Analysis: Telcos risk losing top spenders with data caps

By Georgina Prodhan and Nicola Leske

HELSINKI/FRANKFURT (BestGrowthStock) – Mobile operators risk alienating lucrative smartphone users if they follow the example of AT&T (T.N: ) in ending all-you-can-use mobile data plans to ease pressure on their creaking networks.

According to a survey carried out by GfK NOP in association with Reuters in Britain, users of smartphones such as the Apple (AAPL.O: ) iPhone care more about their mobile data allowance than they do about their choice of operator or even handset brand.

As consumers become ever more avid users of social networks, email and other Web applications on the go, Western carriers are beginning to retreat from the flat-rate tariffs they offered to attract consumers in the first place.

Britain became the first major European testing ground for this new approach when Telefonica’s (TEF.MC: ) O2 stopped selling new UK customers the flat-rate data plans it was obliged to offer when it became the exclusive carrier of the iPhone.

Beyond the iPhones and BlackBerrys that have driven data usage upwards so dramatically in the last few years, a host of other devices including TVs, printers and household appliances may push the number of connected objects to 50 billion by 2020.

“In a nutshell, what we’re projecting is almost a 30-fold increase in mobile traffic,” Declan Lonergan, mobile Internet analyst at communications research firm Yankee Group, said in a recent presentation forecasting U.S. trends until 2014.

Most Western carriers have frozen or cut capital expenditure in the last two years as they prioritize maintaining the dividends prized by investors — meaning the modernization of networks has been largely put on ice.

Meantime, they say they can no longer afford physically or financially to support unlimited data usage, and are banking on the fact that most consumers will barely notice data caps that are in any case far more generous than average data usage.

But the survey found that users of the iPhone, Google (GOOG.O: ) Android phones or Research in Motion’s (RIM.TO: ) BlackBerry — typically, those who spend the most — are far more likely to switch operators to find better data deals.

More than half the users of these devices said they would switch to get a higher mobile data allowance.

Adjusted to take account of the fact that consumers do not always do what they say they will, GfK NOP estimated that 24 percent of contract customers using smartphones would actually switch operators.

(To see a graphic detailing the key survey results, please double click here: http://r.reuters.com/jyk64n: )

NO LIFE WITHOUT DATA

“Experienced smartphone users who understand the benefits of using the Internet on the move and use services to help them in their day-to-day lives simply can’t live without mobile data,” says GfK/NOP analyst Ryan Garner, one of the report’s authors.

“They don’t want to be thinking about their data allowance and possible costs of over-running every time they open their browser or click on an app.”

On the heels of AT&T and O2, U.S. market leader Verizon Wireless (VZ.N: )(VOD.L: ) is mulling changes to how it charges wireless subscribers for downloading data. [ID:nN04182673]

France Telecom (FTE.PA: ) is also seriously considering such a move. “We must come back to a more limited use of unlimited offers,” Chief Executive Stephane Richard said recently. “The notion of unlimited use of mobile networks is unsustainable.” Britain and France, along with Indonesia, have some of the lowest prices in the world for mobile broadband plans, according to a report published this week by U.S. communications analysis firm ABI Research.

OUT ON A LIMB

The danger for operators is that the industry is not moving in a single direction, meaning that operators who restrict data usage are going out on a limb.

In this, it resembles the news media industry, which would dearly love to start charging readers for online content but is frightened that readers accustomed to news for free on the Web will simply switch their attention elsewhere.

An experiment in Britain by Rupert Murdoch’s News Corp (NWSA.O: ), whose Times of London recently became the first mainstream news publication to go behind a paywall, is being closely watched by the whole industry. [ID:nLDE66H09F]

“I see a lot of operators who want to do that,” says John Strand, chief executive of Danish telecoms consultancy Strand Consult. “I think they will do that for a period and try to make it work, and then I think they will abandon it for a period.”

The mass take-up of mobile data services that operators had been hoping for since spending tens of billions in the early 2000s on 3G licenses was finally sparked by the launch of the iPhone in 2007 — and operators battled for deals to sell it.

But Strand has argued for some time that the iPhone was actually bad news for the operators who won those exclusive deals, because of the disproportionate amount of management time, marketing dollars and network bandwidth it consumed.

Citi analysts, in a note published last week, observed that data revenue growth among carriers in developed European markets had shown a consistently slowing trend following a temporary lift after the first iPhone went on sale in Europe.

AT&T, which was Apple’s original U.S. partner in 2007, moved back to tiered pricing for mobile data in June, setting lower entry prices for users who consume little data.

Chief Financial Officer Rick Lindner, on a conference call last month, said some customers were moving to cheaper plans but others would now try data services for the first time.

“We believe over time, based on how much data they use, they will then begin to migrate up to higher tiered plans,” he said.

CHARGING FOR SPEED AND VOLUME

In Japan and South Korea, where advanced data networks have been in existence for longer, tiered pricing has not proved to be the answer to overloaded networks — and some carriers who tried that route are now backtracking.

Japanese operators NTT DoCoMo (9437.T: ), KDDI (9433.T: ) and Softbank (9984.T: ) have stuck to flat rates — with discounts for months in which customers use less data — while encouraging them to use more Wi-Fi to take pressure off the mobile networks.

In Korea, carriers are returning to unlimited data plans because of heightened competition while investing heavily to upgrade their networks — a move that Western counterparts are unlikely to be able to avoid for much longer.

SK Telecom (017670.KS: ), South Korea’s top mobile carrier, last month said it would offer unlimited data services and free mobile Internet calls for customers paying 55,000 won ($46.40) and over in monthly service charges.

Its rival KT (030200.KS: ) said it would invest 5.1 trillion won by 2014 to upgrade networks after its mobile data traffic jumped threefold in the past six months as smartphone users used 21 times more data on average than other customers.

In Europe, Scandinavian operator TeliaSonera (TLSN.ST: ) is betting that the superiority of its next-generation LTE network, the world’s first, will allow it to offer premium services — at premium prices.

“When a service like this is entering the market, you normally more or less give it away for free, and so we did with mobile data,” Hakan Dahlstrom, the company’s head of mobility services, told investors last month.

“After a while… to meet the customer’s need for cost control; that is when you have flat rate. And then after some time the user understand how these services work and how it suits them, and you start charging for speed and volume.”

GfK NOP interviewed 978 UK adults online during July in a survey carried out in association with Reuters.

To read a GfK blog on the survey, please double click on: http://www.gfktechtalk.com/2010/08/12/mobile-data-allowance-grows-in-importance-among-smartphone-owners/

(Additional reporting by Leila Abboud in Paris, Miyoung Kim in Seoul, Sachi Izumi in Tokyo, Sinead Carew in New York and Ian Smith in London; Editing by David Cowell)

Analysis: Telcos risk losing top spenders with data caps