What Data Caps Mean for the Mobile Revolution

Just as the possibilities of cloud computing and streaming media began to make smartphones exciting, Verizon (NYSE: VZ  ) killed its unlimited mobile data plan. This is bad news for consumers hoping to leave their computers behind, and for companies seeking to profit from the growing mobile market. However, there are fewer losers here than you might think.

Customers: annoyed, but unaffected for now
If our data consumption rates remain the same, then the capped plans won't affect most customers. The vast majority of smartphone owners use far less than 2GB a month -- the average user only eats up 435 MB -- while the most data-hungry owners use less than 5GB. As it stands now, the 10GB plan appears unnecessary for all but a small niche of users.

Of course, it's naive to assume that smartphone data usage won't grow. Even so, the average user's consumption would have to quadruple before it outgrew Verizon's cheapest data package.

The cloud and streaming media: a mixed bag
The data caps shouldn't make much of a difference for services such as Microsoft's (Nasdaq: MSFT  ) Office365 and Google Apps. Loading and editing a document on the go doesn't eat up too much data (I've been stuffing my Dropbox folder for two years now, and I've just cracked 20 MB), nor does checking email. Video chat features might eat up a lot of data, but they're better suited for desk work than cruising around town.

I also don't think the data caps will have too much of an effect on streaming video services such as Netflix (Nasdaq: NFLX  ) , Hulu, and Time Warner's (NYSE: TWX  ) HBOGo, either. First, we're not watching many videos on our smartphones. According to a recent study by Sandvine, the iPhone accounted for just 0.54% of Netflix's traffic. Second, I would be willing to bet that most people who watch a lot of streaming video on their phones do so in places like airports or coffee shops, where they can pick up a Wi-Fi signal for a faster connection.

On the other hand, the death of unlimited data could slow the growth of streaming audio services like Google Music, Amazon's Cloud Player, and Pandora (NYSE: P  ) . Although you can use these services at your desk -- Cloud Player comes in handy at work -- they have the most potential as radio alternatives for your Wi-Fi-free car. However, a person with a 2GB data plan and my not-quite-hellish two-to-three-hour round-trip commute would go over the limit in about two weeks.

In this light, Apple's (Nasdaq: AAPL  ) decision not to offer streaming as a part of iCloud makes a lot more sense. Unless some unfortunate iPhone user downloads his entire music collection through his data plan, the data caps shouldn't be a problem.

The data caps could also help Sirius XM (Nasdaq: SIRI  ) . Many investors -- including me -- considered streaming audio a disruptive technology that might potentially render satellite radio obsolete. That's still a possibility, but probably not without less pricey data plans.

Foolish takeaway
In the long run, I don't see capped data plans doing much harm to the bigger players I've mentioned here. However, I do think the plans will probably toss another monkeywrench into Pandora's plan to acquire more listeners and pray for profitability.

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Fool contributor Patrick Martin owns shares of Netflix. You can follow him on twitter @TMFpcmart03. The Motley Fool owns shares of Microsoft, Apple, and Google. Motley Fool newsletter services have recommended buying shares of AT&T, Apple, Amazon.com, Netflix, Microsoft, and Google; creating a diagonal call position in Microsoft and a bull call spread position in Apple; and buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 13, 2011, at 6:09 PM, jalexander7243 wrote:

    It looks like audio streaming is going to run into more data cap hindrances as more apps and services are created that utilize streaming and more “Cloud” services are brought to market. If satellite chips are introduced into smart phones and tablets, as has been written about around patents, then Sirius will hold a large, competitive advantage.

    A similar area that I would be curious to hear other feedback on is with broadband caps. Canada has very restrictive caps that make video and audio streaming very expensive. But even here in the States, broadband companies are instituting caps as well (AT&T, Comcast, Time Warner)… much more generous, however (about 150GBs). But will that be enough in the future for all the video, audio, and app streaming?

    http://money.cnn.com/2011/05/03/technology/att_broadband_cap...

    Similarly as the smart phone market, many companies are pushing their services to the cloud (ie – iCloud). Does anyone know the average size of a Blu-Ray movie that streams through Netflix’s service? The average disc has 18-20 GBs with some much larger, but this obviously includes all of the “extras.” Even separating out the movie itself can still eat up a lot of one’s broadband cap if a household is streaming 2+ movies each week. Add up the rest of the streaming / downloading throughout the month that continues to increase each year and those who do commonly stream audio won’t have much left in their cap.

    Thoughts?

  • Report this Comment On July 13, 2011, at 6:22 PM, waterinfo wrote:

    I have posted the information below several times, especially with regard to the recent IPO of Pandora. The essence of considering Internet radio as a competitor to SiriusXM, is the underlying assumption that a listener is not paying for his incremental use of the radio spectrum delivering his personal programming.

    Until now, only AT&T was charging high usage accounts for excessive usage. Now Verizon has announced similar usage based service for large volume users. Now, the two largest wireless companies have both moved to pricing in the order of $10 per Gigabyte for large users.

    How much capacity will a radio listener consume over the Internet. Full CD quality transmission requires 40 KiloBytes per second, which is 144 Megabytes per hour, or 0.144 Gigabytes. At $10 per Gigabyte, full, CD rate transmission would cost $1.44 per hour.

    But audio and video transmission over the Internet utilizes compression. Compression always compromises quality, and compression of more than ten to one would destroy the listening quality of an audio stream. (It might be useful for phone calls, but not for high fidelity music). At ten to one compression, the volume sensitive pricing represents a cost of $0.14 per hour to listen to the radio. More realistically, the actual cost would likely be between $0.25 and $0.75 per hour. Even at $0.25 per hour, just two hours a day of usage, would cost more than the unlimited monthly use of the SiriusXM service. This doesn't even begin to consider the overall coverage, quality, and variety of programming available on SiriusXM that is not available on any Internet based service.

    Pandora, like many similar services, is doomed to failure because it has no control of its delivery mechanism, and in fact the delivery of its product will eventually cost much more than the product itself. Its business model is vague at best, and its business is not unique and it is easy to duplicate and imitate by competitors.

    A regular radio station has an FCC licensed channel, and has no further cost for delivery of its programming (beyond maintenance and electricity for its transmitter).

    SiriusXM has FCC licensed channels, government approved orbital slots, and has paid for satellites to provide the delivery mechanism for its programming. The costs, mostly sunk costs at this point, are known, predictable, and are essentially independent of the number of users. The company has complete control of its own delivery mechanism.

    Internet radio, as a separate service, like Pandora, is totally, TOTALLY, TOTALLY dependent upon a third party for delivery of its product. The Pandora customer must ALSO be a customer of a wireless internet service, with its own profit motive, and the Pandora customer is paying for that service many times more than the SiriusXM monthly cost.

    Moreover, the cost of the delivery mechanism, being far more than the cost of the content (which allegedly is free), is very likely to become totally volume dependent over the next year or two, especially for high volume users like radio listeners. This will result in an effective hourly cost to listen to "free radio" of somewhere, according to my calculations between 14 cents and 75 cents per hour, possibly much more in some scenarios. Home much money would Domino's make if the delivery cost of its $10 pizza were $100. In addition, the delivery mechanism for Internet radio from a fidelity, quality, and coverage perspective is far inferior to direct broadcast satellite.

    Pandora and its brethren are the dot.com bust companies of our current era. There were hundreds of such companies founded in the mid-to-late 1990's that raised millions and billions in IPO capital and promptly flushed it down the toilet. Pandora will join them.

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