Sprint Nextel's unlimited data plan will eventually face its limits.
As the only carrier that can now boast of offering an all-you-can-eat buffet of data with no strings attached, Sprint has become a haven for bandwidth hogs. It's a boon to customer growth and gives the company a competitive edge beyond pricing or network quality. Unfortunately, it's also tough for the company to reverse its position.
The growth also comes at a cost. The more heavy users jump on the Sprint ship, the heavier the burden the carrier will start to feel. The company has employed tricks to manage the traffic, but they can only last so long. Which leads to the inevitable question: how long before the fully unlimited plan goes extinct?
"There's a tipping point," said Shiv Bakhshi, an industry analyst for Mobile Perspectives. "I wouldn't be surprised with their aggressive offers and new devices that attract usage. It's just a question of time."
The data pressures have already gotten to the other players. Earlier this month, Verizon Wireless switched to a usage-based pricing model, following a move made by AT&T last year. Even as Sprint touts its fully unlimited plans, it said last week that it plans to place limits on its prepaid arm, Virgin Mobile, that would slow down the connection of any user who exceeds 2.5 gigabytes of data a month, a practice known as throttling.
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Analysts believe Virgin's move to throttling will serve as a testbed for Sprint's eventual decision to place limits on its service. They believe Sprint will closely scrutinize the consumer reaction from the move.
Sprint Chief Executive Dan Hesse, however, said Virgin and Sprint's respective situations are radically different.
"Think of it as two different solar systems," Hesse told reporters during a roundtable discussion yesterday.
Still, Sprint will eventually have to do something similar, or begin implementing a usage-based system similar to AT&T and Verizon, analysts say.
"The reality will hit Sprint as well," Bakhshi said. "Whether it's six months or 12 months, it depends on their tolerance for pain."
Roger Entner, an analyst for Recon Analytics, said he believes Sprint will hit that point in five to six quarters, when enough heavy users begin to make their presence felt.
Hesse said in September that Sprint he wouldn't rule out some form of data limit.
"If I have an all-you-can-eat buffet, and the entire New England Patriots football team shows up for dinner, it's going to run me out of business," he said at the time.
Hesse wasn't any clearer yesterday.
"It could be an issue," he acknowledged. He said the company looks at the traffic load every few months, and are looking to ease the burden by using other wireless sources such as Wi-Fi. "Nothing's a guarantee that it's forever."
An image to protect
But a switch isn't so easy for Sprint. The company has spent the past months touting its fully unlimited plans. Hesse has appeared on TV spots dismissing terms such as throttling, and recent commercials even show illustrated graphics that explain how throttling works.
As I've written, Verizon's move to a usage-based model is a godsend for Sprint. As the smaller carrier, it needs another edge beyond price. The company is expected to continue to tout that claim over the next few months as it looks to goose customer growth. In addition, the flat-rate pricing is easy to understand, it reduces customer care costs and increases satisfaction.
Hesse said yesterday that he sees its truly unlimited stance as a unique position in the market.
"Sprint would have the hardest time to move to unlimited because simplicity is a key differentiator for them and they are investing heavily into that," Entner said.
So moving to any kind of limit would present a huge gamble to its image. It's particularly risky when you consider how hard Sprint and Hesse has worked to revive its reputation, which had been one of poor service and coverage. Over the past few years, the company showed the greatest improvement in service and reputation, and now stands equal among its peers.
But all of that progress could disappear if Sprint handles the transition poorly.
"A learning curve"
The carriers' original switch to unlimited data plans several years ago was seen as a boon to the industry. Previously, customers had to count the bytes that loaded via crude mobile sites, and unlimited put their minds at ease. For the carriers, the traffic wasn't taxing because the basic sites and e-mails didn't take up much bandwidth.
But that changed with the iPhone, followed by a wave of Android smartphones all hogging bandwidth with their ability to stream music and video, upload photos, and exchange e-mails with large attachments. Newer ones are able to act as a Wi-Fi hotspot, sucking up even more data through other connected gadgets.
"It's been a learning curve for the carriers," said Michael Grossi, a consultant for Altman Vilandrie. "Carriers need to tightly manage their network economics now."
The excessive use comes from only a small fraction of customers. Verizon Wireless spokeswoman Brenda Raney said 95 percent of its customers use 2 GBs of data or less. Virgin Mobile said less than 3 percent of its customers go over the soon-to-be established 2.5GB threshold.
AT&T was the first to take action and was conscious of the potential scrutiny. Rather than just take away its unlimited plan, it offered two price plans, including a cheaper one with a much lower limit designed to lure new smartphone users. Verizon doesn't offer such a plan.
"The issue is nobody really wants the heaviest users because they are money losers," Entner said. "You take them because the other profitable customers are coming with them."
With Sprint still looking to recover from years of customer defection, they can afford to take on a few more bandwidth hogs. But the company hasn't spent as much on its network infrastructure as its rivals and could hit its ceiling in a few quarters.
When that happens, Sprint will have to start making some hard decisions.