Photo: Neil Crosby Some rights reserved

Last week I took a look at data options for users in the fast-growing prepaid segment of the mobile market and found them to be uniformly miserable, thanks to a combination of price gouging and arbitrary restrictions on handset use. This got me to wondering what exactly was a fair price for mobile data, especially on prepaid plans.

In the postpaid world the U.S. operators offer data plans for  laptop connect cards that provide 5GB for $60/month.  They also have “unlimited” plans for handset users that cost about $15/month for feature phone users and $30/month for “smartphone” users.  The cheaper data plans for phones all have a 5GB/month “fair use cap” and a prohibition on tethering and often on 3rd party streaming media too.  The operators have determined that they can make a satisfactory profit selling 5 GB for $60.  On the phone plans, they know that the vast majority of users will consume far less than 5 GB in a month, especially on a dumb phone. So they call it “unlimited” but expect the average usage will be less than  1.25 or at most 2.5 GB. It’s a lot easier to sell “unlimited” plans than 1.25 GB plans. The operators have the means to  detect abnormal usage patterns which they, rightly or wrongly, associate with tethering and other TOS violations. They can and do warn, charge for and even cut off what they deem to be abuse on unlimited data packages. Most users get the data they need at a reasonable price, the operators make money and everyone is happy.

Abuse on prepaid is harder to control.  Users are essentially anonymous.  If  an operator detects someone obviously tethering and/or using so much data as to be unprofitable they can cut that user’s data access off. But there is nothing to stop the user from starting all over again with a new line of service and a  different SIM or phone.

In the wide open world of prepaid metered data plans make more sense.  But what is a reasonable price?  It’s safe to assume the operators are making money on laptop connect plans which offer 5 GB (5120 MB) for $60/month or $0.0117 per MB.  That’s probably too low a price for prepaid for couple of reasons.  For one  not all connect card users consume the full 5GB/month. There are also economies of scale associated with managing accounts that consume data in $60 chunks compared with ones that are billed in pennies at a time.  So lets be generous and multiply .0117 by four and round it up to the nearest penny, which comes  to $0.05/MB.  The fair price for mobile data is  5 cents per MB.  Incidentally that’s  also the overage rate on Verizon’s 5GB connect card plan.

Based on 5 cents per MB  all prepaid data is wildly overpriced. AT&T’s 100 MB prepaid data package that costs $20 represents a 4X overcharge. The 1MB for $5 AT&T package is overpriced by a factor of 100 and $0.01/KB ad hoc rate represents a 2000% overcharge.

In reality the carriers are hurting themselves as much as they are the users with these ripoff prices which discourage adoption of  profitable data services by a large group of price conscious consumers.

I’m not an expert on telecommunication law, but  it appears obvious  that U.S. operators are using radio spectrum, a public resource, in a manner that is detrimental to the public good. I wonder if the FCC has the power to regulate this sort of predatory pricing and the political fortitude to exercise it?