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June 3, 2010 9:55 AM

How AT&T;'s Wireless iPad/iPhone Caps Might Stifle Innovation

AT&T; just announced that they're changing the way they offer wireless service to devices like the iPad and iPhone. Instead of paying $30 a month for "unlimited" service (really a 5GB cap), now new subscribers will have to pay $15/month for a 200MB cap or $25/month for a 2GB cap. Then there's a $10 fee for every 1GB of additional cap.

While there's been a lot of buzz over what the ramifications of these changes might be, I think most of them are missing the point by focusing on how they'll affect cellphone usage. Put simply: very, very few people will get anywhere near the 2GB cap through today's cellphone usage alone.

Where these caps become potentially troublesome is when you think about devices that go beyond today's cellphones.

The most immediate and obvious one is the iPad. As much as anything else the iPad is intended to be a media consumption device. An average movie takes up about 750MB, so download three movies to your iPad over AT&T;'s 3G network and you're over the cap. Now for every additional movie you download over 3G you'll have to pay a $10 surcharge to buy additional bandwidth from AT&T.; In practical terms, this means that AT&T;'s new cap will put the kibosh on mobile downloading of movies to iPads over 3G.

In all honesty, I'd be surprised if Apple's happy about this turn of events, unless they've brokered a behind-the-scenes deal with AT&T; to not count iTunes traffic against that cap because this could really limit the demand for on-the-go video content.

The next major impact these caps could have is on the upcoming use of iPhones as tethering devices. I know from firsthand experience that a 2GB cap is fine if you're only using it to get online when you're traveling or on the move as I used to have a 3G dongle from Verizon that I tracked my usage on closely. But when I went a few days at home with my cable broadband connection on the fritz, my usage spiked to hundreds of MBs a day because I watch all of my TV online. That much usage would've overwhelmed that 2GB cap within a week. So what this means is that if you watch any serious amount of video online, you won't be able to use your iPhone tether as a primary Internet connection without being hit with a boatload of overage charges.

Now, there is the chance that when iPhone tethering comes online since AT&T;'s planning on charging extra for that service perhaps they'll adjust the caps in kind. But if not, then 3G tethering will only be usable as a complementary rather than a primary way to access to the Internet.

Another impact of these caps is that it will restrict the growth of some user behaviors relative to technological capabilities. What I mean by that is simple. The next iPhone will undoubtedly capture higher quality video and may try to introduce videocalling capabilities. What this means is a lot more data that could be pushed through the network, but only if there's sufficient capacity to do so.

If people start capturing hours of video on their iPhones, they're going to have to upload that over WiFi or transfer it to a computer rather than simply sending it over 3G as they could quickly exceed their 2GB cap without downloading a single file.

If people start getting excited about using videocalling, at some point if there's enough usage and high enough quality video, that usage is going to put them at risk of reaching that cap. So an app that may be free to use when released could start incurring a cost to continue to use if users end up liking it enough to want to do so.

How's that for a screwy business model? Get everyone to really want your product only to make it more expensive the more people use it thereby dissuading that consumption.

Now, I'm not necessarily faulting AT&T; for doing this. Bandwidth has real costs to deliver, and this is likely a step taken to help them drive enough revenue off of this usage to be able to justify additional investments in capacity to keep up with demand.

But in the long run I think it's going to be an unwise decision as I'd rather see a model in place that rewards consumption. For example, maybe they could move to an entirely usage based model where you pay for the GB but with additional usage the price per GB gets cheaper.

Unfortunately, there aren't a lot of easy answers to the question of how do we make sure bandwidth's always getting more capacious and less expensive, but those are the issues a story like this brings up as there's no way that these caps don't stifle innovation for some, even if the additional revenues allow AT&T; to make the experience more reliable for others.

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