There’s one development that could turn the US mobile broadband market on its head this year. If you want to know what it is you can skip to the end of this piece. Or you can read the next couple of paragraphs and let the suspense build.
I’ve spent the last few weeks researching the market opportunity for embedded cellular connectivity in netbooks and notebooks in the US. Two things are abundantly clear. One is that national retail channels such as Best Buy and Amazon are carrying a preposterous variety of unconnected netbooks. The launch of Windows 7 will see a further avalanche of products destined for retailers’ shelves after October. This assures an outstanding year for this category in the US by force of numbers alone.
The other, more central, issue is perhaps a reminder rather than a revelation. Wireless broadband access plans at AT&T, Verizon Wireless, T-Mobile and Sprint need an extreme makeover if embedded cellular connectivity is to have a chance in the US.
The plans are largely uniform, with $60 a month for 5GB available from all four major carriers. There are cheaper $40-a-month options for 200MB and 250MB available respectively from AT&T and Verizon Wireless. But it’s clear from the scenarios described in each company’s literature and from discussions with salespeople at retail sites that the $40 option is impractical for even a modest Facebook user. At worst, the $40 plans run the risk of a consumer backlash as people exceed the limits, although this may be mitigated by usage meters in the connection management software.
There are other options, of course, notably from Sprint and Leap. But these are not mainstream choices, primarily because of limited network coverage. To be fair, Verizon Wireless also offers a comparatively diverse range of options, including a $15-a-day plan and $15 and $30 options for smartphone tethering. All require existing contracts.
There’s a consensus among industry watchers and media that US carriers are on the verge of significant changes to their pricing plans for mobile data access. Most opinion seems to favour family-style bundles of megabytes. But there are a number of possibilities, including the chance that nothing will happen before the end of the year, or that if it does it won’t be enough to move the market.
Consider T-Mobile and Sprint. Both are increasingly in the shadow of AT&T and Verizon Wireless and under pressure from tier-two operators such as Leap and MetroPCS, which are expanding into new markets with recently acquired spectrum. MetroPCS is thought to be aggressively pursuing LTE with a view to doing for data what it’s done for voice. Leap currently offers unlimited data access on its EV-DO network for $40 a month. So there’s a fair argument that Sprint and T-Mobile must do something to shore up their competitive positions, and that radical action on data access pricing would be a good starting point.
But it’s not clear that either T-Mobile or Sprint has the resources — network resources like capacity, coverage, throughput and backhaul, as well as capital, subscribers and brand equity — to fundamentally move the market and attract large numbers of new mobile broadband subscribers. It’s also interesting that Leap’s competitive $40 unlimited plan hasn’t elicited a response from another carrier, even if the service isn’t widely available.
Change in the US mobile broadband market hinges on the competitive dynamics between AT&T and Verizon Wireless. Both are big and getting bigger, with a string of recession-defying quarterly results behind them and FCC scrutiny ahead. There has been some tit-for-tat between the two on mobile broadband, with AT&T responding to Verizon Wireless’ lower excess charge rates in May. But if we exclude their relatively useless 200MB and 250MB plans, the two competitors essentially have the same offer of 5GB for $60.
I believe Verizon Wireless is in a position to call AT&T’s bluff.
AT&T’s success with the iPhone has hurt Verizon Wireless and this looks set to continue. Thanks to the iPhone, AT&T continues narrow the gap between it and Verizon Wireless by attracting more high-spending subscribers. Verizon Wireless’ recent cuts in the price of smartphones to less than $100 may stanch the flow of subscribers away from its network, but such low prices leave little room for operators to differentiate by offering handset discounts. And there’s still no “iPhone killer” out there.
Data traffic is growing exponentially on every major cellular network worldwide. For all operators, the pricing of data access is a balancing act that pits the prospect of extra high-margin revenue against the risks of unknown demand patterns, the effect on networks, and the quality of the user experience.
We don’t know the true nature of capacity constraints facing AT&T, but it’s reasonable to assume that its success with the iPhone in particular has made network capacity and quality of service challenges particularly acute. AT&T executives have candidly acknowledged capacity problems while expressing confidence in the company’s ability to manage them.
AT&T is well positioned to enhance its network and meet these challenges, though it’s likely that in the near term AT&T will be relatively more constrained than Verizon Wireless in its ability to handle the large traffic volumes associated with growth in wireless broadband connections. Of course, this hypothesis ignores many technical details of the providers’ respective networks. Still, I’d bet that Verizon Wireless can boast significantly greater headroom in its peak and average capacity.
Radical cuts in the price of data access may be practicable for Verizon Wireless, and would be an effective counterpunch. Such a move would allow it to seize much of the expected growth opportunity in connected computing and consumer electronic devices. It would deal a severe blow to AT&T’s aspirations in “emerging devices” and frustrate more nascent threats from the likes of Clearwire.
There are risks, of course, and Verizon Wireless has historically been risk-averse. It owes much of its leading market position to a solid network and well-executed marketing that focusses on superior network quality. Price elasticity and mass-market usage patterns for broadband access are unknown in this $60-a-month era. It’s a primary source of risk to the network.
Fortune favours the bold. Verizon Wireless may not make the first move, but I’m looking to it to make the move that transforms those 100 or more models of unconnected netbook on Amazon. The effects would be both disruptive and liberating.
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