Why your cell phone bill is going up

@CNNMoneyTech February 23, 2012: 6:04 AM ET
Cell phone bills are going up as a result of increased demand and a spectrum crunch that is limited the supply of wireless data bandwidth.

Cell phone bills are going up as a result of increased demand and a spectrum crunch that is limited the supply of wireless data bandwidth.

This is part three of a week-long series on the cell phone capacity crunch.

NEW YORK (CNNMoney) -- Has your mobile phone bill jumped this past year?

Get used to it.

Demand for wireless data services is soaring, forcing carriers to invest massively to keep up. They have two main options: Upgrade their network technology or acquire more wireless spectrum to give them more bandwidth.

Both approaches cost billions. AT&T led its rivals by spending $95 billion over the past five years upgrading its network. Verizon just agreed to pay $3.6 billion for a small but tactically significant bundle of spectrum from a group of cable companies.

Those expenses are getting transferred to you, the consumer.

"The insatiable thirst for mobile broadband is going to force all of us to pay more," says Dan Hays, a partner at PricewaterhouseCoopers' consultancy. "Phone bills are going up."

The price creep is already happening. AT&T instituted a $5 across-the-board price hike in January for new contracts, and Sprint raised its monthly smartphone rates by $10 a year ago.

Carriers are working the edges, too. Early termination fees have doubled at AT&T, Verizon and Sprint over the past two years. AT&T hiked its upgrade fee last month, and Verizon ditched its New Every Two discount plan last year. AT&T cancelled its lower-tier texting plans in August.

The providers are also trying to contain their costs by curbing consumption.

In 2010, AT&T (T, Fortune 500) became the first national carrier to switch to a tiered pricing model, charging customers for the amount of data they use. Those with legacy, "unlimited" data plans aren't immune: Four months ago, AT&T began throttling download speeds for unlimited customers who are in the top 5% of the network's users.

Verizon (VZ, Fortune 500) followed last summer by introducing its own version of tiered pricing. Verizon also slows speeds for the top 5% of its unlimited users.

T-Mobile's "unlimited" plans throttle back speeds once users hit certain tiers, beginning at 2 GB a month of data.

Sprint (S, Fortune 500) remains the last national carrier to offer an unlimited plan without slowing down data speeds. However, CEO Dan Hesse told analysts last month that Sprint does take action against customers who "abuse it," and the company recently capped its data plans for tablets and mobile hotspots.

The goal of those limits is to help slow the data flood that inspired them.

"By putting those caps in place, the tremendous growth expectations that have been mapped out may get dampened down a bit," says Ken Rehbehn, analyst at Yankee Group.

There are tiny signs of that paying off. The top 1% of mobile users -- the "data hogs" who consume almost a quarter of all mobile bandwidth -- are still increasing their usage, but at a much slower rate than in previous years.

But more casual users are picking up the slack. Overall mobile traffic grew by 159% in 2010 and rose another 133% last year, according to the latest edition of Cisco's (CSCO, Fortune 500) Mobile Visual Networking Index, the industry's most comprehensive annual study.

As Suraj Shetty, Cisco's marketing chief, puts it: "Data caps are curbing the top 1% of users, but not the top 20%."

For carriers, finding the sweet spot is a delicate balancing act. Heavy data consumption is costly for them. On the flip side, smartphone users, who are typically required to buy pricey monthly data plans, are their most lucrative customers.

The ideal customer is someone with a smartphone they use sparingly.

That reality could eventually be reflected in your monthly bill. All four of the major carriers declined to comment about their future pricing strategies, but analysts expect them to start experimenting with new "pay for what you consume" approaches.

For instance, customers could sign up for unlimited Facebook or YouTube, paying their carrier specifically for the individual services they use. Vodafone (VOD) has a similar plan already in effect in Australia.

Another idea is to have customers sign up for data services through the company whose content they're gobbling up.

Amazon and Barnes & Noble both use that arrangement for their Kindle and Nook 3G e-readers: They pay AT&T for wireless service and let customers download content to their devices for free.

"Why can't the same approach work for video?" Rehbehn asks. "I could buy Netflix and get unlimited streaming on my mobile phone. Netflix would take care of the carriage agreement with the carrier, and I don't have to think about how much data I'm using. There need to be new business models."

Netflix (NFLX) is an oft-cited culprit behind the looming spectrum crunch.

For an illustration of just how dramatic its effects can be, check out industry analyst Stephen O'Grady's chart of his own monthly mobile traffic. He averaged 1 GB of data a month until he discovered Netflix's "watch instantly" catalogue. That shot his monthly usage up to 30 GB.

So would Netflix consider subsidizing its customers' streaming movie addictions? A company spokesman would say only that "consumers deserve access to the content they want at a reasonable price."

Coming Friday: Solutions to the spectrum crunch. To top of page

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