Verizon, AT&T To Limit Bandwidth; They Don't Understand Customers

(MoneyWatch)  There's a basic law of product and service pricing: Offer something people want and then charge sufficiently to cover the costs and make a profit. That law hinges on the big assumption that you understand customers well enough to know what they want and how much of it they'll consume. It's is this point that is causing all the distress for the wireless carriers, particularly Verizon (VZ) and AT&T (T), both of which are making noises about putting the breaks on consumers' unlimited data plans. And that's a shame, because in blaming a few "hogs" for wrecking things for everyone, they fail to see the industry's future.

In speaking with the Washington Post, Verizon CTO Dick Lynch as much as said that LTE mobile broadband service, which will allow even more devices to connect to Internet, will likely be the death of flat-rate data pricing:

"The problem we have today with flat-based usage is that you are trying to encourage customers to be efficient in use and applications but you are getting some people who are bandwidth hogs using gigabytes a month and they are paying something like megabytes a month," Lynch said. "That isn't long-term sustainable. Why should customers using an average amount of bandwidth be subsidizing bandwidth hogs?"

Similarly, AT&T has said that it needs to discourage overly heavy data use on its networks, citing the high-bandwidth users. But cut past the semantic fog for a moment and you see that the companies are blaming consumers rather than the real culprits, themselves.

Both Verizon and AT&T tripped over that fundamental law of business. They made an offer that a bunch of isolated executives probably sagely agreed would pull in customers who wouldn't really use what they were paying for. In one sense, you can't blame their logic, because it fuels how much of the success of cellular pricing. The carriers set pricing in such a way that they maximize the amount a person will pay for a given level of usage. They can pull this off because they have massive amounts of data on customer habits and so can design service plans accordingly.

However, although they do understand how people use wireless voice networks, they don't yet fathom inclinations when it comes to data over wireless. Partly it is because the new data gulping smartphones are still a new category with rapid adoption, meaning that they're in a heavy learning phase. I suspect another factor is that cellular executives don't use phones, computers, and their love children the way early adopters do, and so acted more out of an iPhone-sounds-big-let's-do-something approach than grasping what they were getting themselves into. They thought, "Oh, we'll charge X for unlimited and make a fat profit," only to find that when they said unlimited, many consumers took them at their word.

The problem facing the carriers now is three-fold:

1. They have set the expectations for unlimited data, and pulling it away is going to upset consumers.
2. Even as they cry "Sooie!" they continue to rake in high profits, which makes the claims of being harmed by all that data use -- and lack of building sufficient infrastructures -- sound like a certain porcine byproduct.
3. Federal regulators have regained their taste for command and control and may not look kindly on an attempt to roll back services in the face of fat and happy earnings.

Expect more grumblings resulting in an attempt to enforce limits on data use, followed by some congressional incumbent deciding to hold hearings and issue a blistering report, with calls for greater regulation following in their wake. All this, of course, will drive the telecom carriers to donate even more heavily to their favorite candidates on the appropriate committees. Who says the system doesn't work?

Image via stock.xchng user patbain, site standard license.