O2's revised data pricing model is no surprise

By Thomas Wehmeier

O2’s decision to switch from an unlimited model to one tiered based on usage is of no surprise to those that have studied mobile data usage patterns. Just like AT&T in the US, O2 UK had become the industry poster-child of the capacity crunch era.

What’s been galling for these operators is that a small band of bandwidth hogs have been the cause of lots of the problems – sometimes as few as 5 per cent of users account for as much as 80 per cent of the traffic originated in certain locations of the network. These new tariffs are designed to profitably manage this small percentage of users, whilst also offering attractive pricing for the overwhelming majority of users whose usage is much lower.

There’s a lot of talk about the hunger for data of iPhone users, but our analysis shows that the majority of users will be comfortably served by 500MB of data per month. Indeed, there will be many users that end up paying less with the new tariff structure since they aren’t forced to take the top-end tariff plan.

O2 wants to be known as the “home of the smartphone”, but in trying to achieve that ambition is was always likely to be forced to make two big steps. The first was to ensure its network was ready to cope: pumping £500mn worth of additional investment into its network was that first inevitable step. The other was moving away from its unlimited, and from our perspective unsustainable, smartphone pricing plans.

But whilst consumer appetite for mobile data seems unlimited, one thing that most definitely is not unlimited is spectrum. Spectrum will forever remain a resource both short on supply and high in demand. Although newer technologies are able to use that spectrum more efficiently to supply more bits of data per second through each chunk of spectrum, demand is outstripping that supply. It’s only natural therefore that O2 has felt compelled to switch to a pricing model built upon the principles of distributing a finite resource, rather than one that assumed an unlimited supply.

Operators have not felt brave enough to move away from the flat-rate, largely because it has been so important in fuelling the transparency and confidence that consumers needed to feel secure in using their devices without worry of huge bills down the line. But we always felt that operators would eventually be compelled to bring tiered models to market to account for the challenges outlined above. Differentiating based on usage volume is just the start, as operators dip their toes further into experimenting with new data pricing models we can fully expect to see more customised and personalised pricing plans come to the market.