The Case Against Minute Plans

Recently mobile data exceeded voice for the first time for all devices including phones and computers.  In fact, voice has been essentially flat for years with data experiencing exponential growth.

Yet, most carriers are still focused on selling cell phone service packages primarily based on voice minutes and bundling these with unlimited data and SMS messaging as add-ons – all the while complaining that today’s unlimited data plans are unsustainable, while simultaneously daring each other to be first to change the paradigm in a classic Prisoner’s Dilemma.
Currently, carrier business models rely on getting customers to buy the largest bulk plans possible while delivering the minimum acceptable quality of service – as demonstrated by spotty coverage in suburbs, insufficient bandwidth in urban areas, and outright banning of high bandwidth services like video streaming, VOIP, and tethering.
Limiting availability of “unlimited” data services certainly minimizes costs but to the detriment of user satisfaction.
With no incentive to increase data utilization, US wireless bandwidth has more in common with third world countries than Western Europe or Japan.

Customers are at the mercy of carriers and are forced into playing a cat and mouse game to maximize benefit while avoiding bandwidth throttling and the dreaded “monthly maximum cap” threat letter.
Is it any wonder then that since the beginning of 2009, pre-paid plans have grown significantly faster than traditional post-paid plans which lock customers into monthly fees regardless of usage?
Carriers are reluctant to share cost information and in many ways are unable to quantify costs, as bandwidth is like an empty airplane seat – the seat still flies whether someone is sitting in it or not.  Likewise, wireless bandwidth is there whether someone is using it or not.
Even so there appears to be a quite a chasm between cost and price when a minute long call costs half as much as a single SMS message.
Just last week Verizon wrote off an $18,000 bill from just one month’s mobile data usage after a family’s one year of free data service abruptly expired without warning.
What a Phone Plan Really Buys
Despite carriers’ extensive efforts to gouge consumers by balkanizing voice calls, data, and SMS messages into various tiers of service with wide-ranging costs, availability, and quality of service, they actually all share a single simple underlying metric: bytes of data.
Voice calls are digitized using a variety of codecs with higher bitrates delivering better sound fidelity and error checking.  On the lower end of the global GSM standard is a codec with an 8.8 kbps bitrate.  Applying that rate to the average 671 minutes called per month in 2009 (source: CTIA) equates to roughly 346 megabytes of voice calls per phone per month in the US.
Average data traffic in the US comes out to just 30 megabytes per phone per month based on mobile data traffic from Coda Research Consultancy (below) and the number of phones with service at the end of 2009 from CTIA (285.6 million).

According to CTIA, average SMS messaging makes up just 0.071 megabytes per month based on the average of 535 messages a month and an average of 140 characters per message (source: gthing.net), and the fact that one character equals one byte of data.
Seen another way, based on a typical SMS message price of 20 cents, those 535 messages alone are valued at $107 each month.  This is particularly egregious considering SMS messages are sent on carrier control channels that effectively reduce delivery costs to zero.
So the average US mobile phone customer uses a total of 376 megabytes of total bandwidth every month including voice, data, and SMS messages.  Based on the $44.53 average monthly phone bill (source: CTIA), users paid an average of 11.8 cents per megabyte in 2009.
Past the Smoke and Mirrors
At 11.8 cents per megabyte, carriers are making a fairly hefty margin based on a dated report from Qualcomm which owns many of the patents related to 3G communications.
The data also shows that each technology iteration significantly reduces the cost of delivery so one can reasonably expect even lower costs as the industry moves to LTE (4G).

Carriers have significant other costs too including labor, stores, advertising, capital investments, etc.
However 2009 operating profits from the wireless divisions of the top four US carriers range from a low of 14.2% to a high of 28.2%, which suggests that the market remains very attractive even in a down economy.

Nevertheless, as consumers continue to upgrade to smartphones, demand for bandwidth will increase exponentially making unlimited data plans unsustainable.  Data from Consumer Reports already indicates that average data only usage on iPhones is already nearly on par with the 346 MB of bandwidth used for voice calls.

Interestingly, the compressed data services from RIM’s Blackberry servers contribute to a much lower data demand compared to other smartphones.  When adding in average voice calls and SMS messaging at 11.8 cents per megabyte, Blackberry users are clearly over-paying for the same unlimited data service compared to other smartphone users.  However, in a future where data services are metered, data efficiency could be a distinct advantage marketed to consumers.
Where We Go From Here
With LTE (4G) roll-out plans proceeding aggressively, carriers will soon have even more bandwidth to feed hungry mobile devices.  Meanwhile carriers have already begun PR campaigns to prepare consumers for the end of unlimited data in the foreseeable future.
Having learned their lesson from the race to the bottom in voice call pricing, carriers will instead try to push data services towards the other end of the spectrum of unrealistic profit margins enjoyed by SMS messaging.
Instead, carriers could be more transparent to customers by offering comprehensive mobile device plans covering all types of services based solely on a single metric: total bandwidth used.  This would put users in charge of how much of any service they access and spur innovation in delivering those services more efficiently.
For example, HD Voice (aka G.722) is an audio codec that captures a broad sound range making transmitted voices sound richer, more clear, and realistic at 64 kbps bitrate, more than 7X higher than the standard 8.8 kbps.  Under current minute based plans, carriers are understandably reluctant to support this high bandwidth codec that was standardized over 20 years ago in 1987.  But given the choice, users may prefer significantly improved voice calls and willingly pay more for it.
Carriers could stop playing the role of gatekeeper blocking advanced but bandwidth hungry features and instead adopt a policy of “bandwidth neutrality” (sound familiar?) that both improves customer satisfaction and increases revenues simultaneously.
To capture all possible usage and therefore revenue, carriers would be motivated to ensure complete coverage and available bandwidth across their service areas.
Consumers are already familiar with the concept of applying a single measure to seemingly disparate services.  For example, when buying an MP3 player with 16 GB of memory they are told that it equates to “4,000 songs, 14,000 photos, or 16 hours of video.”  Similarly, instead of unlimited access plans, buckets of megabytes could be offered in pre-paid plans that reward loyal customers with lower per megabyte costs when buying in bulk.
This simplified offering addresses carriers’ concerns over unsustainable unlimited data plans while protecting their bottom line.  Consumers get transparency, better quality of service, and unfettered access to the very best of past, present, and future technologies.