How supersized smartphone plans and mobile data cause consumers to waste their dollars.
Smartphones are becoming one of the most widely used devices in the world, with vendors shipping more than one billion smartphones in 2013 alone. In The Smartphone (The New Press, 2014), author Elizabeth Woyke offers readers an in-depth look into the smartphone industry, including some of its more troubling aspects. This excerpt, which is from Chapter 5, “Waste: Money and Trash,” discusses how smartphone plans cause consumers to overpay for the mobile data they use from day to day.
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Every day, when Todd Dunphy checks his e-mail, he finds messages from people begging for assistance with their smartphone plans. One December 2013 e-mail came from a person who was paying $1,200 a year for unlimited service but only using 150 voice minutes, 25 text messages, and a scant amount of mobile data each month. The issue wasn’t the person’s smartphone—a Galaxy S model that the phone’s owner liked—but the expense of the accompanying plan. “I just feel like I am paying so much money for services I don’t use, but [I can’t] find a very good [alternative] option,” the owner explained. “Please help!!!”
Dunphy has been receiving these kinds of “Please help!!!” e-mails for years. He is a former Verizon Wireless salesman, and in 2007 he co-founded a mobile analytics firm called Validas to save people and consumers money on their wireless service. The Houston, Texas–based company analyzes the cellphone bills of companies, government agencies, and consumers for extraneous charges using its own software. As a result, Validas claims to now have amassed the largest collection of wireless bill information in the United States outside of the carriers.
Sifting through the data, the company says the biggest trend in spending habits is wireless waste—the gap between the service capacity people sign up for and the amount of that service they actually use. Says Dunphy, “the only way I win, as a smartphone consumer, is when I perfectly buy and use [an exact number of gigabytes], which never happens.”
We all like to think we’re savvy shoppers. Yet Validas’s data shows that most of us spend more than we need to on wireless service month after month, year after year. Validas estimates 80 percent of American wireless subscribers are paying carriers $200 a year for excess minutes, messages, and data. On a national level that adds up to $52.8 billion of wireless waste a year. On a global level the figure could be as high as $926 billion, Dunphy says. Smartphones are the biggest source of wireless waste, because their plans are particularly expensive and complicated. According to Validas they are responsible for $45 billion, or 85 percent, of the United States’ total overspending on wireless service.
As a company that aims to lower its clients’ mobile costs, Validas has business incentives to call attention to wireless waste, and potentially to overstate its scope. But others in the industry agree that wireless waste is a problem. A New York–based company called Alekstra, which was founded by a former Nokia executive and provides services similar to those of Validas, has estimated that U.S. wireless waste is as high as $70 billion. A 2013 Consumer Reports survey of more than 58,000 of the publication’s subscribers found 38 percent of its respondents were using half or less than half of their monthly data allowance. Logan Abbott, president of MyRatePlan.com, a comparison-shopping site for wireless plans, says the vast majority of consumers don’t use all the data or minutes they’re allotted.
How do we end up with these supersized smartphone plans? The short answer is that carriers keep pushing us into pricier plans to maximize their profits. The carriers wouldn’t phrase it that way, but industry analysts say carriers are wringing more money out of their subscribers to counteract slowing growth. For years carriers grew by just signing up people who were brand-new to wireless service, but now virtually every American who wants and can afford a cellphone has one. Carriers can still boost their revenues by upgrading subscribers from basic cellphones to smartphones, which require more expensive service plans, but that group is dwindling, too. More than 65 percent of Americans already have smartphones.
Carriers are now primarily concerned with maintaining or increasing profitability, which, until recently, has meant cutting operational costs and raising rates on their smartphone subscribers. Smartphone users are obvious targets. Just by purchasing smartphones users indicate they are more capable of spending, or at least more likely to spend, than basic cellphone users.
When estimating the cost of smartphone ownership, many consumers focus on the upfront cost of new smartphones rather than on the price of the accompanying plans. But the devices cost much less than the plans, which are a recurring expense.
Carriers sell two basic types of service plans: postpaid and prepaid. Postpaid plans are contractual agreements between subscribers and carriers, with carriers billing subscribers for service at the end of each month. Carriers traditionally gave postpaid subscribers deep subsidies on new phones. Since subsidies average around $400, and carriers typically price new smartphones somewhere between $0 and $250, carriers actually lost money each time they sold a subsidized smartphone. To ensure they recoup their costs and turn a profit, carriers make these subscribers agree to purchase service from them for a set period of time, usually two years.
With prepaid plans, customers pay for service in advance, by either purchasing credits for set allotments of voice minutes, text messages, and data bytes or prepaying for a bundle of services per day or month. Prepaid users also buy their phones on their own. Since carriers don’t take on any financial risk with prepaid plans, users aren’t required to sign contracts.
In many regions, such as Africa and Latin America, prepaid plans are more prevalent, but in the United States postpaid plans are more common, especially for smartphone owners. About two thirds of U.S. cellphone users are on postpaid plans and one third are on prepaid plans. To carriers, postpaid customers are more valuable, because they generate more revenue.
The future of the carrier business lies in mobile data. Carriers in the United States and a few other countries, such as Japan, already make more money from data than voice services and most U.S. carriers now automatically include unlimited voice in their smartphone plans. As the Wall Street Journal pointed out in October 2013, “the carriers aren’t making this change because they think customers should just have unlimited calls for free. . . . Focusing on data and giving everything else away seemingly as a freebie actually centers the companies on their main source of revenue growth.” Mobile data is a $90 billion market in the United States alone; globally, it is worth about $400 billion.
Smartphones and data plans are inextricably linked. For the most part, carriers won’t let consumers buy smartphones without signing up for mobile data plans. Asymco analyst Horace Dediu calls the iPhone a “mobile broadband salesman.” Carriers “hire” the iPhone to sell mobile data plans to consumers, and the phone’s job is to move people from $50-a-month plans to $100-a-month plans by transitioning them from basic to smartphones. The prices that carriers pay Apple are essentially sales commissions for accomplishing this job. “Apple gets a huge commission in the form of a price premium and subsidy on the iPhone,” Dediu explains. “It’s the carriers saying, ‘Thanks, you’ve helped us attract more customers to our most profitable service plans.’”
Those service plans can change frequently, in both composition and price. Carriers are comfortable raising rates, because they know consumers are dependent on their smartphones and apps and many are locked into multiyear contracts. “Smartphones are close to a life necessity now,” says Dunphy. “It’s become ‘food, water, shelter,’ and ‘do I have my phone with me?,’ and the carriers know that.”
One common carrier move is to kill unlimited data plans. A few years before the iPhone was unveiled, carriers started rolling out 3G technology, which increased their capacity to support mobile data usage. To spur consumers to access the mobile Internet on their phones, they introduced unlimited plans at affordable rates. But iPhone, Android, and other smartphone users started sucking up more bandwidth than anticipated. “Unlimited plans became the operators’ arch enemy,” says Jake Saunders, ABI Research’s vice president of forecasting. “Operators were blindsided by the small percentage of users who took those plans to the ultimate limit.” In response, AT&T and Verizon adopted tiered pricing to safeguard their networks and profits: subscribers select the amount, or “tier,” of voice minutes, text messages, and data they believe they will use per month. Subscribers who consume more than their allotments are charged a high rate for extra data usage.
Today only 12 percent of mobile subscribers around the world have access to unlimited “all you can eat” data plans, down from 15 percent in mid-2013, according to ABI Research. Tiered, wage-based plans are much more prevalent—they are available to 64 percent of mobile subscribers globally. In fact, unlimited data has become so rare that Sprint launched an unlimited guarantee policy in 2013 and is touting it as a major asset for its customers. But how long can Sprint buck the industry trend toward tiered plans? Sprint has fewer subscribers than AT&T and Verizon, so it has more bandwidth to support unlimited plans. Following its 2013 merger with the Japanese carrier Softbank (Japan’s number-three carrier and now owner of about 80 percent of Sprint), the formerly cash-strapped Sprint also now has funds it can use for network upgrades and maintenance. Deepa Karthikeyan, an analyst for the market research company Current Analysis, says Sprint has to “pull out all stops to create a strong differentiator against the leading carriers,” for the next couple of years. But if it “gains critical traction” in the marketplace and no longer needs such enticements to lure consumers away from its rivals, she thinks Sprint may stop offering its unlimited guarantee to new customers. In a sign that Sprint is seeing network congestion, it recently warned its top 5 percent of data users that it may start reducing their mobile throughput speeds “during heavy usage times” to keep connections fast for other customers.
When AT&T first adopted tiered pricing, the company said the change would “make the mobile Internet more affordable to more people,” because its lowest data tiers cost less than the unlimited plans they were replacing. That was true, but the catch is that bandwidth consumption is escalating as smartphones gain features, a wider range of high-definition media launch, and data connections get faster. Karthikeyan says that “the overall smartphone experience” keeps improving for consumers, but they are also spending more on tiered pricing plans. Subscribers may start out paying relatively little in the lowest tiers, but they quickly move up to more expensive ones, because they need more data and they are charged overage fees if they exceed data caps.
Carriers have also been increasing data prices. Consider the short history of AT&T’s data plans for the iPhone. The iPhone launched in 2007 with a $20 unlimited data plan. A year later, when the iPhone 3G debuted, AT&T upped the price of unlimited data to $30. In June 2010, AT&T switched to tiered pricing, which meant new iPhone 4 buyers had to choose between paying $15 for 200 MB or $25 for 2 GB. Today an individual AT&T iPhone user can still pay $20 for data but will get only 300 MB, and buying 2 GB costs $40. Verizon’s plans have followed a similar trajectory and are even more expensive. Until July 2011, unlimited data on Verizon cost $30. After it moved to tiered plans, $30 bought 2 GB. As of may 2014, $30 will buy 500 MB on Verizon, and 2 GB costs $50.
New types of mobile data plans can cost consumers even more. Multidevice shared-data plans allow subscribers to use a set amount of 4G LTE data among different types of devices and pay only one monthly fee. These plans look pragmatic on paper, since the costs and data can be divvied up many ways, including among family members. But analysts say the plans can easily accelerate consumers’ data consumption and costs, on top of which they must pay a monthly line access fee for each device (independent of data usage). The result is that these plans end up being 10 percent to 15 percent more expensive than other mobile data options, according to Saunders.
Multidevice plans are also more effective at locking in subscribers, since it’s more complicated to switch service and carriers when multiple devices and people are involved. Ralph de la Vega, the president and CEO of AT&T’s wireless business, has described the company’s mobile share plans as “a good plan for us from a loyalty point of view.” AT&T showed its enthusiasm for multidevice shared-data plans in October 2013 when it dropped its regular tiered plans and began requiring new subscribers to sign up for Mobile Share plans. Only 9 percent of global mobile subscribers currently have access to multidevice shared-data plans but that number has nearly doubled since May 2013, showing that carriers are quickly adopting this newer type of plan. Saunders expects more carriers will follow, noting, “Operators realize . . . they can get more money out of the user” with them.
Consumers would make better choices if they understood what they were buying. In July 2013, AT&T, Sprint, T-mobile, and Verizon offered a total of nearly 700 combinations of smartphone plans, according to a Wall Street Journal analysis. Which plan is best? The only honest answer is: it depends. Dunphy advises consumers to buy voice minutes, text messages, and data the same way they buy milk. He means that people should take more care to buy only what they need, since anything left over will be thrown away (or taken away by the carriers, in the case of wireless plans). “Smartphone plans are supercomplicated, with lots of variations,” admits Dunphy. “But we’re trying to get people to think about the way they buy other things in life and apply that thinking to their wireless plans.”
The problem is that mobile data is not sold the way most products are. In order to select a data tier, consumers must estimate how much bandwidth they will use in a month. But most people have no idea how to quantify mobile data, which can fluctuate due to a number of variables. An e-mail with attachments takes up more bandwidth than a text-only e-mail. Browsing graphic-heavy, video-enabled websites requires more data than surfing simple sites. Streaming video over 4G is more bandwidth-intensive than 3G video. Streaming high-definition video can eat up more than twice the amount of data as standard video.
Even carriers disagree about the amount of data a particular activity will consume. Verizon says downloading a song will eat up 7 MB; AT&T says 4 MB. Verizon says sending a text-only e-mail should take 10 KB; AT&T and Sprint say 20 KB. AT&T estimates video streaming will consume 2 MB a minute; Sprint and Verizon say it’s more than double that, on average. The three companies also list different rates for music streaming (500 KB or 1 MB per minute) and Web surfing (256 KB, 400 KB, or 500 KB per page). These are just estimates, which will vary by smartphone model and operating system, and which reflect technological differences between the networks, such as download and upload speeds. Nevertheless, the variance between the carriers’ numbers may increase consumer confusion about data rates and consumption.
Uncertainty breeds risk aversion. People overspend because they are anxious they will exceed their voice and data quotas. Most consumers would rather oversubscribe and know they’ll stay within their plans’ bounds than pay less and have to worry about penalties. Carriers may stoke those fears to make more money. “Sales reps will say, ‘Go with a fifteen GB plan; you have a teenager, you need that,’ [even if you don’t],” says Dunphy. He blames the industry’s sales commission system, which he claims has not changed much since he worked in a New Jersey Verizon Wireless store in the early 2000s. He says: “Every single thing [your carrier sells you], someone is getting a commission on. When a sales rep sells you a higher plan when you should be on a lower plan, it’s because he’s getting paid based on the size of that plan. The system is built like that. Your bill is directly tied to commission.”
This excerpt has been reprinted with permission from The Smartphone, by Elizabeth Woyke, published by The New Press, 2014.