Forbes magazine reports that Verizon Wireless shareholders can expect the company to enjoy fatter profits and reduced capital expenses from the upcoming deletion of grandfathered unlimited data from the company’s roster of data plans.

Trefis, a Wall Street analysis firm that uses MIT-developed modeling technology to predict future company performance, reports Verizon is on the verge of “monetizing every last byte of data that is transferred on its network.”

Verizon’s decision to end unlimited — announced by the company’s chief financial officer at a recent Wall Street conference, will compel customers upgrading to a 4G-capable phone to forfeit their unlimited plan in favor of tiered data.

With Verizon’s 4G network up and running in a large cross section of the country, the wireless carrier has an interest in moving customers to its more efficient LTE platform, which can sustain greater data traffic. With a de-emphasis on 3G, Verizon will be able to reduce capital investments required to maintain that older technology, yet enjoy the financial benefits monetized data usage will bring.

Verizon also plans to introduce shared family data plans, letting customers share a single usage allowance across multiple data devices. But Trefis warns Verizon it must avoid pricing that plan too low, because it could cannibalize the average fees collected from each subscriber (ARPU) who would otherwise have to pay Verizon for a data plan for every device. Instead, Trefis recommends Verizon price family share data plans in a way that keeps ARPU levels stable, which means consumers would not see much savings from the plans.

More importantly, shared data plans will set the stage for explosive wireless data revenue growth in the future, as customers get used to paying connectivity charges for every wireless device, appliance, automobile, and other future technology that supports so-called “machine-to-machine data exchanges” that could become commonplace in the next few years.

“Done right, Verizon could see higher ARPU levels in the coming years as subscribers increasingly use data intensive applications on its speedier 4G network and the carrier is able to monetize every byte of data that the subscribers use with its tiered data buckets,” Trefis recommends.

After intense lobbying, wireless phone companies won a significant reprieve from the watered-down 2010 Net Neutrality policies introduced by Federal Communications Commission chairman Julius Genachowski.

Now some of America’s largest cell phone companies are considering plans that would offer special “toll-free” access to favored partners’ content, while leaving everyone else subject to the companies’ usage capped data plans.

Much of the discussion about exempting certain content from data allowances is taking place at this week’s CTIA Wireless trade show in New Orleans.

Some highlights:

• T-Mobile USA is planning to expand video streaming services offered to subscribers, but with a twist. Content creators could pay to have their shows streamed to customers, and in turn, T-Mobile would not charge that traffic against the customer’s monthly usage allowance. Whether T-Mobile would maintain an ownership interest in the content is unknown, but “preferred partners” would receive exceptional visibility through aggressive promotional campaigns T-Mobile would launch.  So would T-Mobile, which plans advertising and promotional messages inside that content;
• Verizon Wireless said it was looking to create “toll-free” data services that would be subsidized by content providers. Video, games, and even apps could be promoted to consumers as “data usage”-free, meaning it won’t count against your monthly usage allowance. But Verizon recognizes the concept would be controversial and run afoul of Net Neutrality concerns.
• AT&T has already signaled its interest in creating a “content-provider-pays” model where users get free access to content if content providers pay AT&T’s traffic charges.

All three carriers earlier abandoned all-you-can-eat flat rate data plans, and Net Neutrality proponents claim these latest moves are attempts by wireless phone companies to further monetize data traffic.

The Wall Street Journal reports the plans, in some cases, fly in the face of rhetoric about spectrum shortages and a wireless data traffic crisis (underlining ours):

T-Mobile’s Mr. Duea said the goal of new video offerings that don’t count against data plans would be to get customers interested in consuming more data, and set T-Mobile’s plans apart from those of other carriers.

"Data floods" and "spectrum shortages" don't stop T-Mobile.

Current FCC Net Neutrality rules require wireless carriers to not block competing services from companies like Skype and Google, nor censor content. Both Verizon and MetroPCS are challenging those rules in federal court. But wireless carriers are already exempt from giving preferential treatment to certain types of data or traffic, which opens the door to “toll-free” data services.

Net Neutrality supporters believe these practices will uneven the playing field for content creators and innovative new online start-ups, who may not be able to afford the prices carriers charge for first class treatment. It also influences consumer decision-making by encouraging customers to use the “toll-free” services to preserve their monthly data allowance.

Companies like Ericsson and Cisco have plans to market technology that will allow carriers to divide up data traffic into different traffic lanes, some fast and free to use, others subject to a customer’s monthly data allowance, and certain undesirable traffic shunted to low priority slow lanes.

A Verizon Wireless executive ironically blamed the need for “toll-free” pricing partly on the wireless industry itself, which has almost universally abandoned unlimited data plans.

“As we move away from flat rate pricing, there is room for an 1-800-type of service where certain destinations could offset the cost of the network to get customers to those destinations,” said Verizon’s chief technology officer Tony Melone. “There are Net Neutrality issues that have to be addressed, too.”

Melone added the company wasn’t quite ready to launch the “toll-free” traffic lanes just yet, but claimed certain content providers were discussing deals with the company to participate if and when the new toll booths are opened for traffic.

AT&T CEO Randall Stephenson is kicking himself over his decision to allow “unlimited use” plans on AT&T’s wireless network.

Speaking at the Milken Institute’s Global Conference last Wednesday, Stephenson took the audience on a journey through AT&T’s transformation from a landline provider into a company that today sees wireless as the source of the majority of its revenue and future growth.  But the company left a lot of revenue on the table when it offered “unlimited data” for smartphone customers, particularly those using Apple’s iPhone.  It’s a mistake Stephenson wishes he never made.

“My only regret was how we introduced pricing in the beginning… thirty dollars and you get all you can eat and it’s a variable cost model,” Stephenson complained. “Every additional megabyte you use in this network, I have to invest capital. So get the pricing right. Our average revenue [per customer] has been increasing every single quarter since we started down this path.”

Stephenson admitted AT&T’s problems were created by the company itself when it embraced its transformation into a wireless power player.

Years earlier, the current CEO green-lit a new “smartphone” after a visit from Apple proposing a new device that used a touch screen to make calls, launch applications, and surf the wireless web.  It was called the iPhone.

AT&T’s first iPhone, Stephenson said, was not a major problem for AT&T and did not even launch on the company’s growing 3G network. In 2007, the Apple iPhone came pre-loaded with a selection of apps and used AT&T 2G network to move data.  Stephenson said Apple’s launch of a new iPhone in 2008 that worked on AT&T’s 3G network, along with a new App Store that allowed customers to do more with their phones, changed everything.  By 2009, AT&T’s network was overloaded with data traffic in many areas.

“[There] were volumes [of traffic] that nobody had ever anticipated and we had anticipated big volumes of growth,” Stephenson said.

In Stephenson’s view, AT&T’s solution to the traffic problem early on should have been a change to the pricing model, eliminating flat rate service at the first sign of network congestion.

“I wish we had moved quicker to change the pricing model to make sure that people that were consuming the bandwidth were paying for the bandwidth and [instead] we had a model where the high end users were being subsidized by the low end users,” he said.

Stephenson acknowledged the company has service issues in large American cities like New York, San Francisco, and Los Angeles, and blames them on a combination of voracious wireless data usage and spectrum shortages.  However, industry observers also note that many of AT&T’s service woes may have come from an unwillingness to invest in sufficient network upgrades as aggressively as other carriers, which have not experienced the same level of network congestion and the resulting steep declines in customer satisfaction AT&T has endured for the last three years.

But the ongoing congestion problems have not hurt AT&T’s revenue and profits.  Stephenson admitted that in 2006, AT&T earned almost nothing from wireless data and made between 30-32% margin selling voice and texting service.

“Today, we’re a $20 billion data revenue company and we’re operating at 41-42% margins,” Stephenson said.

Despite that improved revenue, AT&T says if they don’t get spectrum relief soon, they are going to keep raising prices on consumers. Stephenson said the company has been increasing prices across the board on data plans, new smartphone ownership, those upgrading phones, as well as reducing certain benefits for long-term customers. Stephenson said these actions were taken because spectrum has become a precious resource and bandwidth scarcity requires the company to tamp down on demand.  But that’s not a message he delivers to Wall Street, telling investors AT&T’s key earnings and increased revenue come from price adjustments and metering data usage.

Stephenson also fretted there is too much competition in America’s wireless marketplace.  That competition is eating up all of the available wireless spectrum, threatening to create a spectrum crisis if the federal government does not rethink spectrum allocation policies, he argued.  Stephenson believes additional industry consolidation is inevitable because of the capital costs associated with network construction and upgrades. He said he was uncertain whether AT&T will be able to participate in that consolidation after failing to win approval of its buyout of T-Mobile USA.

Stephenson believes the days of heavy investment in wired networks are over. Stephenson has systematically sought to transition AT&T away from prioritizing wired services in favor of wireless, a position he has maintained since his earliest days as AT&T’s CEO. The company’s decision to end expansion of U-verse — AT&T’s fiber-to-the-neighborhood service, and concentrate investment on wireless is part of Stephenson’s grand vision of a wireless America.  Stephenson noted the real fiber revolution isn’t provisioning fiber to the home, it’s wiring fiber to cell towers to support higher data traffic.

But that traffic doesn’t come to users free. Instead, Stephenson believes leaving the meter on guarantees lower rates of congestion because it makes customers think about what they are doing with their phones. It also brings higher profits for AT&T by charging customers for network traffic.  Stephenson believes that assures the returns Wall Street investors demand, attracting capital to front network investments.

With that in mind, Stephenson still believes AT&T can help solve the data digital divide, where poor families cannot afford to participate in the online revolution. Stephenson said it can be managed by handing the disadvantaged sub-$100 smartphones and $20 data plans, assuming they can afford those prices.

What keeps Stephenson up nights?  Worrying about business model busters that manage end-runs around AT&T’s profitable wireless services.

“Apple iMessage is a classic example,” Stephenson noted. “If you’re using iMessage, you’re not using one of our messaging services, right? That’s disruptive to our messaging revenue stream.”

Stephenson remains fearful its network upgrades will improve wireless data service enough to allow customers to switch to Skype for voice and video calling, depriving AT&T of voice revenue.

But the CEO seems less concerned than some of his predecessors that content producers are enjoying “free rides” on AT&T’s network.

“We in this industry have spent more time bemoaning the thought that Google or Facebook may use our network for free, and it just hasn’t played out that way,” Stephenson said. “I mean they do use it for free, they’re getting a bargain, and that is fine.”

“I believe what will play itself out over time, is that the demand model will change this behavior,” he said. “We’re already at a place where some companies that deliver content are coming to us and saying ‘we would like to do a deal with you where you would give us a class of service to deliver our content to your customers.'”

“The content guys that have been so loud about these issues [Net Neutrality] are now the ones coming to us saying we want these models,” Stephenson argued. “I’ve always believed that is what would play out.”

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/Global Conference 2012 A Conversation With ATT’s Randall Stephenson 5-1-12.flv[/flv]

Stop the Cap! edited down Randall Stephenson’s appearance at last Wednesday’s conference.  Stephenson faces few challenges as he presents his world-view about AT&T pricing, spectrum allocation policies, network investments vs. data traffic growth, his vision for AT&T’s future, and how much customers will be forced to pay for today’s “spectrum crisis.”  (28 minutes)

“Somehow in the last 100 years, every time there is a problem of getting more spectrum, there is a technology that comes along that solves that problem. Every two and a half years, every spectrum crisis has gotten solved, and that’s going to keep happening. We already know today what the solutions are for the next 50 years.” — Martin Cooper, inventor of the portable cell phone

Despite the fear-mongering by North America’s wireless phone companies that a spectrum crisis is at hand — one that threatens the viability of wireless communications across the continent, some of the most prominent industry veterans dispute the public policy agenda of phone companies like AT&T, Verizon, Bell, and Rogers.

Martin Cooper ought to know.  He invented the portable cell phone, and remains involved in the wireless industry today.  Cooper shrugs off cries of spectrum shortages as a problem well-managed by technological innovation.  In fact, he’s credited for Cooper’s Law: The ability to transmit different radio communications at one time and in the same place has grown with the same pace since Guglielmo Marconi’s first transmissions in 1895. The number of such communications being theoretically possible has doubled every 30 months, from then, for 104 years.

National Public Radio looks back at the earliest car phones, which weighed 80 pounds and operated with vacuum tubes. Innovation, improved technology, and lower pricing turned an invention for the rich and powerful into a device more than 300,000,000 North Americans own and use today. (April 2012) (3 minutes)
You must remain on this page to hear the clip, or you can download the clip and listen later.

A traditional car phone from the 1960s.

The earliest cell phones have been around since the 1940s.  St. Louis was the first city in the United States to get Mobile Telephone Service (MTS).  It worked on three analog radio channels and required an operator to make calls on the customer’s behalf. By 1964, direct dialing from car phones became possible with Improved Mobile Telephone Service (IMTS), which also increased the number of radio channels available for calls.

In the 1970s, popular television shows frequently showed high-flyers and private detectives with traditional looking phones installed in their cars.  But the service was obscenely expensive.  The equipment set customers back $2-4,000 or was leased for around $120 a month.  Local calls ran $0.70-1.20 per minute.  That was when a nice home was priced at $27,000, a new car was under $4,000, gas was $0.55/gallon, and a first run movie ticket was priced at $1.75.

With many cities maintaining fewer than a dozen radio channels for the service, only a handful of customers could make or receive calls at a time.  The first “spectrum crisis” arrived by the late 1970s, when car phones became the status symbol of the rich and powerful (the middle class had pagers). Customers found they couldn’t make or receive calls because the frequencies were all tied up.  Some cities even rationed service by maintaining waiting lists, not allowing new customers to have the technology until an existing one dropped their account.

Instead of demanding deregulation and warning of wireless doomsday, the wireless industry innovated its way out of the era of MTS altogether, switching instead to a “cellular” approach developed in part by the Bell System.

[flv width=”412″ height=”330″]http://www.phillipdampier.com/video/ATT Testing the First Public Cell Phone Network.flv[/flv]

In the 1970s, when the first cell phone “spectrum crisis” erupted, the Bell System innovated its way out the the dilemma without running to Congress demanding sweeping deregulation.  This documentary, produced by the Bell System, explores AMPS — analog cell phone service, and how it transformed Chicago’s mobile telephone landscape back in 1979.  (9 minutes)

“Arguing that the nation could run out of spectrum is like saying it was going to run out of a color.” David P. Reed, one of the original architects of the Internet

Instead of one caller tying up a single IMTS radio frequency capable of reaching across an entire city, the Bell System deployed lower-powered transmitters in a series of hexagonal “cells.”  Each cell only served callers within a much smaller geographic area.  As a customer traveled between cells, the system would hand the call off to the next cell in turn and so on — all transparently to the caller.  Because of the reduced coverage area, cell towers in a city could operate on the same frequencies without creating interference problems, opening up the system to many more customers and more calls.

Inventor Martin Cooper holds one of the first portable mobile phones

In Chicago, Bell’s IMTS system only supported around a dozen callers at the same time. In 1977, the phone company built a test cellular network it dubbed “AMPS,” for Advanced Mobile Phone System.  AMPS technology was familiar to many early cell phone users.  It was more popularly known as “analog” service, and while it could still only handle one conversation at a time on each frequency, the system supported better call handling and many more users than earlier wireless phone technology.  By 1979, Bell had 1,300 customers using their test system in Chicago.

AMPS considerably eased the “spectrum crunch” earlier systems found challenging, and subsequent upgrades to digital technology dramatically increased the number of calls each tower could handle and allowed providers to slash pricing, which fueled the spectacular growth of the wireless marketplace.

Yesterday it was voice call congestion, today it is a “tidal wave” of wireless data.  But inventors like Cooper believe the solution is the same: engineering innovation.

“Somehow in the last 100 years, every time there is a problem of getting more spectrum, there is a technology that comes along that solves that problem,” Cooper told the New York Times. “Every two and a half years, every spectrum crisis has gotten solved, and that’s going to keep happening. We already know today what the solutions are for the next 50 years.”

Cooper believes in the cellular approach to wireless communications.  Dividing up today’s geographic cells into even smaller cells could vastly expand network capacity just like AMPS did for Windy City residents in the late 1970s. Using especially directional antennas focused on different service areas, placing new cell towers, innovating further with tiny neighborhood antennas mounted on telephone poles, or building out Wi-Fi networks can all manage the data capacity “crisis” says Cooper.

New technology also allows cell signals to co-exist, even on the same or adjacent frequencies, without creating interference problems. All it takes is a willingness to invest in the technology and deploy it across signal-congested urban areas.

Unfortunately, network engineers are not often responsible for the business decisions or public policy agendas of the nation’s largest wireless companies who are using the “spectrum crisis” to argue for increased deregulation and demanding additional radio spectrum which, in some cases, could be locked up by companies to make sure nobody else can use them.

[flv width=”600″ height=”358″]http://www.phillipdampier.com/video/NY Times Mobile Carriers Warn of Spectrum Crisis.flv[/flv]

The New York Times offers this easy-to-follow primer on wireless spectrum and why it matters (or not) in the current climate of explosive growth in mobile data traffic.  (3 minutes)

“Their primary interest is not necessarily in making spectrum available, or in making wireless performance better. They want to make money.” — David S. Isenberg, veteran researcher, AT&T Labs

Innovation, not wholesale deregulation, allowed the Bell System to solve the spectrum crisis of the 1970s by creating today's "cell system" that can re-use radio frequencies in adjacent areas to handle more wireless traffic.

Spectrum auctions bring billions to federal coffers, but actually deliver a hidden tax to cell phone customers who ultimately pay for the winning bids priced into their monthly bills.  It also makes it prohibitively expensive for a new player to enter the market.  Already facing enormous network construction costs, any new entrant would then face the crushing prospect of outbidding AT&T, Verizon Wireless, Bell or Rogers for the frequencies essential for operation.

As the New York Times writes:

When a company gets the license for a band of radio waves, it has the exclusive rights to use it. Once a company owns it, competitors can’t have it.

Mr. Reed said the carriers haven’t advocated for the newer technologies because they want to retain their monopolies.

Cooper advocates a new regulatory approach at the Federal Communications Commission — one that mandates wireless phone companies start using today’s technology to amplify their networks.

Cooper points to one example: the smart antenna.

Smart antennas direct cell towers to focus their transmission energy towards the specific devices connected to it.  If a customer was using their phone from the southern end of the cell tower’s coverage area, why direct signal energy to the north, where it gets wasted?  New LTE networks support smart antenna technology, but carriers have generally avoided investing in upgrading towers to support the new technology, expected to be commonplace inside new wireless devices within two years.

T-Mobile calls these technology solutions “Band-Aids” that won’t address the company’s demand for more frequencies to manage its network.  But that kind of thinking applied to the mobile phone world of the 1970s would have maintained the exorbitantly expensive IMTS technology discarded decades ago, since replaced by innovation that made more efficient use of the spectrum already on hand.  That innovation also transformed wireless phones from a tool (or toy) for the very wealthy to an affordable success story that now threatens the traditional wired phone network in ways the Bell System could have never envisioned.

[flv width=”412″ height=”330″]http://www.phillipdampier.com/video/Its a Whole New System.flv[/flv]

It’s A Whole New System: AT&T and other wireless phone companies might want to learn the lesson the Bell System was trying to teach their employees back in 1979: Meet Change With Change.  This company-produced video implores the phone company to do more than the same old thing.  No, this video is not “PM Magazine.”  It is about innovation and actually listening to what customers want. With apologies to Mama Cass Elliot, there was indeed a New World Coming — the breakup of the Bell System just five years later.  Don’t miss the diabetic-coma-inducing, sugary-sweet jingle at the end.  Then reach for a can of Tab.  (10 minutes)