Bye Bye "All You Can Eat" Mobile Broadband?

Tim Chang, partner at Norwest Venture Partners, thinks a mobile bandwidth crunch is coming that will have major implications for usage-based pricing within five years.

 

The marginal cost of delivering wired broadband is projected to decrease roughly 10 percent a year, in terms of total costs per GByte, according to Stuart Taylor, Cisco Systems (News - Alert) U.S. mobile segment leader.

 

But broadband revenues per GByte are declining in the order of 15 percent per year. When you combine the cost and revenue curves, you get a breaking point in the next five years or so, Taylor predicts.

 

Mobile data usage is exploding but mobile data revenue to the carriers has only increased 20 percent per year.

 

That means "all-you-can-eat" mobile data plans are not sustainable.

 

Jon Metzler, an industry consultant who has conducted research for the CTIA, says he’s heard estimates that a YouTube (News - Alert) video of three to five minutes costs $1 for a carrier to handle.

 

The math then is pretty simple. A user paying $60 a month and watching two video clips of that length a day will cost the provider $60 a month.

 

A user paying $30 a month and watching just one clip a day costs the provider $30. And that does not factor in any marketing, support or other costs for any other services.

 

Chang says the reason most 3G data plans are capped at 5 Gbytes a month is that it is the point at which the providers start to lose money.

 

That's one reason why there now is so much interest in Wi-Fi connectivity for handsets: it offloads a potentially significant amount of traffic from the mobile network.

 

Carriers hope the greater efficiency provided by new fourth-generation networks will help. They will, but if video traffic gets added into the mix, they still might find they haven't gained as much breathing room as they originally thought.

 

The 3G networks were supposed to provide similar advantages, but that hope has not materialized. All of this suggests that tiered pricing of some sort will prove inevitable.

 

Still, there is lots of flexibility. Plans can be tailored based on usage. People who don't use video can be charged different rates than those that do. Social network plans can be different from email plans. Customers can be provided incentives to shift some usage to Wi-Fi networks.

 

Chang thinks AT&T (News - Alert) and Verizon have some advantages here.

 

They might be able to do something roughly analogous to what President Ronald Reagan did to the former Soviet Union: maintain an expensive arms race the United States could afford and the Soviet Union could not.

 

To the extent that handset subsidies are becoming a challenge, AT&T and Verizon simply are better situated to keep driving their businesses with significant subsidies that Sprint and T-Mobile (News - Alert) USA will be hard pressed to match.

 

Perhaps. But mobile providers--even Sprint and T-Mobile--are far from running out of creative packaging and pricing schemes that can be tailored to any number of circumstances. Pricing and packaging schemes far beyond those used today are conceivable, and many can be used to create incentives for users that alleviate stress on the networks.