AT&T to Abandon Unlimited Pricing; Others Expected to Follow

Starting Monday, the carrier will replace its $30 unlimited data plan for new smartphone subscribers with new offerings costing $15 a month for 200 megabytes of data traffic or $25 for 2 gigabytes. AT&T said 98 percent of its customers use less than 200 megabytes. Users who exceed 2 gigabytes will pay $10 a month for each additional gigabyte. AT&T will offer customer text notifications on data usage, data usage monitoring and a data calculator. The move offers an early test of whether the government will restrict broadband tiered pricing, as some have predicted in the context of the reclassification and net neutrality debates, said Stifel Nicolaus analysts. The FCC probably will allow broadband providers, at least in wireless, to experiment with business models including tiered pricing, they said -- although companies that own content could have special problems.

The action could prompt others to follow suit, said Barclays Capital analyst James Ratcliffe. “We expect Verizon and others to implement similar plans,” said Oppenheimer’s Timothy Horan. Verizon declined to comment. Sprint is always evaluating pricing but has no changes to announce, a spokeswoman said. “With the latest phones delivering capabilities never before offered on a wireless device, customers are using more data, not less,” she said. “With Sprint Everything Data plans, there’s no need to get out a calculator to tally up prices for each feature or guess how much data you'll use in a month."

Free Press urged the FCC to take “seriously the need to promote meaningful competition in the wireless industry.” AT&T’s new pricing “bears no resemblance to the cost of operating the network,” Policy Counsel Chris Riley said. “This pricing ploy further illustrates why we need the FCC to put an end to the anti-consumer practice of handset exclusivity. While AT&T asserts that its high-end 2 GB cap will only impact the heaviest users, the fact is that today’s heavy user is tomorrow’s average user.” Riley said “Internet overcharging schemes” will discourage innovative new uses and stifle healthy growth in the mobile broadband economy.” An AT&T spokesman said the company disputes Free Press’s conclusions. The new plans will lower the cost of an entry-level voice and data plan for smartphones $15, he said. The plans add consumer choices and will encourage more people to take advantage of smartphones, he said.

AT&T’s announcement is expected to meet a different fate than Time Warner Cable’s experiment with tiered data pricing last year, Stifel Nicolaus analysts said. TWC “folded the tent” quickly after encountering opposition from public interest groups and congressional allies, they said. Public interest groups are likely to push back on AT&T’s pricing, but the usage-based plan is likely to survive for several reasons, they said: The company is lowering the entry level price as it increases the price for heavy users; it’s in a better position to contend that it has wireless traffic-management issues; and it seems to have created a notification safety net for consumers who exceed their monthly allotment. “The FCC has put an unprecedented focus on the wireless industry,” said Nielsen’s Roger Entner. “Most recently, it voiced its concerns regarding bill overages.” The new AT&T data plans offer ample notifications to customers as they approach their data bucket quotas, something the FCC pointed out as lacking now, he said.

The FCC is expected to emphasize the need to provide customers accurate information, and there could be repercussions if companies fall down on this, Stifel Nicolaus analysts said. They noted that some companies had threatened the end of “all you can eat” wireless pricing if the FCC imposed net neutrality rules. But the analysts had expected tiered pricing with or without net neutrality rules. Treatment of tiers may differ when applied only to broadband service in a way that makes Internet video a less effective competitor to pay TV, they said.

Analysts said tiered smartphone data pricing is good for the whole communications industry. As data usage continues to grow, tiered pricing will provide more-consistent and visible long-term revenue growth, Horan said. Unlimited plans are unsustainable though they spur adoption and reduce customer-care costs, Entner said, citing long-term downside risks to the industry’s business model and financial health. AT&T is stimulating demand by lowering the data component of smartphone plans, including for the iPhone, he said.

Some analysts called AT&T’s plan well designed. “All current customers unaffected, very few new customers likely to hit cap, price is actually lower for new customers (easier to position, harder to market against a cheaper plan),” Ratcliffe said. The pricing changes will “bend the curve” on how users consume Internet data on their wireless devices, he said. “The new plans appear well designed to reduce undue network stresses, as they will sweep AT&T’s heaviest users into higher priced plans, or, perhaps more likely, will curtail their profligate usage,” said Bernstein analyst Craig Moffett. AT&T may see lower growth in data revenue in the short term because of the changes, but it will gain leverage over the heaviest data users, improving its ability to manage its network and charge for capacity, said analyst Philip Cusick at Macquarie Securities. Tiered plans may also pull more customers into data plans, he said. “AT&T’s introduction of usage-based data rate plans today represents incremental pricing pressure for integrated devices/smartphones which could increase AT&T’s market share and further accelerate the migration of customers to higher ARPU integrated devices/smartphones from feature phones,” said BTIG Research’s Walter Piecyk.

AT&T’s changes affect Apple iPad users. For new customers, a $25 monthly 2 GB plan will replace the existing $29.99 unlimited plan. Current iPad customers with a $29.99 unlimited plan can keep it or switch to the new, limited $25 plan.