May 17, 2012 3:23 PM

U.S. Mobile Data: More Bricks, Less Straw

As punishment for requesting their freedom, the Egyptian Pharaoh told the Israelite slaves that they had to maintain their quota of bricks, but with less of an essential input: straw.  The burden of meeting demand with less resources applies as well in today's mobile services marketplace.  Wireless carriers face demands for greater bandwidth to support growing mobile data services but, for the intermediate term, cannot expect additional spectrum capacity--it's essential input--on either a firm-specific or industry-wide basis.  

It's unanimous: no matter who you talk to about wireless data, everyone agrees that "more bricks, less straw" is the unavoidable policy.  Thus, as wireless data demand continues to show no sign of abating, wireless service providers will simply have to make do with less than optimal spectrum capacity. So if we're stuck in a "more bandwidth demand, less capacity supply" world, how do we solve the problem of how to ration capacity?  

Who Needs Spectrum When You Can Upgrade Your Capacity?

So what's a wireless operator to do?  Well, for starters, you upgrade existing capacity like crazy by constantly deploying the most efficient technology.  But this isn't cheap.  Since wireless data exploded in 2007 with the iPhone, AT&T alone has gone through a 3G upgrade, an HSPA upgrade, an HSPA+ upgrade, and, more recently, is in the midst of an upgrade to LTE.  

Other companies have accelerated their own pace of upgrades as well.  From December '06 (right before the iPhone launch) through December '11 (when most firms still have a long way to go to realize full LTE deployment) industry capex has increased by almost 50%, according to CTIA (the actual numbers are in a report that I can't afford, so take my word for it).  But, even these improvements won't keep up with surging demand.

With No Spectrum Relief In Sight, Do You Play The Price Card?

Given the limited options for rationing capacity another, though unpopular, move is to raise prices.  Over the last several months we've seen AT&T raise data prices, after realizing that the government was not--anytime soon--going to allow AT&T to efficiently augment its own capacity.  Verizon quickly followed suit.  For now, Sprint appears to be content to let its shareholders shoulder the costs of increased wireless data demand.  But to be sure, increased demand without increased supply does create network strain--regardless of who pays.

Last week, at the CTIA Conference, Chairman Genachowski maintained/reasoned/disputed that the failure of the AT&T and T-Mobile merger last year had anything to do with AT&T's decision to raise prices.  Yet, the Chairman knows better, as he has been a leading prophet of the spectrum shortage.    

How to Recover Costs of Spectrum-less Capacity Expansion?

Given the costs of constantly upgrading capacity, how does a carrier manage excess data demand?  As I indicated above, raising prices sounds like a simple solution, but must account for the fact that big data users are contract customers.  That's how smartphones, and data plans become affordable, and predictable.  

You see, the problem with raising prices for wireless data is that you can really only raise prices to the marginal customer (i.e., the person who's not your customer yet).  Crazy, right?  "Raising prices" is a statement of frustration and designed to curb consumption.  Carriers are telling prospective customers that the network is nearing capacity and use of the remaining capacity will cost you. This is a horrible situation--who wants to be the (unpopular Redskins owner) Dan Snyder of wireless data?

If Sophisticated Buyers Want to Subsidize Consumers, Let Them!

Carriers know that raising prices for mobile data, or throttling data speeds to the largest users of mobile data, is no way to treat your biggest fans.  But with the popularity of mobile device applications, which constantly stream information to and from the customer's phone, customers can unintentionally (and unnecessarily) stress capacity.  Applications can distort data consumption in a way that even the most conscientious web surfers cannot offset.

So, earlier this year, at a conference in Barcelona, an AT&T executive suggested that maybe some applications providers would want to buy capacity in bulk in order to assure their customers that using the desired app wouldn't cause the customer to exceed their usage cap, or become subject to throttling.  Not a bad idea, right?  I mean the applications developer knows how much bandwidth their customers use, and they have a lot more buying power than the consumer.  

Given the public's embrace of mobile data, and the cost of continually augmenting capacity, especially for firms with sub-optimal spectrum allocations, one would think the "public interest" would support options that allow customers to still enjoy wireless data, but at a lower cost/consumption threshold.  One would think . . . .

But Don't Tell Public Knowledge!

The AT&T suggestion seemed harmless enough, but the reaction from the self-proclaimed public interest group Public Knowledge was alarmingly critical.  Then again, this is the same group that published a paper arguing that all wireless carriers should provide flat-rated mobile data service.  The irony, of course, is that flat-rated price structures cannot be profitable unless the majority of users pay for more data than they consume.

The notion of "more bricks, less straw" is, for regulators and service providers, an unfortunate and dystopic reality.  Uniquely, Public Knowledge seems to relish the "more megabytes, less capacity" future with a fondness that can't help but be compared with how the ancient Egyptian brick consumers' lobby must have felt . . . right before the brick supply crashed.

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