Interviews with Digital Media Thought Leaders

ATT Data Pricing Bad for Apple

Podcast Audio | Posted by Phil Leigh on June 17, 2010

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Phil Leigh

Extensive research into usage-based pricing of communications services conclusively demonstrates two points. First, consumers hate it. Even when metered-pricing would consistently result in a lower bill, they prefer a flat-rate. Second, flat-rates markedly stimulate network usage.

Consider how Rochester, New York telephone subscribers reacted to the following message from the Bell System 124 years ago in 1886.

Unlimited telephone use leads to unnecessary occupation of our wires and to much borrowing of telephones by parties who are not subscribers. This encumbers the system with unnecessary and illegitimate calls resulting in greatly impaired service.

When Bell switched Rochester to metered rates, nearly everybody in the city quit subscribing.

It is also interesting to note Bell’s outrage when one neighbor let another use his telephone, which was apparently against the rules. The point reminds me of the RIAA’s indignation toward file-sharers who are often characterized as youthful offenders in need of moral education. Apparently Rochester adults over a century ago also needed edification. But that’s another story, and presumably a good one.

A more recent example of consumer preference for flat-rate pricing dates to 1996 when AOL abandoned metered rates. Prior to the change AOL subscribers’ number one gripe was the ticking clock. They did not want to pay by the hour. It was far more of an annoyance than unsolicited email, dropped connections, or anything else.

A research paper from AT&T Labs about 10 years ago surprisingly concluded that consumers favor flat-rate pricing even when metered rates are cheaper. There are apparently two reasons. One is to avoid the “mental transaction costs” required to constantly monitor usage. A second is termed the “insurance effect”. Basically, consumers are willing to pay a flat-rate premium in order to eliminate the normally remote risk that they will run-up a large bill.

Since AT&T Wireless reports that about two-thirds of iPhone subscribers used less than 0.2 Gigabytes monthly and 98% used less than 2.0 Gigabytes the unlimited data rate at $30 apparently included a sizeable “insurance” premium. That’s because the new usage-based rates are $15 monthly for the first threshold and $25 for the second higher one.

The AT&T Labs paper also documents a marked sensitivity to network usage from fixed-rates. From 1996 until at least 2000 ISP rates in France were metered whereas AOL adopted a flat-rate in 1996 and New Zealand’s major provider adopted fixed rates in 1999. As the chart below demonstrates, per-subscriber Internet use in France remained relatively constant whereas it sharply increased for both AOL and the New Zealand provider.

Flat-Rate Use Sensitivity

At the end of the period AOL subscribers used the Net nearly three times as much daily as the metered-rate French subscriber. In New Zealand the average subscriber was on the Net more than twice as much as the French one.

In conclusion, there’s little doubt that AT&T Wireless’ new usage-sensitive data pricing will adversely impact the utilization of iPhones and iPads on The Wireless Internet. As a byproduct subscribers will be less likely to try new Applications and less prone to use ones currently loaded. Unless alternate usage-insensitive ways of accessing The Wireless Internet materialize, demand for Apple mobile devices, advertising Apps, and Third Party Apps will be lower than otherwise.

Importantly, we do not necessarily conclude that such alternatives shall fail to come-of-age. In point of fact, next month we shall release a research report about the new pricing and how its adverse effects may be offset. Those subscribing by June 25th get a 25% discount from the $395 price. Should you wish earn the discount please email me with a confirming note now.