Tiered pricing will be the hot topic for the next few months

AT&T Possible Price Moves May Backfire

Potential efforts to charge more for heavy data usage may alienate customers and stymie innovation and growth in the wireless Web

By Olga Kharif

AT&T giveth and AT&T taketh away. The wireless service provider that has mastered all-you-can-eat monthly service packages for its mobile-phone customers is having second thoughts. Concerned that some customers are consuming more than their share of data over wireless networks, the company plans to offer some subscribers "incentives" to "reduce or modify their usage" of bandwidth, AT&T Mobility CEO Ralph de la Vega said on Dec. 9. Analysts and consumer advocates say the changes may backfire.

De la Vega, speaking at a conference in New York sponsored by investment bank UBS (UBS), didn’t specify the company’s plans, but said one step will be giving users more information on how much data they’ve consumed. Analysts speculate AT&T may move to a tiered pricing scheme where subscribers are charged more depending on how much bandwidth they use—say, through downloading videos or sending and receiving big documents. Some carriers in other countries, including Canada and Australia, already use tiered pricing.

Yet in a market where customers have grown accustomed to paying a single fee no matter how much data they consume, a switch by AT&T, the largest U.S. mobile-phone operator, may backfire. Analysts and consumer advocates say the move may curb demand for smartphones and wireless data products, stymie development by programmers who specialize in mobile applications, and push subscribers into the arms of rivals, such as Verizon Wireless, that currently charge flat fees. "This notion that customers must now curb their Internet usage or pay up is not only unfair to consumers, it puts up a roadblock to wireless innovation," says Craig Aaron, senior program director at Free Press, a nonprofit group that advocates for unfettered access to communications.

BLOW TO MOBILE DEMAND

Demand for mobile data is expected to keep rising, though possibly at a slower pace, as carriers take steps to discourage heavy bandwidth use, says Chetan Sharma, an independent wireless consultant based in Issaquah, Wash. Limits on data usage or higher prices may also slow adoption of smartphones, one of the fastest-growing areas of the wireless industry, analysts say.

AT&T declined to elaborate on de la Vega’s comments. Verizon Wireless declined to comment.

Companies that specialize in mobile-Web services and products would also suffer from a drop-off in demand growth for wireless Internet access, investors and analysts speculate. These range from startups such as Ustream, which makes a tool that lets Apple (AAPL) iPhone users orchestrate their own live broadcasts of video captured on the device’s camera, to bigger players such as Skype, a provider of Internet-based calling services.

Developers may need to slash prices on games, e-books, and other tools sold in online bazaars such as the Apple App Store, says Richard Murphy, an analyst at IDC. App developers may also need to change how they make money, relying more on advertising rather than one-time fees or subscriptions over time.

A wide range of service providers would be affected. "Mobile is absolutely central [to our growth]," says Tim Westergren, founder of Internet radio service Pandora, which sells applications that put its streaming stations onto the iPhone, Research In Motion’s (RIMM) BlackBerry, and other smartphones. "It accounts for half of our new listeners and a third of our listening hours. Clearly, the more expensive the [mobile] bandwidth, the worse it is for us."

NETWORK CHALLENGE

In the U.S., AT&T is the exclusive carrier of the Apple iPhone. About 3% of AT&T’s iPhone users generate 40% of all the traffic over AT&T Mobility’s network, the company contends. Heavy demand by a small proportion of the user base erodes margins, says Craig Moffett, an analyst at Sanford C. Bernstein (AB).

AT&T supporters contend that unless it changes the way it charges some users for data, customers across the board will end up with worse service. "The alternative is having the network collapse," says Michael Mace, a principal at Rubicon Consulting. AT&T says it is trying to upgrade its network to make it more capable of handling heavy traffic.

But critics say the company shouldn’t penalize customers for what they say is AT&T’s failure to anticipate surging demand for smartphone data. "AT&T’s wireless profits are sky-high, but it still wants an excuse to charge consumers more and continue to advertise a network experience it can’t deliver," says Aaron at Free Press. In December, Consumer Reports reported that AT&T came in last in consumer satisfaction in more than a dozen large cities. The report noted: "If you’re readying to buy Apple’s phone, prepare for possible disappointment with its service."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.