All-you-can-eat 3G may not last

The rollout of 3G (third-generation) mobile data services in the U.S. looks good so far, but the carriers may be painting themselves into a corner.

To get subscribers to buy the high-speed services and start using them, mobile operators are offering some "unlimited" data plans that allow as much streaming, uploading and downloading as the customer wants in the course of the month -- within certain terms of service. Some uses, such as hosting a Web site, typically aren't allowed.

At least one carrier, Verizon Wireless Inc., is looking the other way when users go wild. Verizon has allowed subscribers to use its BroadbandAccess service for capacity-intensive applications such as streaming TV to their notebooks from Slingbox video distribution devices, even though the terms of service forbid this, Executive Vice President and Chief Technical Officer Dick Lynch said at the CTIA Wireless show in April.

However, he warned the fun won't last forever.

"They work very well today in an environment where the networks are admittedly lightly loaded ... and I'm not only talking about mine, I'm talking about everyone's network," Lynch said. "I think you'll find, over time, that the amount of usage that you demand from the network each month will in fact have to ... drive the pricing structure," he said.

Industry analysts say he's right: After service providers achieve the widespread adoption they've been pushing for and there are more users vying for capacity, the carriers may feel pressure to shut down early adopters' freewheeling ways or even end unlimited plans. That would have implications for business users as well as for content-hungry consumers.

Cingular Wireless Inc. spokesman Ritch Blasi acknowledged there are heavy users of the company's emerging BroadbandConnect high-speed service. Cingular's terms of service say customers can use it for Internet browsing, e-mail and corporate intranet access for using enterprise applications. If users violated those terms, Cingular would contact them and discuss the problem, he said. Abuse of the service could become a bigger issue when mainstream users start to adopt it, Blasi said.

"Those are the early adopters of technology, and there's some of those around, but not a lot. Will that be an issue in the future? I guess that might be," Blasi said.

Sprint Nextel Corp. gives subscribers a wide berth, even selling routers that let users share a connection to the company's Sprint PCS Vision service. Sprint believes it can expand network capacity fast enough to keep up with a growing subscriber base, said Barry Tishgart, director of marketing.

"We're going to keep our policies simple and straightforward and encourage people to go out there and find new uses for broadband," Tishgart said. For example, the company's terms of service don't forbid subscribers from making large file transfers to their PCs. If subscribers have to think about how much data they're using, many will be scared off by 3G, he said. However, there are limits: You can't use a 3G phone as a modem for a PC or run a server on an individual subscriber plan. The carrier offers the Sprint PCS Data Link service for businesses as a substitute for leased-line or Frame Relay service.

A 3G crunch could be caused not just by too many users reaching the service on a single base station, but by overloading of the wired "backhaul" that connects the wireless cells to the Internet, said IDC analyst Godfrey Chua.

"We don't really know what the condition of the transmission network is right now," Chua said. The existing backhaul was built to carry voice calls and simple data services offered over 2.5G networks such as GPRS (General Packet Radio Service), both of which demand far less capacity than 3G can, he added. Though some base stations have fiber connections with high potential capacity, many are on microwave wireless links or on leased T-1 lines with 1.5M bps (bit-per-second) capacity. Both are expensive and time-consuming to upgrade.

"My sense is that it will be a bottleneck, but the question is, 'How much?'" Chua said.

All major carriers regularly expand their backhaul capacity. Sprint Nextel said its planned 4G network, a higher capacity wireless system that will use different frequencies from 3G, will play a part in the company's backhaul expansion. The carrier intends to choose a technology for the network by the end of August and start deploying it in 2008.

But like Verizon's Lynch, analysts aren't confident the networks will smoothly grow to accommodate millions of freewheeling users. Something has to give.

The service providers are shooting themselves in the foot by being so generous in order to pull in users, according to Gartner Inc. analyst Michael King. Going from all-you-can-eat plans to per-bit charges effectively would represent a price increase, he said.

"Never in the history of wireless and mobile communications has a carrier succeeded in bringing prices back up," King said.

And though the technology is there to detect and stop terms-of-service violations, doing so could tarnish the image of 3G and lead to a backlash, said In-Stat analyst Allen Nogee.

If heavy usage isn't reined in, it may even affect mobile phone conversations if EV-DO (Evolution-Data Optimized) carriers such as Sprint start putting voice on the network with the next version of the technology, said Forrester Research Inc. analyst Charles Golvin.

One solution may be to offer more flat-rate monthly plans that allow for a large, but still limited, amount of data traffic, Golvin said.

Moreover, another technology trend may eventually ease the pain. Notebook PCs were the first devices to get 3G, but the mass market is expected to embrace it first on mobile handsets, Golvin said. It's harder to use up a lot of capacity on a handset with a keypad and a tiny screen than on a PC, so the shift toward phones may temper growth in demand.

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