Wireless companies struggling with data demand

Olga Kharif
22 Sep 2008

Alexander Krasnitsky loves all the cool things he can do on the Web with his new Apple iPhone 3G. But he hates the 75% surge in the monthly bills he pays his wireless service provider. 'I definitely have no love for AT&T,' says Krasnitsky, a lawyer who resides in Philadelphia.

It shouldn't come as a surprise that consumers who do more with their phones"”Krasnitsky has downloaded some 40 applications from Apple's (AAPL) online software store"”will face higher monthly service fees.

But there's growing concern among analysts, lawmakers, and wireless industry experts that swiftly rising data rates are only the first drop of what may become a deluge of efforts by mobile-phone service providers to moderate data use by consumers and get ahead of the strain placed on their networks. 'They are struggling to keep up,' says John Celentano, president of Skyline Marketing Group, a research and analysis firm that tracks telecom spending. In some cases, mobile-phone service providers 'didn't quite anticipate' how quickly data demand would skyrocket, he says.

Dream come true‾

For years, as the price of wireless voice calls plummeted, mobile-phone service providers longed for the day when consumers en masse would use their handsets for more than sending calls and the occasional text message. The industry is finally getting what it wished for.

Use of mobile e-mail, browsing, and downloads is on the rise as Americans snap up smartphones like the Apple iPhone 3G. An average owner of the new iPhone uses three times more data than a holder of even an older iPhone version, according to AT&T (T). And the phenomenon is much larger than Apple. People are buying Research In Motion's (RIMM) BlackBerry devices, snapping up special cards that connect laptops to the mobile Web, and purchasing specialized mobile data-only devices like the Kindle, an e-reader from Amazon (AMZN) that wirelessly downloads books.

In the 12 months through June 2008, the number of Americans who had access to media-rich social networking sites via a mobile phone rose 93%, according to a survey of more than 30,500 U.S. consumers by research firm comScore (SCOR). About 58% more people sent photos with a phone than in the year before, and the number of Americans with an unlimited data plan rose 58%. 'We've seen a significant acceleration [in data use] in the past year,' says Mark Donovan, a comScore senior analyst.

The question is whether the mobile-phone networks blanketing the country are up to the task of handling all that added data use. Wireless carriers deny capacity constraints. 'Wireless data continue to grow quarter after quarter, year after year, and we continue to add capacity to stay ahead of that growth,' says Mark Siegel, a spokesman for AT&T, the largest U.S. carrier. 'We will continue to do so in the future.' Verizon Wireless and Sprint Nextel (S), the second- and third-largest carriers, echo that sentiment.

Straining at the seams

But regularly dropped signals and spotty Web connections paint a different picture of the reliability of data networks, analysts say. Celentano estimates that as much as one-quarter of some carriers' coverage is straining at the seams. And even if the equipment is capable of handling today's demand, what happens when customers are doing more and spending longer stretches on the mobile Web‾

For one, the industry will need to step up capital spending, Celentano says.

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