Demands on Network Are an iPhone Hang-Up

The iPhone has made AT&T the cool kid on the cellphone block, bringing in lots of new customers all eager to play with the shiny new device. Trouble is, the iPhone is expensive for AT&T, and not just because of the heavy subsidies on the initial purchase price. Users of iPhone download games, video and other Web data at two to four times the rate of other smartphone users, according to comScore. Yet AT&T charges iPhone subscribers the same fee of $30 a month for data that it levies on other smartphone customers. And aside from restricting certain activities, like file sharing, AT&T doesn't limit how much data can be downloaded. But Web applications popular with iPhone customers are bandwidth hogs. A recent analysis by Alcatel-Lucent of North American wireless network use during the midday hour on one day found Web browsing was consuming 32% of data-related airtime but 69% of bandwidth, while email used 30% of data airtime but only 4% of bandwidth. Email taxes network resources but in a different way. As the proportion of customers with iPhones grows -- 5.9 million 3G iPhones were activated in the last three quarters, 7.5% of AT&T's total subscribers -- the resulting growth in downloading and Web browsing will strain AT&T's network. AT&T will need to add cell towers and spend more on the back-haul lines that connect the towers to the rest of the network. The iPhone is the leading edge of a challenge for the wireless industry. Until now, carriers have boosted revenues by taking on new customers -- even when average revenues per user haven't grown much. For example, Verizon Wireless, controlled by Verizon Communications, has lifted ARPU only slightly to almost $52 a month over the past few years. The falling cost of voice minutes and additions of lower-end customer has offset growth of text messaging and other data services. Voice and texting use little bandwidth and are lucrative. View Full Image Bloomberg News Apple's 3G iPhone Now, new customers are harder to come by. The question is whether new data revenues the industry is banking on -- from Web-browsing and entertainment services -- will be as profitable, at least as measured by return on invested capital. That looks doubtful. To ensure networks have the capacity to offer these services, particularly bandwidth-heavy offerings like video streaming, carriers will have to make heavy capital investment. Both AT&T and Verizon are building the next-generation 4G network, each spending more than $9 billion last year on new wireless spectrum, as well as $6 billion annually on overall capacity. The new networks are likely to be more efficient at delivering data applications. Even so, Sanford C. Bernstein analyst Craig Moffett argues that returns on invested capital related to these new services will be lower than on older services. In the short term, carriers should abandon unlimited data pricing plans. Both AT&T and Verizon Wireless already charge extra for heavy users with wirelessly connected laptops. They will have to contemplate similar strategies for smartphone users. Setting the right price won't be easy. With competition, the temptation to discount will be hard to avoid. And there's no guarantee that customers will pay as much for entertainment as for voice-calling and email. Whatever they do, the carriers may be caught between a rock and a hard place. —Martin Peers