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

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.