Looking at O2's New iPhone 4 Tariffs

O2 announced the tariffs for iPhone 4 today to much criticism. Gone are the unlimited data bundles of old, replaced by what could only be described as meagre allowances, reduced voice minutes, additional charges for MMS messages and higher charges.

O2's Tariff means you'll struggle to take advantage of the new iPhone

The Plans

I thought it would be interesting to compare the current plan I’m on to an equivalent plan with O2 at the rates they announced today.  You can see the full list of tariffs here.

Whilst O2 has given unlimited SMS messages, they’ve removed the unlimited data bundle, removed MMS messages from the SMS bundle and halved the number of inclusive minutes.  No matter which way you spin it, it’s a massive step backwards for O2 who have traditionally had very competitive tariffs.

The Justification

O2 clearly understood that this would not be a popular move and have been on the defensive since the announcement.  The official O2 twitter account followed the announcement with links to a blog post by O2 CEO Ronan Dunne and a press release detailing the changes as well as increasingly defensive replies to angry customers.

I want to look at the Ronan Dunne post in a little bit of detail, because it provides some insights into O2’s reasoning, flawed reasoning, behind these changes.  In that post, they roll out a few numbers in an attempt to justify the change to data allowances.  They claim that the amount of data passing through their network is doubling every four months (“At O2, we’re seeing a doubling of data traffic on our networks every four months”).  That 97% of their users use less than the 500MB lowest inclusive allowance (“The vast majority of our users will be completely unaffected by the changes – 97% of our smartphone customers currently use less than 500MB of data every month”) and that 0.1% of their users are the ones who are using significantly more (“Nearly a third of our data traffic is accounted for by just 0.1% of our customer base, for example”).

So to be clear, 0.1% of their users are the ones abusing the unlimited data, yet based on current usage, 3% of users will have to pay more for data.  But that’s not the whole story.  In the comments on the blog post an O2 representative makes the following statement:

the average customer uses 200MB per month – by applying these limits across everyone they are fair and transparent.

Now we have some figures to play around with, we can attempt to work out how many people will actually be disadvantaged by these changes.

O2 say that data usage is doubling every four months.  Whilst it’s difficult to get hold of current and past subscriber numbers for O2, I think it’s safe to say that their user base isn’t doubling every four months.  That means the average data use per subscriber is increasing.  Now I doubt that the average data use is doubling every four months (a figure which would be in line with the networks overall data usage increase rate), so let’s say that the average data consumption per user doubles every  6 months, 50% slower than the overall network usage growth.  This means that your average user, who is currently using 200MB will be using 400MB in six months, 800MB in 12 months.  Within 12 months they will be comfortably over O2’s new data cap, and this is an average customer who would be only part way through either an 18 or 24 month contract.  This could leave many users in a difficult situation, having to either curtail their usage or pay more.

This speculation is fairly arbitrary.  The unknown variable is whether mobile data usage will continue to grow at the same pace.  If I were a betting man, which I am, I would bet the house on it growing faster as more capable handsets such as the iPhone 4 and HTC HDs come to the UK market.

What Doesn’t Add Up?

There’s a telling sentence in Ronan Dunne’s blog post:

So while data consumption is growing at enormous rates, our revenues are largely flat – a far from ideal situation for any business, least of all one growing as fast as ours.

So is the real problem O2 being unable to monetise mobile data use?  That’s surely part of the problem, especially with Apple’s iPhone which gives mobile operators far less control than the average handset (many other phones have custom software, custom settings, default homepages etc loaded on them, the iPhone does not), but there’s another problem.  O2, and they aren’t unique in this regard, failed to predict just how popular mobile data would be.  Again from Ronan Dunne:

When the mobile industry first heard the word “smartphone”, few of us realised how smart these devices would eventually turn out to be. Today, though, their extraordinary power is visible to anyone. They have literally changed our world, in ways that the first smartphone creators could barely have imagined; they entertain, help us navigate around unfamiliar cities or countries and keep us in touch with each other in myriad ways. For tens of millions of people around the world, it’s hard to imagine life without one.

To make all this happen, of course, we need data. And that in turn means that we are becoming increasingly reliant on data networks that were originally conceived with far dumber devices in mind. Thanks largely to smartphones, those networks are under greater pressure every day – one streamed YouTube video has the same effect on the network as half a million text messages sent simultaneously, the equivalent of everybody in Newcastle sending a text at once.

Emphasis mine.

They designed their mobile data networks for the phones that existed at the time, rather than the phones that were just around the corner.  Because of this massive oversight, the customer is having to pay, and pay big.

In the table earlier in this post I put the years in which these tariffs were offered to add a bit of context.  Context that shows haw far backwards O2 have gone in three years.

The changes to the tariff, specifically the data changes represent one of two things.  Either it’s a cash grab on O2’s part or it’s a stop gap.  The problem with the first is that they will lose subscribers, the problem with the second is that this issue is only going to get worse.  Data usage will increase, average consumers will consume more and demand more, whilst expecting to pay less.

And The Rest?

As I mentioned at the top of this post, O2 have been firefighting the negative comments all day.  Yet they have completely dodged the questions that ask why the voice allowance has been halved.  All the talk of fairness and transparency is completely lost when they also pull a stunt like this.  It also undermines their claims that this is a data issue caused by Smart Phones.

We’ve also managed to pick up a few more little bits of information regarding the changes, which I’ve listed below:

  • When you go over your allowance, you won’t be cut off.  Instead your speed will be capped, gradually decreasing.  No specifics have been given.
  • O2 will text you when you are approaching your limit, no doubt trying to sell you a bolt-on for more data.  I don’t want my phone provider texting me trying to sell me something they should (and used to) provide in the first place thankyouverymuch.  This is borderline spam in my book.
  • MMS no longer counting as 3 SMS messages from your SMS allowance has apparently been in place for some time.  I’m sure that 600 messages was plenty for most people, and they would have rather kept their MMS deal.  I know I would.
  • If you don’t use your entire data allowance in one month, the amount you didn’t use won’t roll over to the next.

Public Perception

The biggest problem O2 now have is one of public perception.  Looking at the tariff comparison it looks as if O2 are going backwards.  They don’t look like a network that’s progressing and improving, despite claims of million pound daily investments.  They look like a network that’s struggling to keep up with demand.  A network that got their future usage predictions completely and horribly wrong.

Me? Well I’ve used 955MB this months and I’ll probably be going on to Three, who have far better 3G coverage than any other network according to Ofcom (PDF).  I can no longer call myself a loyal and long term O2 customer.  This was my reaction when I first saw the new tariffs:

Great. Apple introduce multi-tasking so you can stream music and @o2 counters it with data plans from the 1990s.

Note that the new O2 tariffs are for all Smart Phones, not just the iPhone 4.  However, they come into force the day the new iPhone launches, so I’ll let you put two and two together.