Unlimited data, R.I.P.

June 4, 2010: 12:24 PM ET

Why AT&T's reversal to metered data usage will move Internet innovation in the wrong direction.

Starting next week, new AT&T subscribers will no longer have the option to pay a flat fee for unlimited data, as they have since the dawn of our smartphone economy. Many users may end up saving money under the new pricing plan, but the demise of unlimited data will likely have a more negative impact on how people use their devices, how start-ups develop new applications, and the advancement of the Internet itself.

When the iPhone launched in 2007, AT&T (T) charged $20 a month for unlimited data, $10 less than the flat fee iPhone 3G/3GS and iPad users paid, unless the latter group opted into a lower data plan for $14.99. Current unlimited data users, as well as iPad 3G buyers who order by June 6, will be "grandfathered" in -- those users will not see their plans change until their contract is up for renewal. New subscribers will encounter two new options: $15 a month for 200 MB, with $15 for every extra 200 MB, and $25 a month for 2 GB, with a rate of $10 for every extra gigabyte.

The carrier, which is the first major one to make this move, says the goal of its new strategy is to give subscribers more choice.

According to AT&T's own research, 65% of its users download 200 MB or less, and 98% use 2 GB or less each month. If that's the case, users who keep close tabs on their data usage could stand to save as much as $15 a month.

Of course, AT&T also stands to gain -- it is a business and not a philanthropic cause, after all. It's no secret the network has experienced huge growing pains as it tries to keep up with the data usage of its 20 million-plus iPhone and iPad users.

Last March, CEO Randall Stephenson anticipated the shift to what he termed "variable pricing" schemes. Verizon CTO Anthony Melone later agreed the days of "all-you-can-eat" data were numbered. Presumably, other carriers, Verizon (VZ) included, are taking a wait-and-see approach and may follow suit if the new price plans catch on.

Backwards progress

Steve Jobs himself has acknowledged AT&T's carrier problems on several occasions and promised service improvements were coming, but this apparent workaround may not be what he had in mind. And while a substantial number of users should save in the short-to-medium term, at what cost?

BuzzMachine writer Jeff Jarvis argues the trade-off in this area could be steep and harmful to overall Internet growth. If the Internet is all about unlimited expansion and unexplored possibilities, getting rid of unlimited data returns mobile users to the mid-1990s -- the Internet's veritable stone age -- when general usage was metered, or charged by the minute.

Today's 1.5 billion-plus global Internet users are accustomed to blowing through gigabytes of emails, videos and other files without penalty. But the notion of unlimited data, popularized by then-head of AT&T World Net Tom Evslin, was once both revolutionary and controversial. Evslin admitted in a 2005 blog post that skeptics believed the particular strategy was destined to fail or worse, "ruin" the Internet -- a quaint, if erroneous notion in hindsight.

But it's no coincidence that the web, and subsequently innovation, exploded around the same time. Removing the persistent pressure to monitor data usage encouraged development of more applications and more businesses.

Are variable pricing plans bad for business?

In contrast, AT&T is taking the opposite approach with mobile, applying more pressure on subscribers by returning to a metered system. Pundits like Jarvis believe these new variable pricing schemes will only make users nervous, forcing them to question whether every web site visited, every application and update downloaded, and every video viewed is pushing them over the limit.

AT&T claims that 2 GB covers 1 million one-page email messages (sans attachments) or 1,000 one-minute streaming video clips. That may sound impressive, but it's the real-world equivalent of 6 to 12 hours of Netflix movie streams, CNNMoney's David Goldman reported -- and with significantly downgraded picture quality at that.

And Apple's promise -- that the iPad 3G would be the ultimate media consumption device -- has been effectively broken by the new price plans. As smartphone and tablet technology advances, these caps will continually be an issue.

Developers will have to be more cognizant of these newly-minted data caps. Akshay Kothari and Ankit Gupta, developers of the Pulse News Reader, currently the second-most popular paid iPad app on iTunes, admitted the new data plans will force mobile developers to cut down on the size of their apps in an effort to streamline and optimize.

Their RSS feed reader currently weighs in at 500 KB, a mere drop in the bucket compared to something like Wired magazine's app, which weighs in at a hefty 544 megabytes. But Kothari and Gupta say they'll be working towards decreasing the size of Pulse in future updates.

In the end, the caps will make people use their devices less. "On the face of things, that's just a bad business model because less usage and less development means less business for well, everybody," Jarvis says.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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