VERIZON WIRELESS FIRES FLAT-RATE SALVO

Verizon Wireless introduced flat-rate pricing for mobile data over its CDMA 1X network last week, a move that could drive the wireless industry into the same model that has pushed wireline ISPs' margins into oblivion.

While the carrier's $99.95 price point isn't expected to attract flocks of business customers, the debut of flat-rate pricing puts pressure on fellow 1X provider Sprint PCS to offer similar pricing when it launches its nationwide high-speed data network.

Thus far, all carriers offering higher-speed wireless data access have charged on a per-megabyte or per-minute basis, careful not to lose their investments in expensive data networks or erode the value they want to create with compelling applications. But carriers are finding it difficult to stave off the lure of the flat-rate model.

“We looked at our research with dozens of CIOs, and one of the gating factors to wireless data adoption was the fear factor,” said Jim Stratton, vice president and chief marketing officer for Verizon Wireless. “This is for the user on horizontal applications that can go in, month in and month out, and not worry about what they are downloading. This is not a loss leader; this is a sweet spot in the market place.”

Sprint PCS, which is expected to launch its network in August, wasn't planning to offer any all-you-can-eat wireless data pricing plans, sources close to the company said. In introducing its 3G plans during January's Consumer Electronics Show, Sprint Chairman and CEO William Esrey said the company was mulling over pricing plans based on per-bit increments.

“This sets the bar,” said Phil Redman, research director with Gartner Group, a consulting firm that makes wireless buying recommendations to large corporations. “Now Sprint PCS will have to do a flat rate.”

Still, Stratton said Verizon would continue rolling out more per-megabit pricing plans, confident it can educate enterprises and consumers enough to make it the norm.

“I'm not worried about the [wired] Internet model,” Stratton said. “When I look around, there's a huge differentiation with what we have to offer. One of the things we've tried to do is recognize that and say this is a premium service.”

Analysts weren't so sure.

“This is typical of a Bellhead who hasn't learned about what the Internet is all about yet,” said Bob Egan, founder and president of Mobile Competency. “The bar has been established by the wireline world. If wireless is ever going to emerge from some sort of boutique access network and into mainstream, it has to be priced in parity with other forms of access.”

Wireless LAN hotspots, which are multiplying quickly, also could hurt the market, said Warren Wilson, practice director with Summit Strategies.

“I don't know too many people for whom wireless data is important enough to pay $100 per month,” he said. “In the business realm, there are ways to get data cheaper than that.”

A slew of end-user surveys continually indicate that wireless customers — enterprise users and casual customers alike — want flat-rate pricing because of its predictability. According to Gartner, a $65 access fee is the threshold for many enterprise customers.

“Megabit pricing is confusing,” said Becky Dierks, director of wireless research with In-Stat MDR. “There's no concept for the amount of information downloaded and uploaded, and there's sticker shock. Right now, megabit plans aren't attracting swarms of users.”

Flat-rate pricing scares carriers that don't have a good handle on how usage levels may increase, said Dierks. AT&T Wireless was caught unprepared for the number of minutes that flooded its network when it changed the dynamics of the voice world with its Digital One Rate plan, which eliminated roaming and long-distance charges.

“The forecasts for data are speculative, and there's not a lot of history to build off of for 3G,” said Tom Crook, director of technology R&D with Sprint PCS. “There probably are some concerns in terms of keeping up with capacity if there is a lot more demand than we expect. We've put plans in place to get additional capacity quickly.”

CDMA operators like Verizon and Sprint PCS theoretically can handle extra volume because 1X technology adds both voice capacity and higher data speeds. Cingular Wireless and AT&T Wireless are charging customers based on the volume of wireless data they use on their GPRS networks because the technology requires carriers to allocate voice channels for data. Volume-based pricing also ensures that heavy users don't clog the network without paying for it. Gartner estimates that one megabyte of voice traffic on a GSM network is valued at about $1.70.

Cingular did not return phone calls requesting comment. An AT&T Wireless spokesman said the company believes business customers are smart enough to know how many megabytes they need each month and that they may be overspending with Verizon's flat-rate plan.

“It took years to get to flat-rate pricing for CDPD,” Redman said. “Once that went flat rate, there was a higher uptake.”

For many carriers, nirvana is the success experienced by Japanese operator NTT DoCoMo. Its popular i-mode data service contributes nearly $25 of average revenue per user every month. The carrier charges a $2.50 monthly fee in addition to a 25¢ per-packet fee and receives a 9% commission for online transactions. U.S. carriers may have to settle for a cable television model, offering buckets of megabytes or a flat rate and charging for premium content such as location-based applications and downloadable games and music.

“Wireless customers are used to big buckets of minutes, and that's the way carriers may have to sell wireless data, with big buckets of bytes,” said Todd Rethemeier, senior analyst with Bear Stearns & Co.

Richard Siber, partner with Accenture, has long pushed carriers to bill for access based on time of day and urgency — attributes that show the differentiated value of mobility. Carriers actually may reach a point where they give away voice minutes to lock in data customers and charge them premium prices, he said. “Carriers will struggle to move away from giving things away for free to events where you build for value,” Siber said.