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VoIP over Mobile Broadband a Smart Move for AT&T

AT&T, under pressure from the FCC to explain precisely why the iPhone can’t place VoIP calls over 3G when its other smartphones can, reversed its previous policy. Apple will be updating its App Store rules to let developers run VoIP connections over any available network medium, not just Wi-Fi.

This change is a big one for AT&T, which I’m sure wrestled with lawyers, spreadsheets, and customer surveys before implementing the move – a move which could have been forced on the firm by the government, potentially along with other rules and restrictions that AT&T might have wanted to avoid.

Despite the potential loss of revenue, the change should be a good one for AT&T. Why? Because it’s yet another tool to improve customer loyalty for a company whose 3G network has delivered sub-par performance.

I’ve been generally satisfied with AT&T’s service, but I don’t live in areas of weak coverage, and I don’t travel extensively. However, on two recent trips across rural and highway portions of Oregon and Washington, AT&T’s network was generally satisfactory, no matter whether I was on 2.5G (EDGE) or 3G.

In fact, AT&T turning on 850 MHz base stations in Seattle has distinctly improved my iPhone voice and data experience, especially in my house. Before adding 850 MHz service, made available after AT&T disabled a first-generation network in 2008, AT&T was limited to 1900 MHz. The lower 850 MHz frequencies travel further at the same power level, and penetrate buildings and homes far better.

The move to allow VoIP over cell data means that future versions of Skype, Vonage Mobile, and other programs will likely allow iPhone users to drop to cellular subscription plans with fewer minutes, relying instead on VoIP apps for domestic calling. (See “Vonage Releases Apps for Non-Domestic Calling,” 2009-10-06.)

(I’m ignoring here the issue of iPhone subscribers outside the United States, whose carriers have all kinds of different policies and charges. A commenter on this article noted, for instance, that Rogers in Canada doesn’t offer nationwide roaming, charging for long-distance calls within the country; Rogers also caps iPhone usage at 5 GB in its heaviest usage plan, unlike AT&T’s unlimited smartphone service. And there’s also the issue of using an AT&T-connected iPhone outside the United States. AT&T has international data roaming plans, and it might wind up being cheaper to use VoIP over a data plan than to pay the crazily high call charges when roaming.)

But if you look at subscription trends, this change in policy isn’t as disruptive as it looks. I have no idea how many people pay AT&T’s wireless international rates; perhaps billions of dollars are spent. However, the per-minute calling costs are so high without a special plan that I have to believe that most people are motivated to use calling cards or other solutions, which have included VoIP over Wi-Fi with Skype on the iPhone. (AT&T does have calling plans for calling and roaming outside the United States, but these plans are still ludicrous even on the cheap end. For $4.99 per month, AT&T will let you call either Canada or Mexico
from the United States at the rate of 9 cents per minute, versus 2 cents per minute with Skype or Vonage Mobile.)

AT&T’s plainest domestic plan with 450 included minutes already offers rollover minutes, huge quantities of evening and weekend minutes (5,000 per month), and free mobile-to-mobile calling.

For new iPhone customers, AT&T gets a minimum of $70 per month for a single line, or $110 per month for a family plan of two lines. (The breakdown is $40 for voice, $30 for data; text messaging is extra, paid per message or with a plan starting at $5 per month. Multi-line plans start at $40 for voice, $10 for an extra line, and $60 for two data plans, with text messaging on top of that.)

But AT&T’s voice plan income maxes out at $100 per month, where the company offers unlimited voice service. That’s likely the biggest competition for the firm: the $60 difference between a limited-minutes $40 plan and unlimited $100 plan.

However, we must never ignore the cost of customer churn and acquisition (and re-acquisition), which is exceptionally high in the cellular industry. A company can rack up hundreds of dollars per customer between advertising, new phone subsidies ($200 or more per iPhone), and company stores or commissions to independent stores. T-Mobile once offered me the cash and service equivalent of $500 to switch from AT&T at a walk-up kiosk when I was returning equipment I had purchased for testing.

With the pro-rated cancellation fees now offered by AT&T and other carriers – AT&T drops the $175 fee by $5 per month over the contract period – customers now have far less financial motivation to stay with a carrier after a year or so.

If AT&T ups its iPhone customer retention rate by a measurable amount, the company likely saves more than the losses from carrying VoIP traffic over their cellular data network, and achieves better economies of scale, too.

Also remember that time spent talking via a VoIP app over Wi-Fi doesn’t further load AT&T’s cellular network, and when a VoIP call passes over 3G it consumes roughly the same bandwidth that AT&T would use for a voice call. Both Wi-Fi- and 3G-based VoIP calling bring with them none of the responsibility for call completion, billing, fee settlement, or customer support that’s present with normal cellular calls.

In short, AT&T may actually benefit quite a bit from this change in policy, which may be why it didn’t opt for prolonged legal action.

The change also helps builds an audience for AT&T’s next service, LTE (fourth-generation or 4G mobile broadband), in which voice will be much likely more like a service embedded inside a high-bandwidth data offering. Happy iPhone 3GS customers may easily transition into being happy iPhone 4G customers.

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