Phillip "The Mayans Never Met AT&T" Dampier

AT&T has used the specter of a nationwide wireless bandwidth crisis to pressure Washington to adopt its agenda for additional mobile spectrum.  But talk of a looming “data tsunami” has done nothing to stop AT&T from heavily marketing their most data-hungry devices — smartphones and tablets to customers.

In fact, the “broadband shortage business” has become enormously profitable for the former Ma Bell.

Switch to a Smartphone

Wireless carriers like AT&T aggressively market smartphones because they drive the highest average monthly revenue earned from customers.  So far, the marketing push has been an unparalleled success.  PricewaterhouseCoopers reported smartphones accounted for 48% of all wireless phone sales in 2011, up from 30% in 2010.  More than half of customers upgrading their old phones chose smartphones to replace them — an enormous increase over just 36% of upgrades in 2010.  Because smartphones are designed for an online experience, most companies mandate customers subscribe to a data plan, often adding $30 or more per phone, per month to a wireless phone bill.

AT&T’s 4th quarter results told the story, and it was all smiles.  AT&T celebrated customer enthusiasm for smartphones and the data they consume with no worries about “data tsunamis” or “bandwidth crises”:

• In 2011, AT&T’s growth engines — wireless, wireline data and managed services — represented 76 percent of total revenues and grew 7.5 percent versus 2010, led in the fourth quarter by:
  • 10.0 percent growth in wireless revenues
  • 19.4 percent growth in wireless data revenues, up $956 million versus the year-earlier quarter
• 9.4 million smartphone sales, best-ever quarter and 50 percent more than previous quarterly record and nearly double 3Q11 sales; 82 percent of postpaid sales were smartphones
• Best-ever quarter for Android and Apple smartphones, including 7.6 million iPhone activations

Double-Digit Growth for Wireless Revenues. Total wireless revenues, which include equipment sales, were up 10.0 percent year over year to $16.7 billion. Wireless service revenues increased 4.0 percent, to $14.3 billion, in the fourth quarter.

Wireless Data Revenues Increase 19.4 Percent. Wireless data revenues — driven by Internet access, access to applications, messaging and related services — increased by $956 million, or 19.4 percent, from the year-earlier quarter to $5.9 billion. AT&T’s postpaid wireless subscribers on monthly data plans increased by 16.4 percent over the past year. The number of subscribers on tiered data plans also continues to increase. About 22 million, or 56 percent, of all smartphone subscribers are on tiered data plans, and about 70 percent have chosen the higher-tier plans.

Wireless Margins Reflect Record Sales. Fourth-quarter wireless margins reflect record-setting smartphone sales and customer upgrade levels. This was offset in part by improved operating efficiencies and further revenue gains from the company’s growing base of high-quality smartphone subscribers.

Forcing Customers to Upgrade… Or Else

AT&T's 2G Exit Strategy Started in 2009 (Courtesy: Blackberry News)

Back in 2009, AT&T decided it was inventory clearance time, released a memo entitled “2G Exit Strategy,” and slashed prices on 2G “feature” or “messaging phones” to attract customers looking for a bargain.  A few years later, the company is now sending letters to some of them strongly recommending they upgrade to a new, potentially more expensive phone.  If they don’t, AT&T writes, “your current, older-model 2G phone might not be able to make or receive calls and you may experience degradation of your wireless service in certain areas.”

AT&T hopes many customers will adopt smartphones, because the plans that accompany them are far more expensive than the 2G “messaging” plans they replace. AT&T wants to repurpose 1900MHz 2G spectrum for other services, but sometimes customers are left holding the bag if they don’t want the designated replacement phone(s) AT&T is willing to provide.

In Grand Valley, Col. last fall, AT&T created lines outside its stores as customers were compelled to upgrade phones and service plans to continue reliable AT&T service:

AT&T isn’t actually discontinuing the 2G network — it is moving 2G service to less-favorable spectrum it owns in order to make room for improved 3G coverage.  That might work fine in areas less expansive and rugged than western Colorado, but in the Grand Valley, it means many customers will find they no longer have data service at all.

The ongoing tower upgrades have also disrupted cell service generally, and when customers arrive at AT&T’s stores to complain, the employees on hand attempt to upsell them more expensive phones to “fix” the problem.

“There is significant pressure on carriers to migrate to the most efficient networks while needing to address the issue of spectrum scarcity,” explains PricewaterhouseCoopers’ Dan Hays. “We are beginning to see carriers shut off legacy networks and force customers to migrate to new technologies.”

Internet Overcharging for Profit Without Raising Company Costs

AT&T has no worries about data tsunamis and "exafloods" when app makers or consumers are willing to pay more.

With customers seeking to get the most out of expensive wireless data plans, data usage naturally goes up. But so do prices, meaning the “data tsunami” carriers warn about is not bad for their bottom line at all.

In 2011, consumer research group Validas found average data consumption was up 34.7% for all users, from 448.8MB in January to 604.8MB by December.  AT&T responded with a price increase and an allowance boost that will benefit only a tiny minority of customers.  The most popular data plans now cost $5 a month more: $30 for 3 gigabytes, up from $25 for 2GB and $50 for 5GB, up from $45 for 4GB.  But Validas found only 5% of wireless customers use more than 2GB of data per month, with only 2.7% using more than 3GB.

That translates into higher AT&T bills for the 97% of customers who don’t come close to using even 2GB a month.  Although the price hike delivers no tangible benefit to the overwhelming majority of customers, it does deliver an extra $5 a month from their bank account to AT&T’s.

The “Anyone Pays But Us” Model for “Heavy Traffic”

With online video “clogging” the wireless airwaves, companies like AT&T should be interested in offloading as much video to wired or Wi-Fi service. But late last month, the company suggested a way customers could bypass its stringent data caps by allowing content companies to pay for the wireless traffic their customers generate.

“A feature that we’re hoping to have out sometime next year is the equivalent of 800 numbers that would say, if you take this app, this app will come without any network usage,” said John Donovan, who oversees AT&T’s network and technology. “What they’re saying is, why don’t we go create new revenue streams that don’t exist today and find a way to split them … “It’d be like freight included.”

Only wasn’t the railroad already overburdened with traffic, threatened with a nationwide slowdown?  If one is willing to flash enough money, it’s remarkable how quickly the tidal wave of wireless congestion and despair can be pushed back out to sea.  Just don’t tell Washington lawmakers.  This is a crisis of epic proportions after all.

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Carriers Facing Data Tsunami 3-21-12.mp4[/flv]

Derek Kerton, principal analyst at Kerton Group, talks about increased demand for data and the impact on wireless carriers. Kerton compares it to today’s gasoline prices. Demand=higher prices.  Wall Street folks like Kerton thinks more spectrum isn’t the total answer.  Smaller cell sites and more Wi-Fi might be.  Otherwise, prepare for bill shock.  (4 minutes)

The new 4G LTE-equipped Apple iPad you picked up late last week may be burning a hole in your wallet more than you think.  Across the country, consumers are reporting shock and surprise when they discover the new, faster mobile broadband-equipped tablet is capable of blowing through AT&T and Verizon Wireless’ monthly usage caps in a matter of hours.

The culprits: online video and giant-sized app downloads.

Online video on a usage-limited mobile broadband plan simply does not last long on Apple’s newest sensation.  A Wall Street Journal article found one new iPad owner discouraged after a two hour basketball game completely obliterated his 3GB usage allowance provided by AT&T.  With $10/GB overlimit fees just around the corner, AT&T is set to earn enormous data fees from customers who use their iPads to stream video.

[flv width=”512″ height=”308″]http://www.phillipdampier.com/video/WSJ New Apple iPad Eats Up Monthly Data Plans 3-21-12.flv[/flv]

The Wall Street Journal reports the newest iPad has been out for less than a week and buyers are already burning through their monthly data allowances on usage capped 4G mobile plans.  (3 minutes)

USA Today tech columnist Edward Baig also blew through his allowance in less than one day:

Less than 24 hours after purchasing the Verizon Wireless version of the iPad + 4G — and choosing a $30, 2GB monthly data plan from Verizon — I was shocked by the notification on my iPad’s screen: “There is no data remaining on your current plan.”

My remaining options for the month included changing to a $50 5GB data plan or an $80 10GB plan. (AT&T offers a 250MB plan for $14.99; 3GB for $30; and 5GB for $50.)

[…] In my case, I wasn’t watching video. What nailed me, I think, is that I was wirelessly downloading a number of the apps that I had already purchased for my older iPad onto the latest model. Those apps were made available through Apple’s iCloud.

To help avoid just this situation, the new iPad has a 50MB per app download limit on 4G. Anything over that, and you’re directed to Wi-Fi. (The over-the-air download limit on 3G-capable iPads was 20MB.) But that’s a per-app limit, and all those smaller-sized apps I was moving to the new iPad collectively added up.

Storing anything on Apple’s iCloud service or other backup storage sites like Dropbox can prove costly when relying on 4G service from AT&T and Verizon.  That’s on top of Apple’s premium price for 4G-equipped iPads, which start at $629 (comparable Wi-Fi only models are priced at $499 and above).  As a result, consumers are shutting off the wireless mobile feature they paid $130 extra to receive.

“All the advantages of the iPad device are completely neutralized by [AT&T’s] two gigabyte data limit,” Steve Wells told the Journal.

Some customers are upgrading their mobile data plans to 5GB for $50 a month, offered by both AT&T and Verizon.  Others are learning to stick to Wi-Fi.  According to a study conducted by the consulting firm Chetan Sharma, nearly 90% of tablets bought in the United States are Wi-Fi only models.  The added cost for mobile-equipped tablets and the expensive data plans that accompany them are largely responsible.

Consumer Advice:

1. You can still leverage 4G mobile broadband speeds on a cheaper Wi-Fi-only equipped iPad if your smartphone supports the “mobile hotspot” feature. When activated, your phone becomes a Wi-Fi hotspot your iPad can connect to for wireless data. If you have an unlimited mobile hotspot plan from Verizon Wireless (now difficult to obtain unless you are grandfathered on an unlimited data plan), you are not subject to Verizon’s usage limits for mobile devices.
2. Rely as much as possible on Wi-Fi, especially for file downloads or streamed content. Since the iPad can seamlessly switch between Wi-Fi and expensive mobile data service, protect yourself by shutting off Cellular Data within the settings menu when you don’t absolutely need to use it.
3. Turn off LTE service when not needed. 4G consumes battery life faster and its speeds encourage the kind of increased usage that can exhaust your allowance.
4. Monitor how much data you’ve used from the settings menu. Web browsing and e-mail will not consume a lot.  Online video and giant app downloads will.

[Thanks to our regular readers Scott and Earl for sending in several stories reporting on this.]

Apple iPad in the News:

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Brown Says He Wouldnt Ditch iPad 2 for New Version 3-16-12.mp4[/flv]

Joe Brown, editor-in-chief at Gizmodo.com, talks about Apple Inc.’s new iPad, the outlook for Amazon.com Inc.’s Kindle Fire and the tablet market. Brown speaks with Jon Erlichman on Bloomberg Television’s “Bloomberg West.” (6 minutes)

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/WNYW New York Record Breaking Sales for iPad 3-19-12.mp4[/flv]

Shelly Palmer talks about the record-breaking sales numbers of the new Apple iPad. He discusses what is great and not so great about the new tablet on New York’s WNYW-TV.  (4 minutes)

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Reynolds Sees No Danger Despite New IPad’s Higher Heat 3-20-12.mp4[/flv]

Paul Reynolds, electronics editor for Consumer Reports, talks about the magazine’s temperature test of Apple Inc.’s new iPad. The newest iPad runs “significantly hotter” than the earlier model when conducting processor-intensive tasks such as playing graphics-heavy games, Consumer Reports said on its website.  (9 minutes)

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/WFXT Boston New Ipad Is it Worth it 3-22-12.flv[/flv]

It’s the hottest item in the tech world – literally. WFXT in Boston also takes a look at how other tablet manufacturers are doing in competition with Apple.  (4 minutes)

The days of free Internet access are back… sort of.

United Online, Inc. announced Monday that it will offer free wireless Internet access through its NetZero service, provided as a “loss leader” that depends on users upgrading to paid access to cover the service’s costs.

NetZero became familiar to most Americans in the 1990s when the company handed limited dial-up Internet access, paid for through online advertising that subscribers endured in return for getting the service for free.  But broadband costs considerably more, so as the transition away from dial-up turned into a stampede, NetZero faded into memories about as much as AOL signup floppy disks and CD’s.

But now the company is back pitching free access to “4G wireless Internet” with no strings attached, contract commitments, or overage fees.  But that does not tell the full story.

While there is no contract commitment, NetZero requires an upfront investment in wireless hardware — $50 for a USB antenna stick suitable for a laptop or $100 for a “mobile hotspot” that can deliver a Wi-Fi connection to other nearby devices.  The devices are for sale on NetZero’s website.

The “free wireless” offer is probably better described as dim sum — it comes with a 200MB monthly usage limit, which makes it suitable for basic web browsing and e-mail only.  Once your limit is reached, the service is cut off for the remainder of the month, unless you agree to one of several paid usage plans that range from $9.95 for 500MB to $49.95 for 4GB, billed monthly.

After 12 months, NetZero’s free ride is over unless you agree to continue with a paid usage plan.  It ends even sooner if you choose to upgrade to a paid plan anytime during the first year.  Once you do, you lose the option of switching back to the free plan.

Whether paid or not, NetZero users ride on Clear’s troubled 4G WiMAX network, which Sprint — Clear’s largest customer — is planning to eventually abandon for more advanced LTE.  The long term future of Clear, also known as Clearwire, is also up in the air.  The company has ceased investing in its WiMAX network and is making preparations of its own to switch to LTE 4G technology — incompatible with the NetZero hardware you will spend $50-100 to acquire.

Clear’s network has also received considerable criticism for its speed and performance.  Because it operates on much higher frequencies, Clear’s wireless signal has problems penetrating indoors, and has even more trouble where energy efficient window coatings are used, especially in the south.

While NetZero does, in fact, deliver the service for free, the upfront investment and potential service headaches limit its usefulness.  Light users may find free Wi-Fi, increasingly common in a number of businesses, more convenient, affordable, and faster than the NetZero alternative.

A Wall Street analyst says Sprint has a 50/50 chance of being forced into bankruptcy, either pulling through a difficult upgrade to LTE 4G and stabilizing its partnership with Clearwire, or sinking under a load of debt incurred by Apple’s iPhone and network upgrade expenses.

Sanford Bernstein Research analyst Craig Moffett downgraded Sprint this morning from “market perform” to “underperform,” noting Sprint’s complicated five year credit default swap financing deal already prices in a 50/50 chance Sprint will be forced into Chapter 11 bankruptcy reorganization.

Moffett told investors he believes Sprint’s near term future can be described in one of two ways:

“In the first, the company successfully navigates its complicated Network Vision upgrade, stabilizes Clearwire‘s financial position, and delivers a compelling 4G product. In the second, some combination of its gargantuan take-or-pay contract with Apple, a hobbled 4G offering, and a stupendous debt burden bring the company to its knees.”

Moffett says Sprint’s biggest risk may come from Apple’s forthcoming 4G LTE iPhone, which he does not believe will work well on Sprint’s network.

“The problem is 4G. Sprint doesn’t have enough free-and-clear spectrum on which to launch a competitive LTE network, and it doesn’t have the money to clear spectrum that’s already in use,” Moffett said. “We expect Sprint’s competitiveness to begin to backslide when LTE becomes the nation’s de facto standard.”

Sprint continues to rely primarily on its troubled partner Clearwire for 4G service, which uses the aging WiMAX standard other carriers abroad are decommissioning.

With the iPhone 5 due later this year, should it provide access to 4G LTE service, Sprint could be in real trouble.  By fall, Sprint’s LTE network is expected to only provide limited coverage in a handful of cities, and on PCS spectrum less suitable for penetrating buildings.  Sprint would be forced to compete against Verizon’s nearly-completed LTE network as well as AT&T’s mixture of LTE and HSPA+ 4G services.  Verizon and AT&T will operate their 4G networks on 700MHz spectrum which can deliver robust signals indoors and out.

“Unfortunately, at this point we simply don’t believe there is any analytical framework that provides strong conviction as to whether Sprint can or cannot avoid bankruptcy over the next four years or so,” Moffett says. “Instead, one is left with this; are the perceived risks rising, or are they falling? We conclude … that risks of bankruptcy are rising, and that perceived risks will rise still further with the release of the first 4G iPhone.”

[flv]http://www.phillipdampier.com/video/CNBC Sprint to Go Bankrupt 3-19-12.flv[/flv]

CNBC speaks with Craig Moffett about the challenges afflicting Sprint’s effort to build a 4G LTE network and how a bankruptcy might affect customers.  (4 minutes)

A British advertising firm is paying homeless people to act as mobile hotspots for the 4G-challenged in a controversial pilot project that has left some wondering whether it is appropriate to use the disadvantaged as walking wireless access points.

The project took off at this week’s SxSW Interactive conference in Austin, Tex.  Anyone within 20 feet of a roving homeless person outfitted with a transmitting device can make a wireless connection with a 4G network.

BBH New York says it just wants to fill the need for better Internet connectivity at the convention center site.

“Our hope is to create a modern version of this successful model, offering homeless individuals an opportunity to sell a digital service instead of a material commodity,” BBH New York says. “SxSW Interactive attendees can pay what they like to access 4G networks carried by our homeless collaborators.”

BBH has 13 homeless volunteers walking around the convention center announcing they are available to facilitate immediate 4G access for data-hungry attendees.

“Hotspots, Hotspots! If you need to get online, I am your guy,” yelled one homeless volunteer to hundreds of people passing by.

Those who take them up on their offer can make donations for the access, which volunteers get to keep.

The company admits it has received some criticism from those who think the program exploits the homeless, but the company had no shortage of volunteers willing to participate.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/KXAN Austin Project makes homeless a mobile hotspot 3-12-12.mp4[/flv]

KXAN in Austin explores the “Homeless Mobile Hotspot” project that has a lot of people talking at this year’s South by Southwest Interactive conference.  (2 minutes)