This only further highlights the problem that network operators face. Not only are they being asked to capitalize increased traffic that their current all-you-can-eat pricing model doesn’t monetize, they’re subsidizing the cannibalization of their own TV revenue opportunity. That’s particularly true for the cable MSOs whose primary revenue stream has always been TV. The markets are getting close to breaking here.

For years now, EU operators have told us that they’ll need to make better use of Wi-Fi to unload traffic in areas where there are large congregations of users, including all hospitality areas and even some public transportation. One interesting development we’ve noticed in Europe is that the interest in Wi-Fi seems to be sapping some of the interest in 4G/LTE femtocells. The reason we’ve been given for that is that the problem of traffic already exists, and will continue to tax 3G services even when 4G rolls out.

Given that, and given that nobody believes 3G femtocells are a good idea, it makes sense to look at a more persistent Wi-Fi hotspot approach. That could have an impact on femtocell players, of course, but it might also promote public Wi-Fi considerably by ensuring that compatible devices continue to be deployed.

We’re reluctant to brand this particular rumor as truth — this sort of story has been “leaked” before and has proven incorrect — but the story about a massive network upgrade appears to be accurate. We still hear that the upgrade is due to traffic generated by the iPhone, and while congestion could in fact be a point of competition with Verizon, it seems to us that AT&T needs the upgrades, Verizon iPhone or not. It also seems that Verizon would be smarter to go with a 4G iPhone, which would likely mean that competition with AT&T over the gadget wouldn’t develop until 2011.

Everyone knows that smartphone users generate between five-to-seven times more traffic than other wireless users, but AT&T says that 3% of iPhone users consume 40% of its network bandwidth. This shows the situation that all-you-can-eat pricing can get you into.

AT&T doesn’t plan to go there, according to its statements to the media. The company says it’s “inevitable” that heavy users at least pay for their usage. The decision to provide no-cap iPhone data use is out of sync with the rest of the world, where it’s routine to have data plans with specific cap-and-cover-charge policies. In fact, our model says that usage-free pricing will always increase over-the-top (OTT) competition and reduce return on investment (ROI), no matter what technology is used and no matter what services the telcos try to introduce in addition to their basic broadband.

We agree that heavy users have to pay for their usage, but we also think AT&T clearly must have known what would happen here and accepted the risk in exchange for the marketing coup it scored with the iPhone. That means regulators may have to consider whether carriers initiate pricing plans for competitive reasons with full intentions of later claiming overuse of the network and using that to justify usage caps, price increases, etc. Since most wireline network operators will move to usage-price plans (likely starting with high caps for heavy users only), this whole issue may provide an entry point for usage pricing to creep into broadband. None of this can happen quickly, though, so AT&T is also planning to upgrade its wireless services in San Francisco and New York, where problems with performance have been most severe.

The company found, not surprisingly, that 5% of users consumed 80% of bandwidth. This skewing of the old 80-20 rule is one of the primary reasons why operators say that some form of traffic management is essential to insure that the broad population gets good service at a fair price. The data also shows that most usage is in the evening and at home, however, which means that femtocells would offload considerable traffic were they widely deployed.

Many operators tell us that while 3G femtocells are possible, the application of IMS and 4G would make it far easier, particularly if self-organizing principles were applied to cell setup. How valuable all this intelligence will be may depend on regulatory trends, though; many countries are seeing considerable public advocacy pressure against traffic management.

The trend is a critical problem for online growth, and yet it is also the fault of the industry for letting things get to this point. Broadband pricing is increasingly a tax on the underclass of technology users to support the elite. An operator told us that 80% of usage is created by a lot less than the top 20% of users. All of this is a byproduct of the monetization problems, of course.

At the same time, DOCSIS 3.0 interest is rising; Shaw is unveiling the first 100 Mbps service based on it. We also note that companies that are looking at bandwidth caps are also looking at DOCSIS 3.0 services with higher monthly rates, which would be immune from the caps.

Thus, it appears that broadband is going to stratify, with premium users paying more for faster no-cap services. All of this continues to focus investment on access and metro, and on things like CDNs, rather than the core. The fact that over a million Xbox users have activated Netflix streaming tells the tale: Traffic without revenue equals ROI problems, and thus caps on usage. Lack of logic is about to change the industry.