Understanding AT&T's New Financial Model

Jun. 7.10 | About: AT&T Inc. (T)

AT&T (NYSE:T) has ended its unlimited wireless data plan. Should you care? What does it mean? Does it make sense? All good questions, let’s try to sort it out.

Note: If you are an existing AT&T customer with an unlimited data plan, this announcement will not have an impact on your phone bill — unless you decide to add AT&T’s new tethering option, then you will have to agree to the new fee structure.

Wondering what tethering is? It is the ability to attach or “tether” your wireless phone to your computer and use it to connect to AT&T’s wireless network.

Back to our story … voice ARPU (average revenue per user, pronounced “r-pooh”) is declining. So carriers / operators need data income to help pick up the slack. Here’s what AT&T is asking for:

$15/month for the DataPlus plan which includes 200MB of data transfer. If customers exceed 200MB in a monthly billing cycle, they receive an additional 200MB of data for $15 until the end of that billing cycle.

$25/month for a 2GB data plan. If subscribers exceed 2GB during a billing cycle, they will be charged $10 for an additional 1GB of data.

Not to put too fine a point on it, AT&T’s tethering comes almost a year after Apple (NASDAQ:AAPL) added tethering functionality to the iPhone OS, but AT&T’s 20/month extra tethering charge is only for the right to tether your phone. You will still need to purchase a data plan.

What do people think? Daring Fireball blogger, John Gruber, was unimpressed with AT&T’s tethering plan, arguing that the company was charging its customers for nothing. “It’s one thing to charge extra for tethering on an ‘unlimited’ data plan, but it’s outrageous to charge $20 when the bandwidth is already capped.” Others around the Web agreed with Gruber’s assessment, including MacRumors commenter wickywahwah who wrote, “$20 for tethering is BS, but i guess there is always the jailbreak option.” [sic]

However, over on Macworld some people offered a different view, including mkeikha who said, “Tethering is a luxury, for which users should pay a premium.”

OK, tethering isn’t that important. Does a tiered pricing plan make any sense?

Well, it looks like AT&T is offering average consumers an affordable entry point while getting customers to switch from basic feature phones to smart phones. This plan will also allow AT&T to charge the 3% of customers who they claim use 40% of bandwidth fees commensurate with the amount of bandwidth they use.

BillShrink’s CEO, Schwark Satyavolu, said, “While AT&T’s new data package will give the third of smartphone users who average under 200MB of data some short-term relief, about $15/month, most of these customers are the non-iPhone users (based on average iPhone usage numbers). The majority of moderate iPhone customers are going to see small savings - $5 month, but get significantly less flexibility accessing the web from their phones (usage that is growing, especially as more streaming apps get approved by Apple as they have been recently). The biggest immediate impact and long-term harm will be on heavier iPhone users and people who tether, who typically have the highest data usage and will be paying overage fees each month.”

Here are the factoids:

  • 65% of AT&T customers use less than 200MB/mo.
  • 98% of smart phone customers use on average less than 2GB of data/mo
  • The company plans to send text messages to users as they reach 65 percent, 90 percent, and 100 percent of their monthly cap.

“The primary motivation for making the switch to tiered pricing is that the one-size-fits-all approach to smart phones doesn’t make sense anymore,” said Mark Siegel, a spokesman for AT&T. “We wanted to give people a choice. People will use these devices differently, and we needed to give them different options.”

How does the US marketplace look in Q1 2010?

  • 36% — Research In Motion (RIMM)
  • 28% — Android
  • 21% — iPhone

Of course if you’re really unhappy with AT&T’s new financial model, there’s lots of room at the bottom of the market. Prepaid wireless operators, such as Boost Mobile, Virgin Mobile USA, MetroPCS and Leap Wireless, are also starting to offer low-cost smart phone plans. Virgin Mobile offers a prepaid smart phone plan for as low as $35 a month. It includes 300 voice minutes and unlimited data and text messaging.

Finally, it might be instructive to understand the stress that Apple iPhones and iPads are putting on AT&T’s network. iPhone users use 5-7x more data/month than average wireless subscribers, according to Sanford Bernstein.

AT&T has also tried to make it easier for smart phone customers to offload Web activity on Wi-Fi hotspots. The company now offers free access to its more than 20,000 public Wi-Fi hotspots around the country to all smart phone subscribers. Adding such a low-cost plan could potentially put even more strain on AT&T’s network? Some experts say no. Others disagree.

Ultimately, consumers will vote with their checkbooks. The future for carriers and the telecom industry is data. So, whether we like it or not, one way or the other, we (that’s you and me) are going to be made to pay for it.

Disclosure: No positions