T-Mobile Ends Overage Charges

T-Mobile has abolished overage charges for all customers on T-Mobile U.S. consumer plans.

More than 20 million Americans were hit with punitive overage charges in 2013, T-Mobile U.S.  maintains, representing about $1 billion in incremental revenue. The point is not so much the gross amounts, as U.S. mobile service providers earn more than $140 billion annually.

The point is that many consumers deliberately buy usage plans bigger than they believe they will require, simply to avoid payment of overage fees. And those sums are likely to be far greater than $1 billion.

Also, the payments for usage beyond the level a consumer expects ever to use are, by definition, highly profitable: people buy the product, intending not to use it.

If one assumes that data revenues are about $80 billion annually, and that about 10 percent of that is generated by “more than I need” purchases of capacity, then the U.S. industry generates $8 billion worth of high-margin revenue related directly to consumer desire to avoid overage charges.

In addition, the incremental $1 billion in overage fees likely is hugely profitable. Overall, gross margins in the U.S. mobile business at least for AT&T and Verizon, likely approach 40 percent. Many of us would guess the incremental profit margin on overage charges is closer to 80 percent.

If T-Mobile’s practices eventually force the other leading mobile service providers to react in similar fashion, incremental gross margins will be affected, as overage charges are high-margin “products.”

So, though it might not represent a crisis, were overage charge revenues to be slashed, the loss of highly profitable revenue would have impact beyond the gross revenue contribution.

In many industries, “overage” charges or “late fees” or “overdraft charges” account for a disproportionate share of supplier profits.

“For example, an individual on AT&Ts entry-level plan, advertised at $45 per month, will pay $125 if he uses just the average amount of data for a U.S. smartphone user (1.5 GB per person),” T-Mobile US maintains.

The latest move by T-Mobile, if countered by similar moves by the other carriers, would wring highly-profitable revenue out of the industry. You might say it is a pinprick, but there are many pinpricks occurring.