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AT&T Wrestles With iPhone Usage Fees

AT&T said the company needs to "educate the customer" on data usage, particularly in New York and San Francisco, where just three percent of smartphone users are consuming up to 40 percent of the network capacity, according to Ralph de la Vega, CEO of AT&T Mobility and Consumer Markets.

Speaking at a UBS investors conference in New York this week, de la Vega said the most high-bandwidth activity is video and audio streaming. This includes applications on Apple's (NASDAQ: APPL) iPhone that provide nonstop Internet radio.

"We need to educate the customer ... We've got to get them to understand what represents a megabyte of data," said at the conference, according to a report by the Associate Press. "We're improving all our systems to let consumers get real-time information on their data usage."

AT&T (NYSE: T) and Verizon Wireless (NYSE: VZ) are locked in a heated marketing battle over which carrier has the better 3G performance. In the AP story, de la Vega said tests showed AT&T's network to be faster than competitors, but he also noted major problems with connectivity are centered in New York and San Francisco which have a high density of smartphone users.

De la Vega also defended AT&T's network performance, claiming that testing showed AT&T's 3G network is faster than that of competitors and that major problems are concentrated in New York and San Francisco, which are packed with smartphone users.

De la Vega didn't specifically say higher rates are in store, but he did say the company will give high-bandwidth users incentives to "reduce or modify their usage," which would seem to indicate a price increase for some may be in the offing.

A question of survival?

The issue is about more than just AT&T's revenue stream, it's a matter of survival, according to research firm iSuppli.

"All members of the wireless supply chain -- from operators, to cell phone makers, to content developers and aggregators -- are vying for the same thing: ownership of the wireless subscriber," said Jagdish Rebello, senior director and principal analyst for iSuppli, in a release.

"With growth in voice service revenue having evaporated, the only opportunity for expansion in the wireless business is in data. For wireless operators, data revenue growth is essential to fund investments in new network technology that are required to attract and retain subscribers."

While the iPhone is a runaway hit, Rebello said AT&T is not really benefiting from the burgeoning use of iTunes and application downloads.

"Apple has usurped AT&T's ownership of these critical users," Rebello wrote. "Because of this, Apple has generated major revenue and margin growth based on its iPhone business -- while AT&T largely has been unable to cash in on the growth in data services beyond monthly access fees. This is making it difficult for AT&T to make the required investments to upgrade its network to support greater bandwidth. The net result is deterioration in the mobile broadband user experience."

And it's not only AT&T that should be worried, according to Rebello.

"The fight over which companies will control revenue generated by applications and data services will represent the key battleground in the global wireless business during the next two years," he said.

Rebello noted that like Apple, companies including Google, Nokia, RIM and Microsoft are trying to muscle in on the wireless carriers for a share of the lucrative and growing mobile premium content, service and application markets.

"Regardless of who wins, this battle will alter the balance of power in the mobile value chain," he said.

Global revenue for wireless data services, excluding messaging, is projected to grow by 26.2 percent to $87.7 billion in 2009, according to iSuppli. This follows 57.1 percent growth in 2007 and a 60.3 percent expansion in 2008 for total data revenue. iSuppli is forecasting that total data revenues of carriers worldwide, excluding messaging, will grow to approximately $188 billion by 2013.