Sprint Realizing That Data Caps Turn Customers Off

from the about-time dept

Back when Sprint joined other mobile carriers in issuing a 5 GB limit on its EVDO connection, I was among those who noted that it was disappointing that the company sold me an "unlimited" service, and then changed the terms on me unilaterally. It also changed the way I used my EVDO card, making it significantly less useful and valuable for me. I don't want to be thinking about how much data I'm using (and it was especially difficult without a detailed system of tracking how much data you were using). I remember once, while traveling, I accidentally left the EVDO connection running over night, and got worried that Sprint might cut me off. It's just not worth it, and I've actually been thinking about dumping Sprint once my contract is up.

Apparently, I wasn't alone in thinking this and Sprint has noticed. With its new WiMax network, it has stayed away from talking about any caps, and has now admitted that the reaction to the EVDO caps is part of the reason why. They're afraid that, just as they're trying to convince people to use the WiMax network, they'll get scared off by caps. The problem, of course, is that these mobile broadband providers are fighting against themselves on these things. They want to convince the world that these networks are useful -- and to do that, you have to show all the cool things that you can do with them. But, if they haven't really invested enough in the networks, they can actually run into some congestion problems, and so they can't encourage you to use them too much. Hopefully, the investment into WiMax (or, potentially moving on to LTE) will mean that such congestion problems are mostly a thing of the past, and that it's not worth implementing caps.

That said, Sprint's admission of how people responded to the EVDO caps should be a clear warning to ISPs that keep trying to implement broadband caps or metered broadband. Doing so imposes additional costs that you might not have considered, such as the mental transaction costs your users face in determining if it's even worth using your network. Of course, ISPs should know this already. We already have a detailed case study in that AOL only really took off after it switched from hourly billing to an unlimited flat-rate. Why some ISPs want to go back to make their product less valuable is beyond me.

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  1. icon
    Derek Kerton (profile), 16 Jul 2010 @ 11:35am

    Re: Re: Re:

    The carriers are aware of the "shrinking" value of 5GB. This point is true, but only because people's appetite for data is ever-increasing. It is just this fact that has scared carriers into tiered pricing! "If customers use ever-more data, requiring ever-faster networks, how can we keep the prices the same?"

    It finally occurred to carriers that the idea of selling "unlimited" based on the assumption that the average user only uses 200MB/mo may not be such a good one over even the short-term. Mobile data consuption is just growing so insanely fast.

    By shifting from an unlimited model to a tiered model, carriers will be able to offer differentiated services to different classes of users at different prices. Gamers can pay for a low-latency package. Media junkies can pay for a package that supports some Netflix downloads. Email users can pay less for a modest package. I like this, and it seems to me to be the way a market should work.

    Mike argues that 'mental transaction costs' are being ignored. No such thing. The wireless carriers have always been VERY aware of that cost, which is why they started with "unlimited" deals since the advent of wireless data...even if there was fine print that contradicted the marketingspeak.

    It just happens that the 'mental transaction cost' has become less significant than the 'network expansion cost'. When network traffic expands at exponential rates, the 'mental transaction cost' drops in relevance.

    Plus, the carriers are starting to get their act together with respect to proactive notification about how much data a customer is using. They have updated web portals with real-time data consumption meters, they have offered on-device meters, they have pro-active SMS and email notifications when thresholds are reached. They can still improve these features, but they've already come a long way. This information reduces the confusion the customer previously had, and replaces it with the ability to decide and choose: do I want to download a Netflix movie to my phone and use the last 1GB of my plan...or not, or buy up to the next tier.

    Mike's false assumption in all of this is that the bandwidth is free, and so should be priced at the marginal cost. But the marginal cost of bandwidth is a complicated calculation. It is clear from all of our experiences that there are many times of network congestion where our data slows down even with 5 bars. To offer more bandwidth at these peak times requires additional network investment, thus, more bandwidth (marginal cost) is NOT free.

    With the correct assumption that MC > 0, selling an unlimited plan is a risky way for a telco to do business. And that applies whether the network is LTE, WiMAX, or 3G.

    I think the opposite of Mike. I think it's about time that mobile application developers and mobile network users started applying the 'mental transaction costs' of considering their usage of a constrained, limited resource. Developers should be aiming part of their creativity at how to do awesome things while just sipping bandwidth. This has the additional benefit of respecting the battery life, too. Meanwhile, consumers should consider how bandwidth-hungry an app is before downloading it. All things being equal a movie showtime app that uses 5kb is better than one that uses 100kb for the same result.

    Mike, I don't have to tell you that econ is the study of how to best allocate scarce resources. Once we all understand that wireless bandwidth IS a scarce resource, we will start to see better outcomes, where one lady's remote heart-monitoring data is not crowded out by some dude streaming Pandora to his car stereo. OR where that dude CAN stream Pandora to his car stereo, but his data plan will account for it and he will pay a reasonable price for his larger appetite.

    OTOH, the reason Sprint is offering this 'unlimited' plan is just more marketing. They have a terribly under-utilized WiMAX network, and their time-to-market advantage with "4G" is fading fast versus Verizon's LTE. Sprint simply doesn't have any capacity crunch RIGHT NOW. So they employ the kind of short-term thinking that gave us "unlimited*" in the first place.

    Who knows. With adequate competition, we may see that there is always a carrier hungry enough to offer "unlimited" even if it is risky for them. Mike knows as well as I that offering a scarce resource in an unlimited model works only so long as the expected consumption of the average user is below the cost, and then if that expected consumption matches real consumption, and then if that real consumption doesn't grow. Tough constraints.

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