For all the hype, the most revolutionary thing about Apple Inc. (AAPL)'s iPhone 5 is probably its compatibility with a wonky technology standard called LTE, or long-term evolution, used in the high-speed 4G wireless networks being rolled out around the world.
Carriers have spent billions so they can offer faster Internet connections and boost their capacity -- and they need to win over consumers to recoup their investment, Bloomberg Businessweek reports in its Sept. 17 issue.
"The iPhone is going to be the first big catalyst for adoption of LTE," said Murali Nemani, a director of marketing at Cisco Systems Inc. (CSCO)
LTE promises to enable smartphones to stream high- definition movies, handle video chats, and store files and photos on cloud services without a hitch. Getting consumers to pay the freight for all those bytes is another story. While LTE networks can handle twice the traffic of most 3G networks, the proliferation of smartphones, tablets and video-streaming and cloud-computing services will drive up demand for mobile data 18-fold through 2016, according to Cisco.
So far, carriers are dealing with the increase by moving away from unlimited plans in favor of usage caps. If they charge too much, customers may stick with cheaper 3G networks or piggyback on free Wi-Fi at work or the local coffee shop. If they price 4G plans too low, there could be traffic overload that would slow or disrupt service.
Data Deluge
Thanks to the iPhone 5, it won't take long to discover how things shake out. Sales of the device are expected to approach 50 million by year-end. There are now only 2 million LTE devices connected to AT&T Inc. (T)'s network, said Walter Piecyk, an analyst at BTIG LLC. Carriers say they're prepared to manage the data deluge, but they still risk a backlash if too many customers blow past their data caps and incur extra fees.
"In a world where data usage is rising and disposable incomes aren't, there's a question as to whether this is all sustainable," said Craig Moffett, an analyst at Sanford C. Bernstein & Co.
The telecom companies are betting the new iPhone will get consumers more fired up about 4G networks. In an August survey by Piper Jaffray Cos., 47 percent of people polled said they don't have any interest in 4G. The version of the iPad that Apple unveiled in March is LTE-compatible, but less than 20 percent of consumers choose that model, said Moffett, and about half of those who do don't turn the service on.
"It's unclear how much LTE is driving user services right now," said Piecyk.
Overage Charges
To get customers to move off unlimited plans, AT&T and Verizon Wireless (VZ) are both pushing shared data options that offer convenience and some protection against accidental overage charges. AT&T offers 1 gigabyte of data starting at $40 a month, plus $45 per smartphone and $10 per tablet. Exceed the data limit and a user incurs a $15 penalty for each extra gigabyte used. Only struggling Sprint Nextel Corp. and T-Mobile USA Inc. still offer unlimited plans.
These shared plans may help carriers lock in customers to their services, but they may not generate the additional revenue required to pay the bill for building out LTE, said Hans Vestberg, chief executive officer of Ericsson AB (ERIC), the world's biggest maker of mobile-phone networks.
The industry has spent a combined $6.75 billion to secure spectrum rights and buy equipment and will need to invest an additional $62 billion by 2016 to roll out 4G coverage globally, said market-research firm Infonetics Research.
Consumer Needs
Carriers will have to get a lot more creative with the packages they sell. Rather than just sell data capacity, they'll need to offer deals attractive to consumers -- for example, an extra $10 a month for unlimited movie streaming.
"We're going to see operators try to reach different types of consumers with different needs," Vestberg said.
It's already happening outside the U.S. Turkey's Turkcell Iletisim Hizmetleri AS (TCELL) offers access to Facebook Inc. (FB)'s social network on a "zero-rated" basis, meaning time spent on that site doesn't count against the consumer's monthly data limit. In Tunisia, wireless carrier Orange, a unit of France Telecom SA (FTE), has run Happy Hour promotions that offer lower rates for off- peak hours.
Diverting Traffic
Fortunately for carriers, LTE networks work in a way that makes such innovation easier to implement. Certain types of traffic -- say, a high-definition Dodgers baseball game -- can be more easily diverted to an available Wi-Fi network. Cisco's Nemani said large carriers are testing technology that will let them send a warning that offers three options when a consumer is approaching a data limit: accept a lower resolution to use fewer bits, agree to watch a 10-second ad, or pay to finish what they're doing.
"The struggling student may go for the lower resolution, while the businessman will pay the 99 cents to watch the rest of the game," Nemani said.
Ultimately, carriers will try to pressure content owners and distributors -- including Apple -- to pay some of the cost for the millions of movies, songs and other data they put on networks. Amazon.com Inc. (AMZN) already bakes the cost of bandwidth to download books into the price of its basic Kindle devices. Books, though, can be compressed into mere megabytes of data. A single high-definition movie along with a few video chats could easily blow through a 5-gigabyte monthly limit.
Executives at Netflix Inc. (NFLX) and online game companies may know that they'll need to subsidize premium offers to guarantee glitch-free delivery as LTE networks get more congested. So far, they're not saying much about it publicly, said Marcus Weldon, Alcatel-Lucent SA's chief technology officer.
"It's been a bit of a staring contest between operators and content owners to see who's willing to come to the table first to have a realistic conversation about the future."
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