Say goodbye to unlimited mobile internet browsing

O2 is changing its data model and other companies are set to follow.

The mobile phone giant O2 signalled the death knell of plans for "all you can eat" data in the UK. The move marks a significant shift in an industry that is struggling to keep up with the staggering demand for internet services on the go.

On Thursday, O2 announced its move to a tiered data model. The decision marks the end of a flat fee for unlimited data on mobile smartphones and the dongles that bring mobile broadband to laptops.

Matthew Key, the chief executive in Europe of O2's parent company, Telefónica, and Ronan Dunne, O2's UK chief, have long held that the one-size-fits-all mobile data model is broken. Mr Dunne said that dropping the unlimited data plan had become inevitable. "[It] enables us to provide a better overall experience for the vast majority of customers and to better manage demand," he said.

The need to manage its network was highlighted last December when Mr Dunne apologised for the poor performance since the summer. He said the explosion of demand for data had caused problems, and that the company had upgraded to cope with the congestion.

O2 is to introduce a three-tiered pricing model from 25 June. The group wanted to tie the prices it charges more closely to usage. It said the move would be more cost-effective for the majority of customers, who use less than 1GB a month.

Customers will pay £25 a month for 500 megabytes – which a spokesman said 97 per cent of customers do not come close to using. Those looking for heavier use can pay £60 a month for 1GB.

The shift in industry thinking was brought into sharp relief by the small number of customers who are clogging up the data pipes. One mobile insider said: "There is a minority that use a disproportionate amount of data. It affects the performance of those who don't get anywhere 1GB."

As well as browsing the internet, sending emails and swapping photos online, these users download and stream movies and songs, which eat up huge amounts of bandwidth.

A customer on 500MB a month could send 500,000 emails or browse 5,000 basic web pages before hitting their limit. Yet they could only download 12 high-quality music tracks or watch 60 four-and-a half minute videos on YouTube.

Mr Dunne is drawing up the company's investment plans for the next three to five years, and realised it was crucial that O2 changed the way it provides data to its customers if it is to create a sustainable business. "I'm setting in motion the mechanics to put investment in place for the next generation of the network. Previously there was no economic model for investment in data," he said.

Orange is preparing to follow O2 and retreat from all-you-can-eat data in the summer, and 3 is also moving away from the tariff.

T-Mobile is reviewing its policy, and Vodafone dropped the term "unlimited" last year, as the company felt it was misleading.

Mr Dunne said: "There isn't a chief executive or chief technology officer in the industry who doesn't have this on their desk."

Terry Norman, the principal analyst at Analysys Mason Research, said: "This has been bubbling away for a few years. The operators bought lots of spectrum, but found there was little demand so started giving it away. The operators have to do something about this now."

"It has caught everyone by surprise. Not that data is popular, but that it is so popular," he added.

Other factors had contributed to the decision in the UK, Mr Dunne said: "There are regulatory and policy changes coming up. It's obvious there is a huge opportunity from data, but the industry has to realise it has to plan for it, otherwise it will hit a big bump in the road. There is also the Apple factor."

O2 is to introduce its new pricing model from 25 June, a day after the latest version of the iPhone goes on sale in the UK. Mr Dunne pointed to the arrival of the next generation of the iconic device as another driver behind its decision.

The company may have been talking of its role in changing the rules in the mobile market, but its decision follows a similar move by AT&T in the US, which announced plans to shift to a tiered model last week. The rise of mobile data in the UK started with 3, according to Analysys Mason's Terry Norman. It was after that that the data storm began. The flames were then fanned by the iPhone.

Mr Dunne agreed. "The data revolution didn't really happen right away. The industry invested a lot and got its fingers burnt. Now we are we are getting the devices, more people have them and the technology and engineering is improving. All the pieces are coming together."

Although the iPhone was exclusively offered by O2 when it came to the UK in November 2007, it prompted rival handset manufacturers to develop a series of smartphone handsets to compete. Smartphone owners use 10 times more data than standard phone users. Mobile broadband is 100 times higher.

Mr Norman said: "The long-term solution is for bigger, faster, better networks. It will involve investment in new spectrum and a move to 4G. The cost of this is not insignificant . Yet the operators have to find a model to make the vast investment work." Initially, he said, they looked to differentiate themselves through the strength of their own networks, before deciding it made better sense to share the costs with their rivals. The most significant tie-up was the deal agreed last year between 3 and T-Mobile UK. That network will become stronger after the latter's merger with Orange.

Mr Norman added that companies will continue to long to look to different pricing structures, possibly even different services, such as browsing Facebook or emailing. Jessica Ekholm, the principal analyst at Gartner, added that the operators would also look to Wifi to pick up some of the strain; both services will need each other, she said.

Mr Dunne concluded: "By doing this, we are laying the foundation for a sustainable data experience for all customers and the huge possibilities that technology will create over the coming years."