Verizon and AT&T Are Killing the Internet

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And the telco tollbooths keep on coming.

Engadget is hearing that Verizon Wireless -- the market-leading carrier partnership between Verizon (NYSE: VZ  ) and Vodafone (NYSE: VOD  ) -- is about to follow AT&T's (NYSE: T  ) lead in axing unlimited data plans for new customers.

In a move expected to be announced next week, Verizon will be introducing tiered pricing to its new data-chomping customers.

Tiers? Tiers of a clown, I say.

Anatomy of an AT&T breakdown
When AT&T shut down its cyberspace buffet last month, it argued that it would be saving its customers money. Its new $25 monthly plan for 2 gigabytes of data -- replacing its $30 plan for unlimited online access -- would be more than enough for all but 2% of its wireless customers. The data hog minority was taxing its overextended network, and this was supposed to be a "tax the uber rich" approach to appease the masses.

I wasn't the only cynic that didn't buy what AT&T was dishing out. If AT&T would be charging less, barring some flood of nondata consumers signing up for the slight price reduction, wouldn't it be making less? Where was the revised guidance? Where were the model-tweaking analysts?

Turning smartphones into cab meters isn't going to make wireless carriers less money. However, if I'm right, it won't exactly be making them more money either. If Verizon follows AT&T's lead, you will soon see a smartphone audience that is suddenly gun-shy about surfing the Web the next time someone needs a nearby restaurant recommendation or to dig deep enough to find that last enjoyable Nicolas Cage flick.  

A common pro-AT&T point raised during my anti-AT&T rant last month was that folks weren't leaning on their costly "unlimited" data plans because they were often using their smartphones off AT&T's 3G network in residential and commercial Wi-Fi hot spots. In fact, some of Apple's (Nasdaq: AAPL  ) streaming apps and features won't even work through AT&T's gassed network -- including iPhone 4's ballyhooed video chat platform.

Connect the dots, people. If wireless carriers begin capping usage, isn't it just a matter of time before broadband providers follow suit? Every page loaded on your smartphone -- or computer -- will sound like a ticking clock.

We're about to become Europe, Bunky -- without the culture and bad teeth.

The high price of low tiers
There will be some serious winners and losers if the AT&T and apparently Verizon snowballs begin to roll downhill.

On the upside, load up on Sirius XM Radio (Nasdaq: SIRI  ) . As wireless plans start to tick, Pandora through a smartphone is no longer going to be the free aural alternative to terrestrial radio that it is today.

If today's carriers become tomorrow's residential access providers, cash out on Netflix (Nasdaq: NFLX  ) . The company's digital streaming smorgasbord isn't going to seem as valuable when folks actually have to pay up to stream a mediocre indie flick from 1998.

More importantly, the online user's psychology will be tweaked. Someone may check a baseball score, but no longer refresh automatically to stay abreast of the game. Facebook posts will be orphaned, and rare photo uploads will go unviewed. Venture capital backing for the next wave of promising dot-com upstarts will dry up because the very viral nature of the Internet will catch a cold.

Is this the Internet that you want? Does Silicon Valley not realize what AT&T and Verizon are doing? When the Internet grows up, the last thing it wants to be is a tapas bar for small nibbles before moving on.

Apple has too much at stake. Google (Nasdaq: GOOG  ) has too much at stake. The two have invested too much in their smartphone and fledging mobile advertising platforms to take this lying down. Entire industries will start to crumble as consumers count their bandwidth like dieters pace their caloric consumption.

Apple should punish AT&T for last month's move that changed the dynamics of its premium 3G iPads. If Verizon truly follows suit, it may as well be on the lookout for a third carrier to lead next summer's iPhone 5 revolution.

Time is ticking -- like so many wireless data plans these days.

Can the smartphone market survive the end of unlimited data? Share your thoughts in the comments box below.

Google is a Motley Fool Rule Breakers recommendation. Apple and Netflix are Motley Fool Stock Advisor picks. The Fool owns shares of Google. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz has an iPhone and iPad loaded with free apps and maybe four or five he has paid for. He does not own shares in any of the companies mentioned here, except for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (15) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2010, at 3:27 PM, conifercove wrote:

    AT&T was already the poor alternative for iPhone users and while I had to make the switch to AT&T to get my iPhone, I will admit that my At&T experiences haven't been all that problematic.....yet! I am also a limited user of the AT&T 3G network and do most of my work on WI-FI networks where the service is much faster and less quarky. Losing my unlimited plan may not be a real loss to me but I resent the change that AT&T has foisted on all of us and will look for alternatives when and if I have to make the transition to a limited data plan. Having a Samrt Phone with a Stupid Provider isn't a good thing!!

  • Report this Comment On July 21, 2010, at 3:39 PM, makelvin wrote:

    Prior to ATT's announcement of their limited data plan to replace their unlimited data plan, I was think of getting the iPad 3G; after the announcement, I have no interest in the 3G version of the iPad and just go with the lower cost Wifi version. I wonder how many other people feel the same way.

  • Report this Comment On July 21, 2010, at 3:43 PM, makelvin wrote:

    Another thing that I thought is interesting is with metered data plan, every time we get and ad on the phone over 3G, we are paying the bandwidth for that ad. These web ads as well as Apple's iAds are literally costing the customer's money.

  • Report this Comment On July 21, 2010, at 4:06 PM, kpcsrc wrote:

    Is anyone really surprised? I'll bet that back in the day, electricity was probably not metered and you paid one price to power your 1800's home (after paying to have the wires run!) Does a buffet plan make sense for electricity? or natural gas? or water? What's wrong with paying for what you use and not supporting your energy hog neighbor? I don't hear arguments that the power lines are already in place, the generators already exist, so why charge me for how much I use? Do you think costs don't increase for the provider (AT&T or Verizon or ComEd) as usage increases? At some point, the electric company had to decide to meter their service to allocate costs to those causing additional operational costs. This isn't difficult. I'll pay my own way but don't want to subsidize others.

    And what's in this for AT&T besides getting the cost-causers to pay their own way? It allows them to get more customers into smart phones that otherwise wouldn't choose to pay for a data plan. $15/month for 200M vs $30/month unlimited? For those light users on the fence about getting a smartphone, this equates to a savings of $360 over a 2 year contract and therefore potentially more customers to AT&T.

  • Report this Comment On July 21, 2010, at 5:03 PM, justplanecrazy wrote:

    Alright. The comm czars want to play. Okay. I am of the inferred opinion that Google and Apple have some clout, together, to create, yes create their own ISP service to 'stick-it' to the comm greedy folks in their respective (not respecting) companies.

    Google and Apple, you folks were already working on this one and are way ahead of this curve ball thrown by the comm guys.

  • Report this Comment On July 21, 2010, at 6:27 PM, DrXman wrote:

    I agree with you Rick. In fact, I've written two articles about it:

    This first is backgound on AT&T, Verizon, and others' efforts to control the internet -

    The second is about Google's response -

    Other artlcles on list give more perspective about other media.

  • Report this Comment On July 21, 2010, at 6:41 PM, zumamike wrote:

    It would be nice Rick , if you would exercise the same respect that Fools Rules require from our comments.

    What this about "Europe - without the culture and the bad teeth". pretty stereoyped generalization, no?"

    You may have thought it smart when you wrote it down, but it doesn't look smart when I read it in a professional column.

    And what is "bunky". Some sort of street slang we're all supposed to be familiar with?

    Respectfully . . . . .

  • Report this Comment On July 21, 2010, at 7:48 PM, eldetorre wrote:

    I am of mixed opinion about this. First of all, the internet is largely a government built entity. The comm providers are making loads of cash just for providing the pipes but little to none of the content. Exactly the opposite of broadcast and satellite providers. Actually the exact opposite of everything else in our market economy. Imagine if you had to pay more to shop at Walmart than you spent for actual merchandise? It is a ripoff.

    On the other hand bandwidth isn't free, (though as an engineer and tech professional I can tell you it costs more to purchase and maintain a transmission tower than a network.)

    There are some people who ARE bandwidth hogs. However charges should metered only above a certain threshold and only for continuous usage, not short bursts. Needless to say ads must not be be included in that count at all.

  • Report this Comment On July 21, 2010, at 9:01 PM, FlorisHJ wrote:

    For me the lower cost 3G data plan ($15/month for 250M) plus free access to all ATT hotspots without data limit was actually the thing that pushed me TO the 3G iPad, not away from it.

    Some tiering makes sense - but I agree that nobody, ever, should be made to pay for the bandwidth used to deliver advertising. Which the cable TV guys have succeeded doing for years now - am I the only one still upset about that?

  • Report this Comment On July 21, 2010, at 11:34 PM, RaptorD2 wrote:

    The funny thing about pricing tiers is that consumers are willing to pay more for less. Less advertising, that is. As HBO and Showtime rocked the cable tv market, is it not possible that someone will take internet content, cut out advertising (sorry, advertisers) and charge a premium for "premium" content?

    That is the tier I'd be willing to pay a little more for, and by and large, advertising is the real bandwidth hog in the story.

    If your theory plays out, personally I can get by finding the nearest Starbucks without my smart phone. I'm ancient enough to be able to say, "Been there, done that" and I can do it again. The question is whether our teenagers can handle a world without endless information? And that one remains to be seen because they've never seen such a world.

  • Report this Comment On July 22, 2010, at 2:06 AM, Rowants wrote:

    To FlorisHJ- you're not the only one upset with cable tv. I cancelled cable about 7 years ago. The agent asked why. I told them too many commercials, nothing I wanted to watch, and I despise supporting channels I don't watch or find racist (BET mainly). They said I could get more programming by going up another tier. I told them to cancel me, I can just flip through the 4 broadcast networks and turn the tv off faster that way. The agent thought I was speaking chinese or something. I guess it's like the frog in the pot, keep raising the costs slowly enough, and most people don't notice. COX is doing it to my internet now. The raised the price of my low level service to the point I can double my connection speed for $1 more per month. I feel the water getting warmer.....

  • Report this Comment On July 22, 2010, at 11:31 AM, zirconx wrote:

    kpcsrc - electricity is a bad analogy. The electric company *creates* electricity. When you pay them for it you are paying for the wires to your house and the costs to actually create the electricity.

    AT&T doesn't produce bits. All they provide is a pipe. I understand that it costs them more to let me transfer 5GB than it would 1GB, but not by much.

    2GB is way to low, this article is right people are going to be changing the way they use the internet, which will hamper innovation.

  • Report this Comment On July 22, 2010, at 11:56 AM, eekthecat wrote:

    Why exactly do you think home ISPs are going to follow suit? I mean you didn't actually provide any argument for that, you just asserted that they probably will. I haven't heard anything about ISPs having trouble supplying bandwidth to their customers, and broadband has only been getting faster over the years, so why would there suddenly be a move to limit bandwidth? It's true that that would kill the internet, and I think precisely for that reason, it won't happen, because so many companies would stand to lose, the pressure and backlash from those companies on the ISPs would be enormous.

  • Report this Comment On July 22, 2010, at 2:27 PM, rufianno wrote:

    The internet is pure capitalism. I pay for the things that are worth my money. consumers are not stupid.

  • Report this Comment On July 22, 2010, at 2:52 PM, Pick1es wrote:

    I'm definitely in the 2% bandwidth hogs group. I love getting all my books, movies, music, programs and games, for free. It'll be a sad day when that ends.

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