AT&T Under Pressure To Cut Price Tag On IPhone's Data Plan
By Roger Cheng and Ben Charny, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- 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
(END) Dow Jones Newswires
06-11-091530ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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