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Are You Paying Too Much for Smartphone Data?

By Daniel B. Kline – Jan 20, 2016 at 2:54PM

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Overages and pre-buying more than you need is costing a lot.

In the early days of having what was then called a cell phone, it was all about how many minutes your plan had.

Go over your allotment -- which was not easy to track -- and you faced overage fees that could pile up quickly. As time passed, companies began to increase minutes in the plans and exempt weekends and evenings, before eventually nearly every carrier made unlimited minutes part of their basic offering. The same thing happened with text messages -- they used to be a limited resource where overuse resulted in overage charges, but now they are unlimited in most cases.

Now, people carry around virtual computers on which they browse the Internet, listen to streaming music, and even watch video. This change in consumption has led to the two biggest carriers, AT&T (T -1.22%) and Verizon (VZ -1.73%), shifting their overage efforts into data.

Essentially, phone calls and text messages are unlimited because they are no longer the prime reason people use their smartphones. Now, it's all about the data plan, and consumers -- at least those using AT&T and Verizon -- are in a lose-lose situation.

Why is it lose-lose?
It's important to note that overages -- which are penalty fees consumers receive when they go over their data allotment -- are mostly confined to Verizon and AT&T customers. T-Mobile (TMUS -0.35%) does not charge customers when they exceed their data allotment. Instead, the carrier slows down speeds (although it does allow people to pay to add on more data at the original speed). Sprint (S) still has some plans with overages, but it also offers unlimited data plans, and plans that work like T-Mobile's.

For the most part, those options protect Sprint and T-Mobile customers from billing uncertainty and unexpected charges.

But, AT&T and Verizon customers are in a no-win situation because they likely will end up either buying too little data, or too much. If they purchase too little, they incur overages, but if they buy too much, it ends up wasted. AT&T does offer limited data rollover (it rolls over for one month, then is lost), but it's not nearly as generous as T-Mobile's virtually limitless carryover. Verizon does not offer rollover, meaning that any unused data simply disappears at the end of the billing period.

AT&T and Verizon put their users in a place where they can either buy a small plan and risk overages, or simply always pay for more than they use. That's a system that benefits the carriers and penalizes consumers.

How big is the number? 
In 2015, T-Mobile CEO John Legere said in his year-end message that consumers paid $2.5 billion in overages, 95% of which he said was charged by AT&T and Verizon. Overages are a hard number to define because it's debatable as to whether a customer electing to add data on a one-time basis is really paying an overage, but consumers' perception that they are paying up big is clear, according to research from Cowen & Co.

"Nearly one in five cell phone customers reported paying overages during the past six months. But AT&T continued to lead all of its rivals -- 28% of AT&T customers told Cowen & Co. that they were charged for overages, compared to 20% of Verizon customers, 12% of T-Mobile customers and 5% of Sprint customers," wrote CNN Money's David Goldman.

That's an increase from the same survey in October, which showed overages at record levels, according to the news site. And, in addition to these record numbers, countless consumers are also paying for more data than they need in order to avoid billing surprises.

Legere believes over-buying is a bigger problem than overages. Image source: T-Mobile.

"In the second half of 2015, 32% of Verizon customers and 24% of AT&T customers upped the amount of gigabytes they can download each month," CNN Money reported.

Legere addressed the issue in his November 2015 Uncarrier X event, saying  that overages had increased 60% in 2015 over 2014. "They've got you right where they want you," he said. "What do you think the margin is on overages? It's pure. It's total."

But T-Mobile's CEO does not think overages are the biggest problem consumers face. He actually thinks over-buying, which he estimated at $45 billion, is the real issue.

People are paying too much
A big reason AT&T and Verizon get away with charging overages, or forcing people into plans that are bigger than they need, is that many people have very little awareness of how much data they use. All four major carriers make it possible, though not always easy, to monitor data use as it happens. They all also make it easy to see how much you consumed after the fact. 

What none of the carriers can show you is how your usage accelerates as you adopt new technology. Maybe you started streaming podcasts in your car or watching movies on your smartphone. That could dramatically change your monthly data use.

This is a clear case where carriers -- specifically AT&T and Verizon -- are going to charge as much as they can as long as customers put up with it. That leaves it in your hands to either monitor your data and adjust your plan accordingly, or simply switch to T-Mobile or Sprint. 

For AT&T and Verizon, overages are a gift that keep on giving. People sign up based on a certain rate and either pay too much, or exceed their data allotment and pay more. It's a problem you can solve for yourself by either sending the big two a message and leaving, or becoming much more data-aware. Either way, these are fees the American public can and should put an end to.

Daniel Kline has no position in any stocks mentioned. He is a T-Mobile customer who uses a lot of data. The Motley Fool recommends Verizon Communications. 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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