AT&T Rocks Smartphone Industry by Dropping Unlimited Data Plans

In a pioneering move likely to shake up the mobile telecom industry, AT&T (NYSE: T) today (Wednesday) abandoned unlimited-pricing plans for new wireless subscribers accessing data on smartphones.

The changes could lower the cost of service for the vast majority of AT&T's users but potentially raise rates significantly for heavy data consumers. The new plans go into effect on June 7, the same day Apple Inc. (NASDAQ: AAPL) is widely expected to unveil the next generation of its popular iPhone.

By instituting usage limits on what were previously unlimited smartphone data plans, AT&T embarks on an important and long-awaited shift in how carriers bill their customers.

Executives from the nation's largest carriers have long discussed a move toward tiered, bucketed data pricing scenarios for smartphones, but AT&T is the first major U.S. carrier to implement such changes.

As devices become more sophisticated and data traffic explodes, AT&T and other carriers, including Verizon Wireless, a joint venture of Verizon Communications Inc. (NYSE: VZ) and Vodafone Group PLC (Nasdaq ADR: VOD), have recently put consumers on notice that they are going to have to start paying for the amount of data they use.

"While the convenience, simplicity and peace of mind that comes with an unlimited plan helps to drive adoption and reduces customer care costs, it is also unsustainable," said Roger Entner, an analyst at The Nielsen Company.

"It certainly has driven adoption through predictable pricing, but with a long-term downside risk to the overall business model and the financial viability of the entire industry," he said.

By implementing its second price cut for wireless plans in six months, AT&T may be rolling the dice by sacrificing short-term revenues for the chance to regain control of its network and the power to structure pricing plans according to usage.

The company said it will eliminate its $30 unlimited data plan for new smartphone subscribers. The new plans will lower the cost of an entry-level voice data plan by $15 to $54.99, including 200 megabytes of data. New customers will also be offered 2 gigabytes of data for an additional $25. Users who exceed 2 gigabytes of usage will pay $10 a month for each additional gigabyte.

AT&T says 98% of its customers use less than those amounts.

Existing users will have the option of sticking with their current plans indefinitely, even if they switch phones, AT&T spokesman Mark Siegel told The Wall Street Journal.

AT&T is also dropping the $30 unlimited-data option for new buyers of Apple's wireless-enabled iPad and replacing it with the $25 a month 2-gigabyte plan. iPad users currently paying for unlimited data will be able to keep doing so.

"The new plans appear well designed to reduce undue network stresses, as they will sweep AT&T's heaviest users into higher priced plans, or, perhaps more likely, will curtail their profligate usage," said Craig Moffett, an analyst at Sanford C. Bernstein.

AT&T's networks in New York and San Francisco have been plagued by declining call quality and dropped calls. The company claims the networks have been suffocated by an avalanche of heavy data use by a small number of iPhone subscribers.

Ralph de la Vega, chief executive of AT&T's wireless and consumer units, has said 3% of the company's subscribers account for 40% of its data traffic.

In fact, AT&T's exclusive deal with Apple to sell the iPhone has brought it preeminent status as a wireless provider. Ironically, however, the additional traffic brought on by the big boost in subscribership is now threatening AT&T's entire 3G network as the provider struggles to handle the large bandwidth appetite of the popular device.

Apple Chief Executive Officer Steve Jobs acknowledged that the difficulties are a concern for Apple. Speaking at the All Things Digital conference Tuesday evening, he said the carrier has made progress but has more to do.

"They're doing pretty good in some ways, and in others they could do better," Jobs said. "I wish they were improving faster... [but] I'm convinced that any other network, had you put the iPhone on it, would have had the same problems."

Still, data revenue at AT&T is key to the company's survival, as growth in the segment has offset the erosion of voice plans, a sector of the telecom business, which has been slumping for years.

The company said the new data plans would only have a minor impact on revenue and said they don't affect its announced financial projections for the year.

AT&T may see lower growth in data revenue in the short term as a result of the new changes, analyst Philip Cusick at Macquarie Securities told The Journal. But the new plans will gain leverage over the heaviest data users, improving its ability to manage its network and charge for capacity.

The new, tiered plans may also pull more customers into data plans, he said.

News & Related Story Links:

• Fierce Wireless:
  AT&T kills unlimited data pricing, supports iPhone tethering
• Wall Street Journal:
  AT&T Moves Away From Unlimited-Data Pricing
• Money Morning:
  Price Wars Likely to Spur Smartphone Explosion in 2010