficiently run, and that privatizing these public institutions
        would result in a large net increase in costs. In fact, Roddey, the
        republican commissioner, went out of his way to suppress the results.
        This same situation is repeated over and over again. This is not to say
        that every government program is efficiently run, or that every
        business has graft and waste. But to make the unqualified claim that
        government, per se, can only make these situations worse is absurd
        and ridiculous, and in no way supported by the facts.

        That said, so is the comment that 'this crap is a luxury, so if don't
        want to pay for it DON'T USE IT."

        Well, thanks for the information. I was under the impression that we
        were all forced to use it. What exactly is your point here? To borrow a
        euphemism from one of your later posts, NO FREAKING kidding!

        But so what? Are you claiming that consumers have no right to
        complain verbally about prices that they find exorbitant? Really?!?
        Then feel free to keep being dragged over the coals by every
        corporation out there. I am sure they love you and all your lemming
        compatriots. But I for one stand with the rest of the consumers who
        raise their voices, forcing companies to drop their prices. These
        consumers are EXACTLY why your much lauded capitalism actually
        works, not lemming apologists like you who blindly accept whatever
        sub par product is shoved in front of them for whatever price is asked.
        SpiritusInMachina
        • Interesting extrapolation

          [i]"These limits are driven by economics, and if the government tries to stick their spoon in the mix hey will only make it worse."

          Says who? You make this statement as if it should be accepted as fact. [/i]

          Says me. I wrote it.
          And no, I'm not telling you to accept it as fact, I'm telling you that's my opinion.

          Nevertheless, you saying that there's "no data" to support my opinion is quite laughable. Here's a little secret: that's what capitalism is based on, and many economists will tell you that the rules of supply and demand are real. But again, that's just my opinion.

          Now that we're clear on that..

          It's very interesting how you extrapolate my opinion regarding government's role on [b]text messaging pricing[/b] to me thinking that government is [i]always[/i] inefficient.

          You seem to have reading comprehension issues so to be clear: I was talking about text messaging pricing
          I was talking about text messaging pricing
          I was talking about text messaging pricing
          I was talking about text messaging pricing
          I was talking about text messaging pricing

          My intention in my original post was to say it's silly to suggest government should be involved in something as trivial as text messaging pricing. I think they have bigger things to worry about right now.

          Clear? Cool.

          [i]First, if free market capitalism always wrought maximum efficiency at any given time point[/i]

          Wow, where exactly did I write that capitalism [i][b]always[/b][/i] effects maximum efficiency? I don't remember... Oh yeah, I didn't. I didn't even talk about efficiency...

          But for the record I believe our current economic pickle is due to the erosion of necessary regulation of the financial sector. Things need to be balanced, too much one way or the other and we end up in precarious situations.
          That said, it has nothing to do with... what was the subject? Oh yeah, text messaging pricing.


          [i]But so what? Are you claiming that consumers have no right to complain verbally about prices that they find exorbitant? [/i]

          Um, no. What I was saying, in fact, is that if your opinion is that text messaging is too expensive then DON'T USE IT. That's how you voice your opinion. That's how you tell companies that it's too expensive. If it is in fact too expensive many people will do the same and the company will be forced to lower their price.

          The argument that text messaging is way too expensive is like whining about the price of orange juice by comparing it to the price of gasoline. "OMG!!! orange juice is $6/gallon, WHAT AN OUTRAGE!!!!!"
          The price of OJ and the price of gasoline don't have anything to do with each other (well, except for the costs associated to producing, transporting, etc OJ and how gasoline plays a role in that), and trying to attack one by comparing it to the other is asinine.


          Next time you feel the urge to go on some political tirade at least base it on something the person actually wrote. Sometimes talking about text messaging pricing is just talking about text messaging pricing.
          tikigawd
          • Pots, kettles, and the price of OJ

            "I'm not telling you to accept it as fact, I'm telling you that's my
            opinion."

            No, you were making an unqualified statement of fact. To wit:
            "if the government tries to stick their spoon in the mix hey [sic] will
            only make it worse."

            "Nevertheless, you saying that there's "no data" to support my opinion
            is quite laughable. Here's a little secret: that's what capitalism is based
            on, and many economists will tell you that the rules of supply and
            demand are real. But again, that's just my opinion. " This is not my
            opinion.

            As for me extrapolating, I needed do no such thing. You made a
            generally qualified statement to back up your specific assertion
            regarding text messaging, not the other way round. I have no reading
            comprehension issue here. You however seem to have major problems
            with fundamental logic and language.

            And to be clear, no one said the government needs to micromanage
            txt pricing. At no point did the OP even allude to that. Rather there
            was a call for more general government intervention. While I do not
            agree with the OP in this regard, your blanket, knee jerk, government
            is bad response is unsupportable by facts.

            And as a matter of fact, if you knew much about the history of the
            current teleco landscape, you would know that it actually has quite a
            bit to do with SMS pricing.

            There are many ways to voice an opinion that have market effects.
            While not using the service is one. making vociferous complaints is
            most certainly another. You are not in any position to make aspersions
            on someone for taking one tack over the other.
            That said, two items in a comparison do not have to be related to one
            another directly. If you can not see the relevance of comparing things
            like orange juice to gasoline, then you aren't paying attention (not
            that this has anything to do with the current discussion.)

            As for the rest, I feel free to make any comment I wish, and do not
            need your permission or sanction. And perhaps before you offer such
            guidelines, you should pay more attention to what YOU write. If you
            make general statements to back up specific arguments, expect to
            have those general statements examined.

            I am fully aware of how capitalism works. If you did, you would
            understand that the rules of supply and demand effect every social
            system, including government, and that such rules do NOT preclude
            well-run public programs. In fact, it is far more interesting that I call
            for specific verifiable data, and you post logical fallacies such as
            appeal to authority and irrelevant premises.
            In short, first, it does not matter what "many economists say." That is
            a logical error referenced above. More to the point, many of your
            authorities have actually admitted that they were wrong about their
            understanding of markets, including the venerable Alan Greenspan, so
            two can play at that game.
            SpiritusInMachina
          • You're right, I'm wrong

            Yeah, I'm stupid, and have no grasp of the English language.

            Everything you said is right, and I was wrong.

            You schooled me.

            I'm going to cry now.

            bye
            tikigawd
          • Indeed

            Enough said
            SpiritusInMachina
          • Deus Ex - how little you are like the namesake...

            You want actual proof of privatization outperforming government services?

            http://www.reason.org/news/show/1002729.html
            http://whyy.org/blogs/itsourcity/2009/02/11/rep
            ort-privatized-edison-schools-outperforming-
            non-profit-run-schools/

            Ta-dah! Simple as that. Oh, and complaining
            loudly to a company when you don't pay for
            their services doesn't get you very far. You
            don't give them money, so they don't care what
            you think. On the other hand, be a loyal
            customer and then remind them of your loyalty
            and often you'll find them bending over
            backwards for you. Money talks louder than
            words.
            p0figster
    • what???

      and while you are about what about them gas prices? I want to be able to drive my car all night and day for 'a reasonable flat monthly fee'

      get real.

      If you are using a lot of bandwidth then you are consuming the company's resource. simple as that. and from their perspective if they are ALREADY making squillions of whiskey vouchers a year from morons spending a few bucks texting each other a conversation that would have cost a few cents to do 'live' then the resource you are consuming is pretty valuable. Hence the plan.

      Always read the fine print in your agreement. Anything in this life given away for free is generally worth every penny. Communications infrastructure is expensive to get into service. We will all end up having to pay for it.
      paul_bruford@...
      • If 5 G amonth

        is worth $60 what make the 6th worth 500 instead of 12? The only comodity sellers in the world that seems to think it is reasonable to charge heavy users 40 times more PER UNIT thaN light to moderate users are the wireless sellers. Even electricity doesn't do that. Heck even smack dealers don't do that. It is gouging pure and simple. If they can't handle the traffic then cut users off after the limit is reached. If it is not necessary for your other customers to cut off the heavy users then it is not necessary to charge them 40 times the going rate either.
        danm50
        • I'm late to the conversation...sorry

          But what you're saying is wrong. It's not
          price gouging. Pizza Hut just sent me an email
          - get a medium one topping pizza for a penny -
          IF I buy a large at regular price. Is the
          large price gouging? I mean, it costs 1800x as
          much (if you figure it's twice as big, then
          900x) as much as the medium. Or what about a
          value meal at McDonalds? If I try and buy the
          pieces separately, they cost more...that's
          price gouging!

          What the telecos do when they sell you 5G of
          traffic is they plan on you using 5G of
          traffic. They make sure their network can
          handle it and so they sell it at an appropriate
          price. But then, greedy hands start taking
          more than what they planned on. So, they're
          not charging you $500 for the gig, they're
          charging you $12 for the gig and $482 for using
          more than you said you would and not allowing
          them to anticipate it.

          Another example, have you ever rented an
          apartment while you were going to trade
          school/college/university? I lived one place,
          our contract (which was $250/month) expired but
          we couldn't move into our new place for a
          month, so we asked how much they charged per
          day after the contract ended. You know how
          much? $20/day. That adds up to $600+/month.
          Is that price gouging? No! I got the $250/mo
          by signing a contract for a specified length of
          time. They planned on me being out by a
          certain time, now, last minute, I want to
          extend my stay, outside of my contracted price
          which inconveniences them because they can't
          move people in when they'd planned, etc...

          Anytime you get a package deal, expect the same
          product outside the package to be more
          expensive, because the company doesn't have the guaranteed cash flow or the opportunity to plan
          the dispersal of it's resources appropriately.
          p0figster
    • No Free Lunch

      I'll bet CosmicOz doesn't spend 40hours per week at his/her workplace and happily accept $.0.0 in return. When we all do that, wireless band width will be high speed, high quality, and there will be no cap, and it will be free. Get real!
      monei011
  • Cellular wireless is sounding like a worse deal all the time

    never mind that the coverage is terrible, the costs are high, the networks are slow, and the whole thing is being oversold beyond reason.
    zmud
  • For once, Canada is in the lead in wireless

    I'm on Rogers wireless in Toronto, and thanks to lots of bad press and consumer complaints our wireless providers offer a "Cap" on the overage charges at $100.

    Sounds like a lot? I've used 30GB+ in one month and my bill was a whole $130 for the month with all charges and taxes in.

    Overall, Canadian wireless is considerably more expensive than anywhere else in the world - but it seems we've got the sweetest deals on 3G data... go figure.
    _Aoshi_
    • Welcome to Australia..

      This is how ALL internet has been charged in Australia. I pay AUS$90 per month for 5GB on a wireless mobile plan - not because I want to roam around, but because my house is not on an ADSL / Cable network.
      Having said that, the 3G speed is not so bad. I just don't use it for videophone / large downloads or anything like that.
      Oook!
      • Aussie land

        Problem with Oz is that it's a huge island of 20 million people in the middle of nowhere...I am a big fan (I lived there and have a kangaroo tat on my leg) but it's totally understandable that Oz/Canada/US and any large country has really high telecom rates compared to Europe. The costs to build are just that much higher.

        Having said that, Rogers (Canada) is evil!
        alexh1111
      • Welcome to New Zealand

        Same in NZ. Wireless or fixed line (ADSL,or dialup) most plans are capped, with heavy over use charge. Simple reason really. Limited band width of switches etc means that if I hammer a limeted pipe, other users of the ISP suffer. They take the sensible approach of rationing above average capacity / number of users figure. Most people respond to price.

        monei011
  • ZDnet doesn't help!

    With all the useless graphics and video gimmicks on each page ZDnet is not helping the average user stay withing the monthly limit. I would love to set my browser to not load images UNLESS I WANT THEM but most web (egocentric) page designers don't allow the information to be legible or usefull in this mode (IS ANYBODY LISTENING?).

    PS: There are a few sites like ZDNET that I would gladly subscribe to ($$$$) if I could be assured of information only with no clutter!
    kd5auq
    • I'm sure

      ZDNet designed their website thinking of all the mobile users...
      If using wireless internet is too expensive for you then DON'T USE IT!!

      Having wireless internet is not a right, it's a luxury.
      tikigawd