AT&T Under Pressure To Cut Price Tag On IPhone's Data Plan
12 June 2009 - 5:45AM
Dow Jones News
With pricing in the smartphone race heating up, AT&T Inc.
(T) has been slow to shift gears.
The Dallas telecommunications giant has stubbornly kept
unchanged the pricey data plans required for the Apple Inc. (AAPL)
iPhone - a chief complaint and impediment for consumers. The
decision to hold pat comes as the industry increasingly addresses
the downturn in consumer spending with lower priced service plans
and phones.
AT&T wireless chief Ralph de la Vega said last month that
the company was considering a lower tier. Any such plan likely
would include limits on how long users could surf the Web or how
many programs they can download over the air.
But AT&T is reluctant to offer a cheaper plan because it
would lose a rich source of revenue used to offset the subsidies it
pays Apple to keep the iPhone at the $200 level, as well as the
cost of delivering that service. AT&T has to balance the
growing number of iPhone users with the amount of traffic they take
up in the network.
In addition, investors wouldn't be happy with the lower
margins.
AT&T spokesman Mark Siegel said there are no plans to alter
the company's data prices, which will be in effect when the iPhone
3G S launches June 19.
"We've been very happy with our pricing," he said. The average
monthly bill for an iPhone user is in the mid-$90 range, according
to AT&T. Apple declined to comment for the story.
Nonetheless, AT&T is under pressure to offer a lower priced
plan. In a recent survey, the top reason for customers avoiding the
iPhone was the service plan's price, followed closely by the
smartphone's price tag. Apple, in cooperation with AT&T, solved
one issue by slashing its older iPhone 3G model to $99.
Meanwhile, competitors are offering similar service plans at
reduced prices. Sprint Nextel Corp. (S) said its plan with the
iPhone-rival Palm Inc. (PALM) Pre costs $600 less each year than
AT&T. Verizon Wireless, meanwhile, offers a plan for unlimited
data and messaging for $70 a month. AT&T offers a similar plan
but charges $5 extra for text messages.
And it could turn out AT&T will charge an additional fee for
mixed media messaging and tethering, two new iPhone features, that
could add another $10 to $40 or so to a monthly bill should iPhone
users opt for these features.
The iPhone's success - more than 21 million have been sold in
two years - has buoyed AT&T despite declines in its traditional
landline business.
On average, the revenue generated from an iPhone owner is 1.6
times higher than AT&T's other wireless subscribers, the phone
giant says. That extra revenue played a big role in AT&T
generating first-quarter margins.
But AT&T pays a steep price for those results. It has to
hand over hundreds of dollars per iPhone to keep the smartphone
priced low and to maintain the phone company's status as the
device's exclusive U.S. provider. As a result, it takes several
months before AT&T can recoup those costs through service
revenue.
Of more pressing concern to AT&T is the cost to deliver the
service. AT&T is investing in network upgrades to double the
speed for iPhone 3G S. But industry observers note that the iPhone
already makes up for a disproportionately large amount of data
traffic.
"One of the big problems that AT&T has right now is that
normal users are going way overboard into unlimited territory,"
said Roger Entner, who runs telecom research for Nielsen.
The higher the traffic, the more AT&T has to pay to
transport that data across the network. So-called backhaul, or
where traffic hits the ground network, is believed to be one of the
company's largest expenses. Therefore, a lower-priced plan may add
customers but would hurt margins because the cost to manage the
traffic would rise faster than the added service revenue.
To solve that, a lower-priced plan with a restriction on the
amount of data makes sense for AT&T to explore. However, it's
unclear whether customers would be willing to accept caps when
they've been trained to think of data as an unlimited service.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020;
roger.cheng@dowjones.com