Three cheers for limited data plans

O2 in the UK today followed AT&T in the US in eliminating its unlimited data plans for mobile users. While most of the commentary I’ve seen on the web has been negative, I think there are three reasons to believe that limited data plans will improve your mobile experience.

First, it will be cheaper for most people. With a flat-rate unlimited plan, carriers have to charge enough to cover the cost of average data use. This means that light users are subsidizing heavy users. Since there are many more light users than heavy users, most people will experience a decrease in their data fees.

Second, the plans will reduce congestion. Using a congestible resource like mobile bandwidth places a negative externality on other users of the service. Charging a fee for use is like imposing a Pigovian tax on any other negative externality. Just as properly-designed toll roads can reduce traffic, an efficient data charge will speed up the mobile web.

Third, and most importantly, limited data plans will provide incentive compatibility. They will put the carriers on the same side as consumers. With flat-rate unlimited plans, once carriers have you locked in, their incentive is to avoid investing in their network—to maximize profits by minimizing costs. But with a pay-per-use plan, their incentive is to improve their network so you will use more of it. With unlimited plans, their incentive is to disallow features such as tethering, which put additional strain on the network. With limited plans, they would want to make tethering as simple as possible, in order to get consumers to use more of their services. I think the improved incentives will make a major difference in the quality of service that consumers receive.

My prediction is that a year from now, AT&T and O2 customers will both experience better and cheaper networks and continue complaining about metered data plans. The least they could do is give some thought to the idea that the latter will cause the former.