Un-limited calling plans broke the law of supply & demand

According to an article in Business Week, the data traffic over at&t’s network has jumped 5,000% since the iPhone was introduced 3-years ago.  While some of the increased traffic is due to the shift away from the smartphone being primarily a business tool and more toward becoming a ubiquitous device for the general public, it is by no means the majority.  The majority of that network traffic increase is coming from only 3% of users...or “network hogs.”  at&t currently estimates that 3% of its iPhone users account for 40% of its network traffic. 

Although I complain about the number of e-mails & text messages I get on a daily basis, I’m still not even close to being a “network hog.”  But I have encountered the mysterious creature.  On a recent international trip I sat next to a “network hog” in a bar while watching my favorite American football team.  Although the game was televised and sound in the bar was crystal clear, this uber-fan had the hometown radio broadcast with our favorite local announcer streaming through his iPhone for nearly three straight hours.

The old economic models for ROI on a network, any network, were relatively simple.  You had to generate enough traffic to sustain a utilization rate that paid for the high fixed cost of the network.  It was always just assumed that if the utilization was high enough, the laws of supply and demand would guarantee that the price charged would generate a profit.  However, it now seems that with un-limited calling plans the price component is so low that it has broken the model.

In an interview prior to the Consumer Electronics Show (CES) at&t Mobility President Ralph de la Vega said that the carrier is looking at changes to the $30-per month unlimited data plan that most of its smartphone subscribers use.  The CFO in me says, “it isn’t IF at&t and other US based service providers will have to introduce different pricing models…the question is simply WHEN.”

Although an unfamiliar concept to US telecom subscribers, most non-US based service providers have tiered pricing and/or caps on monthly usage.  And even here in the US we are used to tiered pricing for other services.  For example, court-side seats to watch Kobe Bryant at an L.A. Lakers basketball game are far more expensive than the seats at the top of the arena.  And I could go on for days about the price differences of individual airline tickets on the same exact flight.

While the current un-limited pricing model has temporarily broken the law of supply & demand, it will have to be fixed.  If it isn’t proactively fixed, then one of the other variables (utilization or fixed costs) will bring it back into line.  For instance, the utilization rate of the network could decline due to poor customer service which leads to increased churn.  Or, due to the lack of revenue capital expenses could be cut to such an extent that it is impossible to maintain & up-grade the network.  Obviously neither of these is an acceptable answer.   

As painful as it may be, if I were in the C-suite of a major service provider, I would much rather deal with the blowback of a pricing change rather than let the law of supply & demand dictate my future for me.