The Limitations of Capacity


The Limitations of Capacity

By Hunter Newby, CEO  |  August 01, 2010

This article originally appeared in the August 2010 issue of INTERNET TELEPHONY.

Unlimited-use communications services have been with us for many years.

• In 1997 several ISPs were offering T-1s of unlimited Internet access for just under $2000 per month. Today 1.5mbps will cost you about $1.50 wholesale on a gigabit Ethernet circuit.

• In 1998 several CLECs offered DS-3s of unlimited call termination in certain LATAs for $5000 per month. Today, call termination to the entire 1+ can be had for less. 

• In 2001 Vonage was founded introducing flat-rate residential calling over the public Internet for $19.95 per month. 

• In 2003 Skype (News - Alert) was founded. It is free, supports video and now works on mobile devices. 

• In 2007 several major wireless carriers were offering unlimited monthly voice plans for $100 per month. These plans are now below $50. 

Communications services were becoming less expensive because they were riding on infrastructure that was in place and largely paid for (or written down in bankruptcies). As a result, the United States experienced a period of major growth and prosperity, and the world became a smaller place. Since then the prices have continued to drop due to competition and demand, but there is at least one exception – AT&T's (News - Alert) data plan for the iPhone and iPad.

From the AT&T announcement:

AT&T*, the U.S. smartphone leader, today introduced new wireless data plans that make it more affordable for more people to enjoy the benefits of the mobile Internet. Customers can pick the new data plan that best meets their needs – either a $15 per month entry plan or a $25 per month plan with 10 times more data. Current smartphone customers are not required to switch to the new plans, but can choose to do so without a contract extension."

This is very interesting, curious and requires some explanation.

Why would AT&T do this?

The Apple (News - Alert) devices have been incredibly popular, and the AT&T network has had a very difficult time keeping up. The amount of capital that AT&T must spend to upgrade its wireless transport network to support the customer demand exceeds what it would like to spend in the timeframe required. To slow the curve of the hockey stick, it introduce a new rate structure that makes users be more aware of what they're doing since there is a penalty for doing too much. If the users use too much, they must pay more, which then helps AT&T fund the necessary network investment from within the wireless unit - verses taking it all from the core transport side.

How can it do this?

Simple, AT&T has an exclusive contract with Apple. There is no competition. Since it is the only network that currently works with these desirable devices AT&T can change whatever it wants. It is a delicate balance though. If it charges too much, it may have an impact on Apple sales and therefore its monthly subscriptions. If it doesn't charge enough, its own success will consume it.

Inherent in the Apple devices is the App Store. This is truly the competitive advantage over all other devices. Yes, the Apple devices are cool and easy to use, but they have their limits. The fact is that the application developers have a liquid market to create, market, sell and deliver in the App Store. Others are trying to compete, but it is very difficult to un-seed this incumbent.

The wireless network becomes just transport, so it is not so fancy, but it is essential. In the near future the Apple devices will work on other networks; and, of course, they will interoperate, so the exclusive lock will be broken. It is unclear how long AT&T will keep the metered data plan in place, but for sure once there is network competition for the Apple devices the first one to go back to flat-rate, unlimited use will win the customers; and then it is back to the race to the bottom.

The issue rests in how to finance the necessary network construction. The end users need it, so they will be the ones to pay for it ultimately. It is a function of time, money and demand. Fiber-to-the-tower is incredibly necessary for all of these wonderful apps to work. Hulu (News - Alert) and Slingbox to the mobile device are reality today, but only where the network connections will support them. These apps and many others, such as Skype Video on mobile, are here now, but not everywhere.

Managing the network build out process across the entire USA is no easy task. One thing is clear, for the USA to be competitive in the world we must have this infrastructure, and it must be unlimited use – eventually. This is the evolutionary path of every other major U.S. communications service and what currently exists in many other countries around the world today. Anything else would be very limiting.

Hunter Newby (News - Alert), CEO Allied Fiber writes the VoIPeering column for TMCnet To read more of Hunter's articles, please visit his columnist page.

Edited by Stefania Viscusi