AT&T Faces Pressure to cut iPhone Data Costs

Some may view smartphones as a necessity, but that doesn’t mean users are happy about the costs associated with the phone’s monthly data plan. iPhone users are especially among this group who don’t like the pricey data plans required for the phone.

As the wireless industry continues to address the downturn in customer spending by offering lower priced service plans and phones, AT&T is holding its ground with the iPhone and required data plan that accompanies the phone despite increasing pressure from the industry and from consumers.

Last month, AT&T wireless chief Ralph de la Vega said the company was considering a lower tier service plan for the iPhone that could include limits on how long users could surf the Web or how many programs they could download over the air. This sounded promising at first, but AT&T is reluctant to offer a less expensive data plan for the iPhone because it would lose a valuable source of revenue. The current data plans are used to help offset the subsidies AT&T pays to keep the iPhone at the $200 level. The plan also offsets the cost of delivering the service. All in all, AT&T must balance the growing number of iPhone users with the amount of traffic they use on the network.

In a recent survey, the number one reason customers avoided the iPhone was because of the service plan’s price, followed closely by the smartphone’s price tag. Apple and AT&T are addressing this second concern by lowering the price of its older iPhone 3G model to $99.

Additionally, AT&T’s competitors are offering similar service plans for other smartphones at reduced prices. For example, Sprint Nextel claims its plan for the iPhone-rival Palm Pre will cost users $600 less per year than AT&T. Verizon Wireless offers its smartphone users an unlimited data and messaging plan for $70 per month. AT&T says the average monthly bill for an iPhone user is in the mid-$90 range.

To make matters worse, it’s possible AT&T could charge an additional fee for mixed media messaging and tethering, two new features found on the latest iPhone. This could add another $10 to $40 to an iPhone users’ monthly phone bill.

Even though AT&T is under pressure to offer a lower priced plan, AT&T spokesman Mark Siegel said there are no plans to alter the company's data prices. The plans will be in effect when the new iPhone 3G S launches June 19th.

The iPhone’s success has been vital to AT&T, especially as its traditional landline business has declined. Over the past two years, more than 21 million iPhones have been sold. On average, each iPhone owner generates about 1.6 times the revenue of other AT&T wireless customers. You can bet this added revenue is not something AT&T will give up easily.

AT&T must pay for some of these results, however. In order to keep the iPhone priced low and maintain the company’s status as the exclusive iPhone provider, AT&T must shell out hundreds of dollars for each iPhone. It takes AT&T several months to recoup these costs through service revenue.

In addition, AT&T must continue to invest in its network in order to deliver reliable service and speeds for iPhone users. The iPhone already makes up for a disproportionately large amount of data traffic. In fact, iPhone users overwhelmed AT&T’s network in March due to heavy use. The higher the traffic, the more AT&T must pay to transport that data across its network. This so-called backhaul is believed to be one of the company’s largest expenses.

While a lower-priced plan may help entice new customers, it could hurt AT&T’s margins because the cost to manage the added traffic could rise faster than the added service revenue. Of course, AT&T could implement a lower-priced plan with data limits, but whether or not customers would be willing to accept caps when they’ve been trained to think of data as an unlimited service is yet to be seen.

In all, it appears that AT&T isn’t going to change the iPhone’s data plan pricing for the time being. But, competition has been known to convince carriers to change, even when such changes were unexpected. Time will tell who wins this battle.