Cellular Biz & Its $99 Problem

42 thoughts on “Cellular Biz & Its $99 Problem”

  1. I don’t know, Om. I think you are coming at this from a bit of a skewed perspective. What’s ARPU these days, $60/month? That’s a lot closer to the cheapest rate plans than the $200/month you claim to be spending (counting data and overages). Simple math tells me that customers like you are in such an extreme minority that you aren’t doing much to bring up the low end of things. I think the carriers are going with the assumption that a lot of people on $80/month plans are going to step up to unlimited and that this additional revenue is going to more than offset the losses from people like you. Where they might be in trouble is how long they can hold the line on $99. If Xohm ever actually launches, one would assume you could use something like Skype on that service and be paying a hell of lot less than $99 for unlimited calling.

  2. I have saved money by going from ATT premium plans to the cheap plan and paying the overages, both on voice and data, and I am not a light user. The math is complex.

    During the long distance wars of the 90’s. Sprint Canada has an Unlimited no cap plan – they had to can it, as radio stations started using it for voice back haul from sporting events. You know, leaving the connection up for 5 hours, instead of paying for a commercial audio feed from the broadcast aggregators. Individuals were doing this too, so Sprint started putting a per call clock on – max 2.5 hour per call, then disconnect.

    If I could get unlimited voice (or, like 2000 mins) and unlimited data for 99, that would be like my old ATT plan, all the data at a ridiculous 40 /month, and 1000 mins voice at 79. Ouch….

  3. Om,

    The all you can eat buffet is definitely going to cause some puking in the cellular world.

    Like you, I tend to go over my monthly minutes and hated the overage charges I used to get on my monthly bills. It was one of the things that led me to start RingBranch (http://www.ringbranch.com). As a T-Mobile MyFaves user, I can talk as much as I want and not worry about going over my quota minutes. And I get to stay on a lower cost plan. (Sorry we can’t help you since you are on AT&T.)

    Regards,

    Allen Graber

  4. I agree with Om that a pricing driven strategy is all wrong. Any advantage price discounts give you tend to be wiped out quickly as competitors match your offer (last week $99 bucks might have sounded like a great deal, today it is the standard). The price crunch is coming — there is no need to accelerate it.

    The mobile carriers need to fix the relationship they have with customers by creating new kinds of value for them. There is tremendous amount of confusion among everyday subscribers about how to get the most out of their phones (iPhoners excluded). Rather than positioning themselves as trusted advisers and helping the consumer navigate the technology choices available to them, the carriers have been content to emphasize commodity attributes of their offering (price, network quality, self-expression).

    The utility model is broken in an age where handheld devices are the key convergence appliance–one that is sure to radically change the marketplace in the next 3-5 years. By carrying on as providers of a dumb pipe, the carriers will ensure their own demise.

  5. for one this inevitable. i believe the carriers are much more interested in increasing the spend of there majority customers than they are concerned about a drop from a few big customers. the reality is that i would guess by the end of 2008 all cell plans will be unlimited. once they get rid of the minute meter completely for domestic calls they can save on thing like customer service related to billing issues, etc. and the rates will come down its going to be a lot closer to $50 than $100 for unlimited voice; but at $50 that is still $10 than they get now from the overwhelming majority of customers who are on $39.99 plans.

  6. Verizon and AT&T have a distinct difference in plans for regular phones and smartphones. Smartphones will probably not be eligible for these unlimited plans, especially from a data standpoint. These plans are going to focus on the people that talk and text a lot. If you have a smartphone, I think that you will be out of luck in moving to these unlimited plans.

    Also, the press releases for both companies do not mention the family plan aspect of these new unlimited plans. I bet we won’t see family unlimited plans for at least 3-6 months if at all.

  7. Compliments of SAI (http://feeds.feedburner.com/~r/typepad/alleyinsider/silicon_alley_insider/~3/238858164/verizon_99_dollar_unlimited_cellphone_plan_wont_kill_us)

    VZW says that less then .5% of their base have plans over $99 and they think that money lost to that (and potentially overage people like you) will be made up by lower price plan users moving up to the $99 plan.

    Yeah, the .5% is based on people with plans while it doesn’t talk to additional revenue generated by overages – that would be interesting to know.

    I’m just guessing that they ran some statistical analysis and calculated the haircut lost from the high end revenue generators (both plans and overages) would be made up for with additional revenue generated from lower price plan people stepping up.

    I do agree that the “race to the bottom” isn’t healthy for anyone. One difference between the LD services in the 90’s and wireless providers now is that LD only had one service to offering – that long distance servive – while wireless providers can cross-sell data, ringtones, etc.

    r.

  8. Convincing people that telephony has a per-minute cost is one of the most lucrative scams ever perpetrated. In a competitive market, you wouldn’t expect prices to artificially higher than costs forever. You will note these plans do not offer you unlimited or unrestricted data, and do not cover international calls, where for some reason the FCC has not imposed a choice of long-distance provider the way you can with land lines.

    The cellcos want to give a push to the landline to mobile migration, and a swift kick to cablecos for voice market share, that’s all. At some point, they will realize the cost of maintaining the per-minute billing infrastructure outweighs the additional revenue and move everyone to either prepaid or unlimited plans.

  9. Om,

    I have to not only agree with Jesse here, but i’d add the carriers are likely targeting market adoption of data services. These services have better margins and tremendous revenue upside with market take up. Hence, if you can get the average $80/month user to upgrade to a $99/month unlimited plan, plus add on $30/month unlimited data (for example), then the average user just contributed an additional $50/month. This seems to be the carrier strategy here, at least in my opinion.

  10. Hi Om,

    If you don’t think US Cell has put a lot of thought into this your crazy. I worked for a small start-up company that competes with Cricket Wireless. We had rates plans that ranged and did offer an unlimited calling plan at $90. Most of the sub base was sitting at about $39 a month for 1000 minutes. We struggled with this same concept on cannibalizing our existing higher sub plans but in the end we decided to sell out to Sprint. And this was 5 years ago. Carriers have been looking to do this plan for quite some time. Now the Metro PCS and Cricket are gaining momentum this brings the issue forefront.

    Great Info though.

    Leigh

  11. I have to agree with Curtis’s comment above. The wireless carriers realize that the real revenue stream is data, not voice. By getting more “high-end” customers in the door with attractive unlimited voice plans, they are anticipating a large increase in the demand for data services, where the profit margin is much higher.

    The problem with comparing this situation to the ’90’s is that those phone companies were mostly one-trick ponies, simply providing landline phone service.

  12. With proliferation and penetraton come commoditization.Let’s face it celluar voice is a commodity. Of course their DATA services are NOT QUITE YET A COMMODITY and you will find fiercly loyal DATA customers that will not move. But the voice service is the commodity that Chambers always said it would be.

  13. You have to look at what is driving this decision by the carriers. I personally believe that the iphone is driving this change since it is snagging some of the best consumers (those willing to spend over $100 on their cell phone) and it is hurting the other carriers badly — amd they want to stop the bleeding before the HSPDA / 3G network iPhones come out. They also want to lock you into this $99 plan and eventually they will be hooking you on data charges as well. Data is the future for wireless carriers and this will come into focus once HSPDA / 3G data hits mass market and is a viable competitor to DSL, and perhaps low end CableModem.

    I’m just waiting for the first carrier to offer to pay for you to break your existing contract — then total chaos will break out in the wireless world!

    Andy

  14. I have a family of four on 1400 minutes with Verizon for $110/mo and we rarely go over our minutes. Granted we still have a land-line, but at $40/mo it makes no sense for us to switch to the buffet and cut the cord.

  15. @ Jesse and others

    1. The data plans are not going to save their bacon. For now they are picking up the high-end customers who need emails and what not and data access, and making some money there, as shown by recent growth curves. However, it would be tough for that trend to continue after the biz-types and early adopters have all signed up.

    There are a lot of people who pay $40 a month for their mobile voice service (majority in fact) and have little or no interest in data beyond some SMS and occasional downloading of ringtones. I think as the market gets more competitive – Verizon, Sprint, AT&T and T-Mobile (later this summer) – and there is more speed parity, the data margins are going to crash as well.

    1. Jesse, the $60 ARPU basically proves my point. I think there are far fewer people who want the $99 plan. Why would they spend $40 more?
  16. The odd thing is that I remember At&T having a similar unlimited plan back in the day (like around 1999 or 2000). It cost around $179/mo though so it’s much cheaper now but so are costs of providing mobile minutes.

  17. I could care less about these voice plans. Erik Schwartz has the facts right: the money is made in breakage, not overages. So this isn’t a big deal. What is a big deal is that these guys only went half way. What we really need are unlimited DATA plans that are as clean and simple as these voice plans. T-Mobile kind of addressed this by throwing in unlimited SMS and MMS into their new plan, but they also need to include web surfing and e-mail.

    Why do I make the distinction? Because it is all very confusing for consumers right now; at home, they pay $XX a month for a bit pipe for their PC, and ANY kind of bit they receive is included in that one, unlimited pricing package.

    On mobile, you pay one price for SMS (a la carte or package), one price for MMS (a al carte or package), one price for a web browsing package, and another price for a (typically push) e-mail package. It’s crazy and confusing. And carriers wonder why no one is adopting their data services. Besides lousy devices and inadequate content, they throw sadistic pricing schemes on top of all of it to boot. Oy.

    Just drop every kind of data service into one monthly price package (even if it is a three figure number) and let me have any and all the data services I can consume. It may be pricey, but at least consumers will have complete visibility into the data plan on their phone, and may actually start using those services. And that just may lead to higher adoption rates and more margin down the road.

  18. Why would you treat your best customers well? I don’t really get your question. Are you suggesting that this is somehow an issue? Are you sure you pay $1200 per annum? And how many $1200 plans would you end up buying because of the simplicity. This is a masterstroke – like iTunes and 99c. There is a cost to complex pricing that makes customers wince. A soccer mom can live with $99 per month better than $59 per month plus variable charges that she has to now argue over with her 16 year old daughter.

    This is good for business. And no, that does not mean that voice ARPUs go up.

    ARPUs are going down, irrespective. And voice is a commodity. This makes new customer acquisition easier and reduces churn.

  19. […]From Daylife: Malik’s primary point was that by capping the potential revenue from high-paying customers, the cell companies are starting down a slippery slope to limited margins and zero or minimal profits. I think the latter portion of Urman’s quote stands repeating, with a slight contextual twist:

    “The burden is still on the carriers to keep on thinking of ways by which they can create revenue.”

    Is the flat rate plan that way? I have no idea, Malik thinks not, but we’ll find out soon enough.

    […]

  20. Malik is confused.

    The average consumer gravitates towards perceived bargains; they don’t actually measure their value. A $40/month user with a 1000 minute contract and occasional overages to $75 will clearly bite on $99 “flat rate”, and brag about till the cows come home. They will not do the math, which might show that instead of paying $1200 a year, with some good habits, they could get by on $50 a year with prepaid.

    Friends often tell me of their “great deals”, i.e. “my DSL is only $14.95 a month”, but like an adjustable rate mortgage, they fail to mention its a teaser rate for 3 months, then it goes to $39.95 (plus fees and Al Gore tax). People lease cars “for only $199 a month”, though the real cost of ownership is closer to $1K.

    “Unlimited” dialing plans will be a net revenue generator for all cellcos, even if some smug “premium” accountholders see it as a discount over their existing trickle-down accounts.

  21. Verizon is the one who started this new price ‘war’ of sorts. Higher priced unlimited plans existed (already said in comments above). If you’ve been following their press releases lately.. you’ve seen quarter over quarter loss of landline phone service customers (acronym: POTS) to VOIP customers in droves (several hundred thousand lines per quarter). Therefore, it makes sense to try and convert some of these customers to a higher priced cell phone service you can take with you anywhere. From other carrier’s perspectives (one’s who really don’t do last mile wired line services) this WILL hurt them in the LONG RUN.. unless they can find some ways to control costs or rub the magic cost control genie lamp vigorously.

    What I find interesting.. is that companies have not started increasing the minutes on lower priced plans.. because with $99/unlimited, those bucket of minutes plans now look like a crappy value. So, in theory those customers are now at risk for churn.. but I suspect they’ll do something about that too later this year. If not.. I may be one for ditching my cell phone, because I’m not going up to the $99 plan and yet I’m getting ripped off on a low per minute plan that’s around half the price of the unlimited plan… Probably the lower plans need to double in the size of minutes.. with a base bucket of 700 minutes @ $25.. 1200 @ $35, 1500 @ $50, etc. It’s when customers use more than 1500/month unlimited makes sense anyway. I would see more sense in those prices taking affect than upselling to $99, imho.

    What would be nice is the evolution away from selling VOICE minutes to data plans, upon which VOICE operates.. this way all services can operate on “bandwidth” cap constraints.. ie 128kbit symmetric all the way up to 10mbit data plans/unlimited. However the technology & the marketplace just isn’t quite there yet. Possibly in the next 3-4 years this can happen. 3d & LTE are promising to make this a reality.. provided we don’t have this looming recession take hold.

  22. All this is nothing new Ive has unlimited minutes from US Cellular for the past 3 years but the only difference is that is use to cost 69.99 which is what Im still paying.I use about 4-8,000 minutes a month since it’s my only phone.I cant see how there doing anything but losing money on the deal but in the end it sucks for them but good for me.

  23. Any advantage price discounts give you tend to be wiped out quickly as competitors match your offer (last week $99 bucks might have sounded like a great deal, today it is the standard). The price crunch is coming — there is no need to accelerate it.

  24. Hi, my name is Om Malik. I’m a single data point. However, I’m a predictor for the entire market and will ignore the possibility of users moving up to an unnecessary price because the word unlimited makes them cream themselves.

    Get a clue. Your market segment is an absurd minority, barely a blip on their radar. They’ve enjoyed milking you for years and have clearly identified the increased income from users upgrading their plans as more than enough to offset outliers.

    Welcome to statistics 101.

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  26. We recently switched over to Helio who has had a $99 unlimited plan for sometime now and from the comparison it still seems like they are the best. They have offered me the plan for a month to month basis with unlimited voice and data for all my employees for $99 a line. I believe this is only available through their business channel at http://www.heliobusiness.com .

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