The iPhone Is Not an All-You-Can-Eat Buffet

Why AT&T should dump unlimited data plans.

Ever since it became the exclusive carrier for the iPhone, AT&T’s fortunes have resembled a scene out of Indiana Jones —a scramble to get out of the way of an unstoppable boulder. The iPhone has prompted millions of people to join AT&T, but paradoxically, it has also hurt the company’s image. The problem is that all of those customers use their phones too much. The typical smartphone customer consumes about 40 to 80 megabytes of wireless capacity a month. The typical iPhone customer uses 400 MB a month. AT&T’s network is getting crushed by that demand.

A lot of technologies exhibit a positive network effect—they get better as more people use them. The iPhone is just the opposite—as more people in your city sign up, local cell towers get more congested, and your own phone performs worse. In New York, San Francisco, and other places with lots of iPhones, people have terrible trouble getting calls to go through or taking advantage of the supposed speed of AT&T’s 3G network. The wireless provider is taking the blame: Half of all iPhone owners say they’d switch to another carrier if Apple dropped its exclusive deal with AT&T, which reports say could happen next year. AT&T also scored lower than any other U.S. carrier in a recent customer-satisfaction survey—the first time it has ever claimed last place.

AT&T insists that it’s working on the problem. The company plans to spend at least $17 billion to improve its network this year, and it’s increasing its 850 MHz-band coverage—signals that travel farther and penetrate buildings better than the ubiquitous 1900 MHz frequency—in major markets. But building out additional capacity takes time and, more important, isn’t likely to lead to iPhone nirvana. That’s because it doesn’t combat—and would likely exacerbate—the central problem: Some iPhone owners are hogging the network.

Every iPhone/AT&T customer must deal with the consequences of a slowed-down wireless network. Not every customer, though, is equally responsible for the slowdown. At the moment, AT&T charges $30 a month for unlimited mobile Internet access on the iPhone. That means a customer who uses 1 MB a month pays the same amount as someone who uses 1,000 MB. I’ve got a better plan—one that superusers won’t like but that will result in better service, and perhaps lower bills, for iPhone owners: AT&T should kill the all-you-can-eat model and start charging people for how much bandwidth they use.

How would my plan work? I propose charging $10 a month for each 100 MB you upload or download on your phone, with a maximum of $40 per month. In other words, people who use 400 MB or more per month will pay $40 for their plan, or $10 more than they pay now. * Everybody else will pay their current rate—or less, as little as $10 a month. To summarize: If you don’t use your iPhone very much, your current monthly rates will go down; if you use it a lot, your rates will increase. (Of course, only your usage of AT&T’s cellular network would count toward your plan; what you do on Wi-Fi wouldn’t matter.)

To understand the advantages of tiered pricing, let’s look at AT&T’s current strategy of spending billions to build more network space. Why won’t this work? For the same reason building more roads doesn’t reduce traffic—more capacity increases the attractiveness of driving, which brings a lot more cars to the road, which leads to more gridlock.

Traffic engineers call this “induced traffic,” and the same phenomenon is likely to occur on the mobile Internet. Right now there’s only one thing stopping me from using my iPhone more—the network’s too slow. If I get a big e-mail attachment when I’m away from a Wi-Fi network, I normally don’t download it, because it would take several minutes to come through. When I’m scrolling through the New York Times at a cafe, I tend to choose big, meaty articles that I can read without a lot of time-consuming page-loading. When I go for a walk, I don’t usually start up Pandora’s streaming-music application; it cuts off too often on AT&T’s congested network, so instead I listen to music that’s already on my phone. But if the network worked perfectly all over San Francisco, I’d probably change my behavior radically—I’d download every attachment, browse the Web like mad, and start streaming music every time I left the house. A lot of other iPhone owners would do so, too—and people who’ve held back on getting the iPhone because of network problems would sign up. And just like that, the network would crawl to a halt.

One of the most effective recent innovations in reducing traffic on roads has been “congestion pricing“—charging people who drive to certain areas (the center of London or Singapore, for instance) during rush hour. Congestion pricing works by reducing demand for a fixed good—in this case, the road network. A tiered iPhone pricing plan would work according to the same theory: Adding a small congestion fee would subtly alter iPhoners’ behavior. In an effort to keep down their monthly bills, some people would reconsider loading up YouTube or a streaming-music app—and the network, in time, would become unburdened. (Should people in noncongested iPhone areas also be subject to tiered pricing? I’d argue that they should. It’d be too difficult to impose different prices in different areas for mobile phone service; and, anyway, smartphone usage is projected to rise, so those unclogged networks are likely to fill up soon.)

Of course, users would cry bloody murder at first. The traditional criticism of tiered pricing on telecommunications systems is that it’s too expensive and too annoying for customers; people don’t know how much they’re spending during the month, and then they’re smacked with huge bills. Most Internet companies aren’t big fans of tiered pricing, either. They worry that adding a meter to Internet time will reduce people’s propensity to try out new stuff online—killing innovation on the world’s most innovative communications platform.

But tiered pricing on the iPhone doesn’t have to be onerous. I’d call on AT&T to create automatic tiers—everyone would start out on the $10/100 MB plan each month, and your price would go up automatically as your usage passes each 100 MB tier. The key to implementing this policy is transparency. The phone should have an indicator—sort of like the battery bar—that changes color as you pass each monthly tier. That way, people can adjust their usage to suit how much they’d like to pay—limiting surfing if they approach the next tier, or deciding to press on if money’s no object.

What will Apple say about tiered pricing? Steve Jobs probably won’t like it—after all, metered service discourages people from using his device, including spending money in the App Store. Indeed, it’s possible that Apple’s contract with AT&T prohibits metered online access. But whether it sticks with AT&T or allows other carriers to sell the iPhone, Apple would be wise to consider tiered pricing. For one thing, it would reduce the monthly cost of the phone—which could bring in a lot more customers. Even better, it will make the iPhone less annoying to use, which has to be one of Apple’s goals.

Some iPhone fans will argue that metered pricing would kill the magic of Apple’s phone—that sense of liberation one feels at being able to access the Internet from anywhere, at any time. The trouble is, for many of us, AT&T’s overcrowded network has already killed that sense, and now our usual dealings with Apple’s phone are tinged with annoyance.

If tiered pricing prompts a lot of people to cut back on their monthly Internet usage, AT&T could very well lose money on the deal—in the short run, at least. But over time, as the network clears up and people can use their iPhones once more, people might start to feel differently. They may even stop hating AT&T.

Correction, Oct. 6, 2009: This article originally stated that half of iPhone customers use 400 megabytes or more network capacity per month. While the average iPhone user does consume 400 MB per month, it’s impossible to say how many customers use more than 400 MB because AT&T hasn’t released that information. (Return to the corrected sentence.)