June 14, 2010
Much has been made about AT&T Inc. (NYSE: T)'s move to eliminate unlimited data plans, which caused uproar among compulsive media downloaders. Yet the move was correctly welcomed by curmudgeonly Light Reading editors.
AT&T's move was a correct business decision. If you are a gas station, you do not provide an "all-you-can-eat" price, or it might put you out of business. But there's a more important question: Why did AT&T make the move now, and what are they afraid of?
I think the timing of the move is pretty clear. The industry is about to undergo a massive change, foreshadowed by AT&T's struggle to keep up with the onslaught of data traffic coming from the iPhone: A mobile data explosion, fed by the arrival of the smartphone and the mobile Web, is coming.
Powerful smartphones, soon to be fueled by 4G networks, are going to start flooding the network with mobile data. This comes just after the mobile telecom industry surpassed a landmark in 2009, in which the networks reached a "crossover point" and started carrying more data than voice traffic, according to several sources.
Consider the fact that when the industry moves to 4G and Long Term Evolution (LTE), data access rates will generally leap an order of magnitude. This accompanies will accelerate an expansion in new high-bandwidth applications, such as video communications.
This will shape the future of the industry. Is it good or bad for large mobile carriers? Much of it depends on regulatory and competitive issues. But last week's announcement that AT&T will abandon unlimited data plans should come as no surprise. It's the commercial acknowledgment that we have entered a new era of telecommunications: the world of data first, voice second.
This represents the final leg of a secular shift in the life and times of the "phone company" to a "mobile Internet company." Telecom companies started losing landlines rapidly in the 1990s.
Consider the following points:
The global mobile data revenues reached $220 billion and mobile data now contributes 26 percent of the overall global mobile service revenues, according to Chetan Sharma Consulting.
2009 also marked the year when the global data traffic (monthly) exceeded the global voice traffic. In the US, the yearly mobile data traffic exceeded the voice traffic for the first time.
It is expected that 2009 marked the year that mobile data traffic reached a new milestone of 1 exabyte (EB) or 1 million terabytes (TB). By 2016-17, the global yearly mobile data traffic is likely to exceed 1 zettabyte (ZB) or 1,000 exabytes, according to Chetan Sharma Consulting.
Over 50 percent of the world's households carry a mobile device, according to Accel Partners.
The move from 3G to 4G is a major paradigm shift, it means that the entire architecture will now be packet-based IP data.
4G means more bandwidth, which means geometric growth in applications.
Now, this may not all be bad. When telecom companies innovate with data-driven services, they have shown they are able to boost revenue. As a recent presentation by telecom research consultancy Chetan Sharma Consulting shows, telecom services have been replacing lost voice revenue with data revenue. AT&T's move to cap data plans is part of a plan to tighten that system up, by eliminating the "data hogs."
So far, the shift from voice revenues to data has been slow enough so as not to be too disruptive. Telecom companies were able to strategically invest in mobile while slowly shedding landline businesses. At the same time, they continue to pay their shareholders dividends and make executives happy with large bonuses.
Recently, there is evidence that the growth in mobile data revenue is slowing. It flattened during the recession of 2008/2009. And as data rates increase, costs will increase.
As we move toward 4G mobile services, which look like they will be rolled out in a large scale in 2011 and 2012, service providers will bring the entire Internet to the subscriber fingertips. This changes the game, because at the same time, mobile users are beginning to move beyond the "walled garden" and demand access to more Web-based content.
The Web standard HTML5, which is also likely to emerge in scale at the same time as LTE and 4G, will crystallize the evolution of the mobile Web.
So, this is the end of two eras at once: The end of the "walled garden," and the end of "voice" as the bread and butter of telecom company revenues.
I believe this will change the industry. If telecom companies want to avoid the enviable commoditization and cannibalization of their core voice services, they are going to have to think creatively, almost like entertainment companies. There needs to be an aggressive move into new premium services, including media, gaming, video, and e-commerce.
That's on the revenue side. On the cost side, service providers are going to have to aggressively roll out higher bandwidth mobile access networks. In a recent research report on my Website, The Rayno Report, we found that service providers are inadequately prepared for the arrival of 4G: Less than 10 percent of mobile cell sites are wired with fiber.
The coming 4G data explosion is going to be revolutionary. It represents huge opportunities for handset manufacturers, equipment providers, application providers, and service providers alike. But if service providers intend to survive and prosper in this environment, they are going to have to make some radical and rapid changes: In the next few years, they need to overhaul their mobile access networks, their mobile applications strategy, and potentially even their entire business DNA. Mobile providers have entered a new era of the mobile Web, and selling voice just won't cut it anymore. They now have to think like Internet entertainment companies.
— R. Scott Raynovich, Special to Light Reading
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