Does AT&T's New Data Plan Make You Think of an Israeli Daycare Center?

It did for a reader named Peter Rice. “I was recently reading about AT&T’s new service plans for the iPhone [see an overview here], and immediately thought of the story of the day-cares that started fining parents if they were late, and that the problem actually got worst.”

He’s referring to something we wrote in Freakonomics. It’s based on a paper by Uri Gneezy and Aldo Rustichini about a set of Israeli day-care centers which started fining parents who were late in picking up their kids. The problem was that the fine was so low (about $3 per occasion) that it backfired: late pickups actually rose, apparently because the new incentive (a cash fine) was weaker than the old incentive (the guilt of being late).

Peter continues:

My impression is that AT&T is currently getting a lot of bad press because its network can’t handle all of the data that the iPhones are trying to transmit over their network, so their pricing strategy is in response to that. Nonetheless is it possible that it will backfire? Are there a bunch of users out there that have essentially limited their usage because they realize that it bogs down the network and are limiting themselves basically by guilt? The pricing scheme seems a bit lopsided to me with a tenfold increase from 200MB to 2GB for just $10. Is it possible that some of those users will pay the extra $10 and then feel entitled to hog a lot more data? Or is there something about this scenario that makes it very different from the day-care situation, economically speaking?

  1. I’d be surprised if even a handful of phone customers have been feeling “guilt” about hogging too much data; raise you’re hand if you’re one of them; that said:
  2. The $10 incremental fee for so much more data does seem cheap enough to encourage some customers, especially new ones, to sign up and then, since they’re already paying for a vast amount of data, use much more than they might have otherwise. People eat more food at an all-you-can-eat buffet; they consume more health care with all-you-can-consume insurance plans; there’s no reason to expect they won’t gobble up more data too when they’ve already paid for it.
  3. On the other hand, more price-sensitive customers (or those who accept AT&T’s rhetoric that most existing customers fall far short of the heavy-data-user cutoff) will opt for the cheaper plan, which would limit their consumption.
  4. But the tricky part of a bright-line tiered pricing strategy is that it asks people to put themselves firmly into one box or another, rather than paying a la carte. And once you put people in a box of any sort, one of the first things they want to do is smash down the walls.

Chris Lyons

Something like this had occurred to me too. A lot of AT&T's existing customers are going to stick to the grandfathered unlimited plan, I think, since they'd only get a $5 reduction in their monthly bill (which is less than a 7% reduction after taxes and fees). Whether or not they use more than two gigabytes, they're going to hang onto their unlimited plan "just in case".

And as a result of paying more (Even just ~7% more) for the unlimited data, they're going to feel the need to use it to feel like they're getting their money's worth. So customers who weren't data hogs before will suddenly become data hogs.

Steve

I also think that another factor will come into play. Users in the United States who want the iPhone are effectively forced into using AT&T (there are ways around it, but it is very expensive). AT&T has very poor customer service, and generally iPhone users strongly dislike AT&T. The final piece is that most people have grandfathered unlimited data plans.

I can see a "revenge" factor of people with unlimited data plans deliberately driving up their data usage.

Ben

You know, they probably have data on actual usage, and the tiers are likely developed accordingly. The rest of us have no idea what actual usage is, so we can only speculate. Several websites have asked users to post their data usage graphs from the AT&T website, and the vast majority of these have been very low usage. This suggests that most people will be fine on the $15/month plan and would therefore be saving money.

Of course, it makes little sense for AT&T to complain that iPhone users are hammering their network and at the same time claim that 98% of them don't use much data. I think this is a bet that when customers move to the $15/month plan, they'll self limit out of fear of excess charges. They're going to bring down usage by lowering the price and at the same time, probably bring on more customers by making the price more appealing.

Jim Kiley

With a daycare, you feel guilt because you see and know the person who you are inconveniencing. You don't see or know AT&T, a monolithic impersonal widely-disliked corporate entity. So there's no guilt there. Monetary fees would be more likely to be an effective disincentive in that situation.

Ronald L.

Well, in the UK, O2 just introduced bandwidth caps on their iPhone Plans. The more you pay per month, the more data you get - ranging from 500MB to 1GB, with the option of raising the cap for an additional ?10.

Interestingly, O2 was the only carrier to have unlimited data, even when other carriers had the phone. But now, that differentiation is gone.

But I guess the load and demand was too much for the network.

Ari

Agree with #4. You could now face the day care worker and think you are perfectly in the right to come late since they are getting paid for that. With AT&T there's no guilt as your never harming an individual that you need to face. The abstract idea that I'm using too much bandwidth thereby harming others is not the same idea as having to face someone, particularly someone caring for your child.

Tim

The problem are the people who are illegally tethering to their laptops. They use up to 10 Gigabits! a month. That's equal to ~50x the typical use of customers. By limiting new users to 2 GB, they prevent any more of these people from entering the customer pool. Improvements made to their network will be able to keep up better with the demand this way.

Of course, some of these selfish illegal tether-ers may decide to keep their unlimited data plan and up their usage even further to "stick it" to AT&T. In reality, all they'll be doing is making the service that much worse for other paying customers.

Linda

It reminds me of a gym membership at new year's. Full of post-holiday guilt, I sign up for a costly multi-year contract that offers me unlimited use of glamorous equipment to become a better person. The gym owner profits immensely because after the guilt wears off I'll put no burden on the facilities at all.

Maybe the business case isn't about the high-load users at all. Maybe it's about getting the low-load users unrealistic ambitions to pay a small extra fee for service they'll never use after January. Metaphorically speaking.

Walt French

I take it as a first principle of economics that consumers respond to pricing, so we'll have to see what actually happens under the new plan.

That said, I think AT&T made a good, if somewhat contorted, step in the right direction towards providing customers with all the service that they want to get at a reasonable price.

Unlike the day care centers, AT&T has no need to send all the kiddies home at 5:30, the motivation for the original change. They're in the very impersonal business of providing bits of data. Each additional increment of data usage or connection requires, on average, a bit more backbone or tower processing, and if they can get predictable revenues and demand patterns, that's a win. Forgetting the psychological factors (which I think both AT&T and Freakonomics go overboard on), the cost of providing those capabilities, including profit, might be something like $5/month and 25? per 5 megabytes.

Such a plan would not encourage "getting one's money's worth" because 15? of "wasted" data at month-end isn't worth transmitting another couple dozen emails. Nor is 25? enough, in my mind, that people would be nervous about rolling over to the next bucket while clicking on the link to see your friend's new kittens while out for a $2.00 coffee, versus waiting to get home to the home network.

Rather than daycares, the current unlimited plan seems a pretty perfect analogy to the all-you-can-eat restaurants: those who are willing to gorge themselves force the places to offer up meals that aren't very attractive to us who emphasize balanced nutrition, wholesomeness, taste, novelty, presentation, atmosphere, etc.

AT&T's unlimited plan has driven some people to use all the data they can, with the expected consequence that the experience is the worse for the rest of us who want the occasional bite without being dropped or unable to get on.

Verizon, Sprint & T-Mo haven't yet faced this problem because the iProducts are around half (!) of all mobile data access. Although these networks might really want to build subscriber volumes now with unlimited plans, the Android ethic certainly is going to force all carriers to be mindful of how their pricing will affect their ability to do business.

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Brett

@Tim

"They use up to 10 Gigabits! a month. That's equal to ~50x the typical use of customers. By limiting new users to 2 GB..."

I'm just going to nitpick here...

10 Gigabits = 1.2 Gigabytes
Gb does not equal GB
8 bits = 1 byte

I also don't know where you're getting your number of (what I'm sure was intended to be) 10 Gigabytes. And I don't know where you're getting your "typical use of customers". Just because AT&T decides to limit one plan to 200 MB doesn't mean that's the 'typical use". Since the usage stats for AT&T is proprietary I don't expect to see any firm numbers any time soon.

Rich Wilson

@Tim
Is tethering actually 'illegal'? I assume they have some language in the contract, but I have trouble with rules that try to define data. I pay for it, it's my data, I should be able to do what I want with it.

My response, if I wanted an iPad, would be to tether it to my Verizon droid.

CL

AT&T has not had a clear policy. The old "unlimited" plan is quite limited. My contract clearly says that if tethering is "detected" AT&T will cancel my service and charge me outrageous termination fees. I bought a Nokia smartphone on eBay for the keyboard and the PIM apps (I don't access the web.) When AT&T detected the new phone, it AUTOMATICALLY added the $30 data plan. After a lengthy conversation with an AT&T rep, I learned that a phone with a keyboard, wifi access, and Nokia operating system is "smart", even though each of those features exists on other "dumb" phones, and really has little to do with actual data use. When I complained, they removed the data plan. I'm personally opposed to ambiguity in contracts (aren't all of us Freakonomics fans?) and I like that I can now pay just for what I use. I'm also enjoying watching my bill go down as the market does what it does best.

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Brooke

It's pretty disturbing that some people (the author of the post included) are inclined to call people "data hogs" for using the capacity that they bought.

If I pay a given fee for a predetermined amount of access to a product or network, I have the right to use as much of it as I desire, up to the limit in my service plan. Even if I use more than the "average" customer on that plan, it doesn't make me hog. It makes me a customer getting my money's worth.

Tim

@Brett and Rich

Apologies for the bite/byte typo. Brett, you are correct that I meant gigaBYTES. I got the 10 GB figure from the following message board thread.

http://forums.macrumors.com/showthread.php?t=926678&page=11

You can see that one user even claims to have used 28.9 GB in January 2010. On a previous page another user had reached 11 GB. Most of the high-end users admit it is due to jailbreaking and tethering. When I stated that tethering was "illegal" I meant that it is against the terms of the contract.

The 200 MB value for the typical user came from AT&T's statement released when changing their policy saying that 65% of their smartphone users were under 200 MB.

http://www.att.com/gen/press-room?pid=17991&cdvn=news&newsarticleid=30854&mapcode=financial|Wireless

Tim

@Brooke -

I have no problem if you're using the service as specified in the contract and get your money's worth. If you are circumventing the terms of the contract and using data in a way that violates the contract (tethering) at the detriment to the network and those following the terms of the contract, then I have a problem. That's all I'm saying.

Larry

I'm on an unlimited plan and I have no idea how much bandwidth I use. I think what is going to happen is new customers who have no idea how much bandwidth they need, are going to be dissuaded from getting a data plan on ATT because they just have no idea what they'll need. Customers will turn to other carriers out of fear.

And even if you are pretty sure you know what you need, one month you'll accidentally stream some music or video off the cell network when you think you're on wifi - or your kids will play with your phone and you'll get a huge bill. There are going to be horror stories of unexpected $1000 bills.

And besides all of that, if you have to constantly monitor your smart phone usage it just won't be fun anymore.

Jeffrey

Not currently an iPhone user because I didn't want to shell out for the old data plan. Was wondering. Is there an App that lets you monitor how much data you are gobbling up? I'd hate to pay for the cheap plan and then get charged extra for each MB I goggled beyond the 200MB allotted.

charles

ATT is generally the innovator in bad ideas.

Dan

Oh, everything will be fine.

AT&T isn't doing anything new or innovative; Australia and New Zealand mobile carriers have always had caps for data use, and people survived. I particularly like Virgin Mobile's pre-paid mobile data pricing--a base price for 1GB that has to be used in a month then $10 for each 300MB more, or somesuch (I've moved back to the States; can't remember the details). On my iPhone I'd hit 800MB a month, and wasn't too worried about going over, as I'd get a text message warning I was low--plus it was only $10 if I really needed more.

But then again, Australia and New Zealand ISPs almost always come with data caps as well, so customers there are pretty conditioned to monitoring their usage.

DaveyNC

As Larry @16 says, I think part of the reason that people use as much data as they do is that they have no idea how much they are actually using. I would even venture to say that many Jesus Phone users can't differentiate between when they are using data or voice connection. What I mean is, to many they are just using their phone as it was intended. A call or an SMS or a look at the MySpace page is all the same to most of the users.