If you are a smartphone owner/user, then the term “data plan” should be a part of your daily vocabulary. All network carriers in the United States, such as AT&T, Verizon Wireless, and Sprint, mandate the customer to add a data plan if the cell phone of choice is a smartphone. This makes basic sense – smartphones consume data for functions like checking email or browsing the internet.
Yet until this past year, all the major carriers operated on a “one-size fits all” model for data plans offered. The premise is that, regardless of the amount of data one consumed, a fixed fee is levered (normally between $30 and $40). One assumption made is that because all smartphone use data, the amount of data consumed is ultimately insignificant. It was also more profitable to charge a fixed amount for an unlimited data plan, as the population of smartphone owners was smaller than the “dumb phone” ones (I am casting out a lot of jargon).
But this year, things have begun to change. Carriers have one by one have begun to shift their model from a “one-size fits all”, to a usage-based one. The word “unlimited” would no longer apply to data plans – unless the customer is willing to pay an arm and a foot for the privilege. If my memory serves me right, AT&T was the instigator of these changes: they offered a two-tier model of data plans, one much smaller than the other (250mb vs 5 GBs?). Now it appears Verizon has proceeded to follow suit (see left).
I am a strong proponent of investigating the basis for change, when change does occur. In this case, it is pretty obvious that the network carriers are being greedy and “want to screw the customer!” I agree with this sentiment, but there must be more fact-based explanations. For one, the population of smartphone users have grown from a niche market to the mainstream – people everywhere has opting for smartphone when given the option. The multiplayer battlefield between Apple’s iOS, Google’s Android, Microsoft’s WP7, and HP’s webOS has already been heavily fought over and over again. The result is greater strain on the capacity on the carriers’ data networks; everyone wants to be connected, to facebook and tweet on the go. In addition, the quality of data has become pluralized into the 3G and the 4G (latter being much faster than the former) worlds. All in all, it no longer seems fair to charge the same price for different usages and different speeds.
From an economic perspective, I am surprised it has taken this long for carriers to catch on. [T-Mobile and Virgin Mobile may be touting their unlimited data plans right now, but I think this will change.] The reason lies in the centuries-old practice of price discrimination. While outright price discrimination (e.g. first degree) is illegal in most countries, companies are allowed second degree and third degree price discrimination. For the case on hand, network carriers seem to be applying third-degree price discrimination – which entails creating a multi-level prices of entry, and having the customer voluntary self-identify by selecting the price of entry. As an example, if I know I consume more than 2GB but less than 5GB of data per month, I can opt for the 5GB plan outright. In this way, the network carrier can capture more of the consumer surplus than before – while also opening up the market to new potential customers.
I say I am surprised to see the length of time taken to see these changes come into effect because all network carriers have long practiced third-price discrimination. Think about it for a second: are these new usage-based data plans identical to voice plans, only they are for data instead of minutes? Network carriers have been charging more for the privilege of talking longer or texting more for decades! It’s puzzling it’s taken them this long to catch on; perhaps the increasing data-hungriness of smartphones has forced their hand. Other common examples of third-degree price discrimination are utilities such as electricity and gas, which are always levied based on how much one uses.
Don’t get me wrong – I am by no means happy that the usage-based data plans have become widespread. Charging $30 for a 2GB or $50 for 5GB of data is absolutely ludicrous. And is it realistic for anyone to opt for the 75MB for $10 a month plan? I’d call it an obvious trap for customers – and very good grounds for lawsuits against the carriers. But I wanted to take a step back, detach for a second, and look at the economic rationale behind these actions.