Verizon's Network Optimization Policy Is About Pricing As Much As the Network

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Verizon Wireless' (NYS: VZ) decision to deploy and -- to give the carrier credit -- fully explain its "network optimization" techniques (don't call it throttling!) is the latest signal that the carrier intends to move as many of its customers to usage-based pricing plans and to LTE devices as quickly as possible.

The network optimization policy should not come as a surprise to anyone who has been paying attention to the industry -- Verizon basically said back in February that this was coming. Verizon explained the ins and outs of the new policy in a thorough and refreshingly transparent FAQ.

Basically, the policy breaks down like this: if a subscriber is a 3G CDMA smartphone customer with unlimited data and they are in the top 5 percent of Verizon's data users -- which as of August is 2 GB of data or more -- they "may experience managed data speeds when connected to a congested 3G cell site after reaching certain data-usage levels in a bill cycle." This policy does not apply to those on usage-based smartphone plans, which were introduced in July, or using LTE devices (at least for right now -- Verizon said it reserves the right to apply this to LTE devices later). Network optimization will be in affect for these heaviest data users for the remainder of the billing cycle and the following cycle. Verizon argues that this is not throttling because it will only apply when customers are connected to a congested cell site, and otherwise their data speeds will be normal.  

So why is Verizon doing it? The simplest explanation is that Verizon just wants to protect is network and ensure the best possible experience for as many subscribers as possible (and thus maintain its reputation as stalwart wireless network operator). Who could argue with that?

However, the logical conclusion I draw from the network optimization policy is that Verizon is incentivizing its unlimited smartphone data customers -- and there are a lot of them, considering the usage-based plans apply only to new smartphone customers -- to move to usage-based pricing, or to LTE devices, which only support usage-based plans. Verizon says as much in the FAQ, giving customers the option -- if they don't want to have their speed reduced -- to move to usage-plans or just hop on LTE. Verizon's LTE network now covers more than 160 million POPs, which is more than half of the U.S. population. The network is available in 143 markets, and Verizon expects to cover 175 markets and 185 million POPs with LTE by year-end.

Verizon spokesman Jeffrey Nelson told me the carrier is emphatically not recommending that customers pick one option over the other. "We're not recommending any particular area. But with the tools that are provided and your understanding of your plan and how you use it, you can make the best choice," he said.

He said some customers may choose to keep unlimited data for $30 per month, even if they are in the top 5 percent of users, because that is right for them. Others might choose to switch to a usage-based plan or to an LTE device (Verizon's usage-based smartphone pricing breaks down as follows: $30 for 2 GB, $50 for 5 GB and $80 for 10 GB). "We've got a responsibility that all of our customers have a great experience," he said. "That is the goal."

That's fair. However, Verizon has also explicitly said it expects to get more average revenue per user as more customers switch to usage-based plans. At an investor conference in August, Verizon Communications CFO Fran Shammo said that as more customers use LTE devices and as video and other multimedia content traffic increases, more customers will move to its higher priced $50 and $80 data usage tiers. "Usage is on an escalating scale," he said. "The tiered pricing will become more important as times goes on than it is today."

AT&T (NYS: T) Mobility plans to introduce throttling for its top 5 percent of heaviest unlimited smartphone data subscribers starting Oct. 1. Unlike Verizon though, the highest data tier AT&T can incentivize these customers to go to is $25 for 2 GB.

NPD Group analyst Ross Rubin said that Verizon's network optimization is more about moving customers to usage-based plans than about moving them to LTE devices, since LTE coverage is still not as widespread as EV-DO. However, moving customers to LTE would help Verizon unclog the 3G network and deliver data at a lower cost per bit. "For consumers who aren't willing to pay for the highest amount of data consumption it simply minimizes their impact," he said. "For those who are willing to pay to for the highest data amount of data consumption, it pushes them toward the usage-based offering."

So, like almost all actions carriers take, this is as much a business decision as anything -- even though the nominal (and laudable) goal is delivering a high-quality network experience for as many customers as possible. Verizon sees the future, and it is usage-based. Now it is trying to get customers there.  

This article originally published here. Get your wireless industry briefing here.

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