What is the definition of unlimited data? It used to be literally all the data you could use. In the case of AT&T (NYSE:T), the meaning has become increasingly hazy, and that could end up driving customers to alternatives such as Verizon (NYSE:VZ) or Sprint (NYSE:S).
AT&T used to offer an unlimited data plan, something that 17 million people (nearly half of its mobile customers) signed up for. The company dropped the option in 2010, but gave existing unlimited-data subscribers the option of keeping the plan. Then came a policy that throttled the data-download speed of the top 5% of its users for a given month, in a specific area, cutting their download speed by as much as 99% for the remainder of the month if they reached that threshold.
In other words, it significantly slowed down the connection of its most active users, based on a moving target for data consumption. As might be expected, customer backlash was vocal, with complaints that the move had rendered smartphones essentially useless for days at a time. Petitions were signed, lawsuits were filed. AT&T’s response was that it had never guaranteed the speed of data downloads.
After losing a small-claims court case in California where a customer’s Apple (NASDAQ:AAPL) iPhone had been throttled after reaching between 1.5GB and 2GB of data per month, AT&T changed its policy and said it would start throttling unlimited-data subscribers once they reach 3GB of data in a month.
Managing network limitations
Mobile network providers face a daunting challenge. The transition from feature phones (that offered texting and rudimentary Web browsing) to smartphones has meant a huge increase in the amount of data being sent over wireless networks. According to CNN, since AT&T began selling the iPhone in 2007, the company’s data traffic has increased by 8,000%.
The growing popularity of streaming-video services like Netflix (NASDAQ:NFLX) on smartphones — features that use far more bandwidth than other online activities — combined with a limited wireless spectrum means something has to give. Otherwise, network congestion could lead to all customers seeing the sort of spotty performance AT&T users in New York and San Francisco complained of when iPhones first began overwhelming cellular infrastructure in those cities.
Does throttling data actually impact most smartphone users? According to TechCrunch, the average smartphone user in that top 5% of heavy downloaders consumes between 3.2 GB and 3.9 GB of data per month, with few exceeding 5 GB. While AT&T is considering options such as letting app makers fork out for the cost of the data used by their apps, it’s entirely possible that its customers are considering alternatives too.
Verizon also offers iPhones and throttles data for its top unlimited data plan subscribers, but does so only when the cell tower they are connected to is overloaded, and even then the carrier uses the lowest speed reduction necessary. T-Mobile (which doesn’t sell the iPhone) starts throttling at 5GB and Sprint (which does carry the iPhone) still offers a $79.99 monthly unlimited data plan — no throttling.
The iPhone 5 factor
Will AT&T start bleeding customers who are fed up with throttling? When Verizon and Sprint first offered the iPhone (which was originally an AT&T exclusive), there was an expectation that frustrated AT&T users would switch and new smartphone buyers would shun the No. 2 U.S. carrier, but that didn’t happen. In fact, during the fourth quarter of 2011, AT&T set a new record with 7.6 million iPhone activations (compared to Verizon’s 4.2 million) and added 717,000 wireless subscribers.
But a new Apple iPhone release in 2012 may well set the stage for a large-scale migration from AT&T. If the iPhone 5 is released as expected this year, the company may finally see consequences for its policies. A truly new iPhone model (as opposed to the iPhone 4S, which was more of an upgrade) combined with building customer frustration may lead some of those 17 million grandfathered unlimited-data plan subscribers to make the leap to Sprint or Verizon, choosing an alternative wireless provider when they upgrade to a new smartphone.
If the iPhone 5 supports the high-speed 4G LTE network standard, as expected, Verizon’s investment in 4G technology is likely to provide further impetus to switch. AT&T is currently rolling out this faster network in limited markets, but it had counted on a planned purchase of T-Mobile to beef up its nationwide coverage and combat Verizon’s head start. When the proposed merger with T-Mobile fell through, AT&T was left scrambling.