With the growth in data usage far outpacing that of voice traffic on mobile networks, wireless providers are quickly abandoning the model of selling baskets of minutes to individual users. This week, AT&T stopped offering minute related plans for smartphone users, following in the footsteps of T-mobile, Sprint, and Verizon, which all ditched the minutes model for smartphones over the past year.
Starting at the dawn of the mobile eras, mobile minutes have long been the measuring stick of the cellular world but the introduction of smartphones in the late 2000s radically changed wireless usage profiles. Since 2008, the growth in voice revenue have been consistently slowing down while data revenues have gone on an explosive growth curve. “Data is now the only way they can make money” said Tim Bajarin, analyst at Creative Strategies.
The move mirrors what happened in the landline business. Over the last few years, data networks and companies taking advantage of them have allowed for telecommunication prices to drop sharply.Voice Over IP, a technology that allowed operators to route telephone calls over the internet, first put some pressure on land lines pricing, eventually leading all the major providers to move away from charging long distance fees on any calls within the country to move to a flat pricing model, with unlimited minutes becoming the default standard.
With the rise of smartphones, a lot of the technology that drove the pricing down on landline eventually made it to the mobile wireless space, with smartphones essentially functioning as computers do, giving them the ability to carry applications like Skype and others to communicate. “The whole industry is changing quickly with Skype and wireless carriers offering unlimited plans hoping you won’t actually use them” said telecommunication pioneer Alex Mashinsky, who founded Arbinet, an early VOIP operator that was acquired by Primus, in the 1990s. “With consumers no longer looking at minutes, carriers should generate more revenues from the data plans, which are limited.” And as new technology like Voice Over LTE (VOLTE), are implemented, all network traffic will become data traffic, allowing carriers to free up scarce resources to put more people on their existing networks.
“But data is more expensive in terms of bandwidth capital cost for setting up networks so while they save on voice they still have real cost for enhanced data networks,” points out Bajarin. As a result, the wireless operators could find some pressure on their margins. “All-you-can-eat data plans from competitors will keep a check on raising data plan prices from other carriers” meaning that there is little room for raising prices while the cost of providing service is growing.
The operators will have to look for creative ways to increase revenue, and those gains may come from outside the US market. “The US network biz models are out of kilter to the UK says European mobile analyst Ewan Spence. “The UK has far more pay-as-you-go input, which tends to be more minutes focused,” a model that could remain more appealing to large wireless operators. This difference may explain rumors of a Vodafone takeover by AT&T swirling around the industry: Vodafone recently left the North American market when it sold its stake into Verizon Wireless and AT&T needs to find new ways to grow now that its hold on Apple hardware has been loosened by fast-moving T-mobile. Along the way, it may also represent new challenges for companies like Sprint and T-mobile, which have aimed to differentiate themselves by offering unlimited plans.
Whatever happens in this phase of the telecommunication revolution, it appears that consumers will be on the winning end as the era of complex mobile wireless plans seems to be coming to an end, with gigabyte now becoming the new measuring stick of wireless costs. And this may just be the beginning of more radical changes, as new players like FreedomPop are now looking to drive the cost of entry plans to zero, a move that could be the seed of the next round of disruption in the industry.