What Will Carriers Do When the Data Gravy Train Derails?

In the U.S., which has a population of 304 million, there are about 270 million cell phone subscriptions. With a market this saturated, the conventional wisdom is that there’s not much room for growth, especially as the amount paid for voice declines. And this is why mobile data has loomed so large for carriers in the last few years. According to the CTIA, a cellular industry association, wireless data service revenues for the year 2008 rose to more than $32 billion — a 39 percent increase over 2007, when they totaled $23.2 billion. Wireless data revenues for 2008 amounted to nearly 22 percent of all wireless service revenues.

So now that the market for phones is saturated, carriers are positioning to gain in the next wireless revolution, based on data connections. But selling data plans to people is going to become more expensive in the next 5-10 years as more consumers seek to use them.

Right now, wireless data is booming. Verizon saw wireless data revenue rise 41 percent from 2007 to 2008. In that same time period, operating income on wireless rose 3.5 percent to almost 30 percent. But those profits may come under fire as carriers deal with more people on their networks. Chetan Sharma, a wireless industry analyst, says that carriers will see demand rise for wireless data to the point that even lower-cost networks, such as the next-generation long-term evolution (LTE) network, will not be enough to make delivering wireless broadband profitable without drastic changes in both pricing models and alternative forms of delivering the service.

ericsson1“LTE will help force costs down 60 percent on a per-megabyte basis, but usage might go up by the same amount,” Sharma says. “Most of the gains [for network upgrades] are in the cost savings, but with faster throughput, things will download faster and people will do more of it, and since the price of the service is fixed, the cost of delivering the content will only go up.”

One problem is smartphones such as the iPhone that can access the web and bring wireless networks to their knees. Also becoming a growing nuisance are data cards that allow a laptop to get online. Sharma says that when operators look at data use on their networks, 4 percent of subscribers are using about 68 percent of the bandwidth on a given tower. Those users are surfing from data cards. Ericsson has estimated that data cards comprise 73 percent of traffic on a wireless network, which is amazing, given that they make up 3 percent of the subscriptions.

To manage this, AT&T has turned to Wi-Fi hotspots to dump traffic from its more constrained 3G network. T-Mobile has embraced femtocells, which offload cellular traffic to a home broadband connection when users are inside their home. But Sharma and others in the industry believe it’s only a matter of time until the pricing model will go from a flat fee to pricing based on when people want to surf the web, as well as how much bandwidth they are willing to pay for at a time. Perhaps someone would pay more for a 1.5Mbps connection so she can download a movie, but would settle for 200kbps for downloading her email.

The carriers keep discovering that if you give people access to fat pipes, they’re going to use them. That’s good for innovation, but on the wireless side, it can cause problems for the carriers’ bottom lines.

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