Why The Wireless Industry Is Moving To Flat-Rate Pricing

from the lower-transaction-costs dept

One of the recurring trends in high-tech markets is that as information goods get cheaper, they're increasingly sold as all-you-can-eat bundles rather than as individual units. This has been true of land-line telephone service for decades. In the late 1990s, we saw the same transition occur in Internet access. In this decade, we've seen the explosive growth of Netflix, which is an all-you-can-eat plan for video. Now it appears that cell phone companies are inching in that direction too, as Mike discussed last week. For $99/month, Verizon Wireless, AT&T, and T-Mobile will let you talk on your cell phone as much as you want. Sprint is apparently considering adopting a similar plan. This isn't actually all that new.

There are two fundamental economic forces at work here. First, metering imposes costs, both on consumers and on carriers. For carriers, there are the obvious expenses of keeping track of billing information, as well as the attendant support costs when an angry customer calls to complain about unexpected charges. For the customer, metering imposes the mental overhead of having to keep track of whether it's currently "peak" or "off peak" time, how many minutes are in his plan, whether he's currently "roaming," etc. A lot of customers are happy to pay a little bit extra for the peace of mind of knowing exactly how much they're going to pay each month without having to keep track of their calling activity. Second, the wireless market, like the phone, Internet, and DVD markets, is capital-intensive. Unless the network is already fully loaded, the marginal user costs wireless carriers close to nothing. As a result, metered pricing often causes under-utilization of the network because minutes are priced far above their marginal cost. Switching to a flat-rate plan can be economically efficient because it encourages greater utilization of the network without undermining the carriers' ability to recover their fixed costs. That has always been the rationale behind the free night and weekend minutes offered by a lot of cell phone companies over the last few years. They're just expanding it so it applies 24/7.
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Filed Under: flat-rate, wireless
Companies: at&t, sprint, t-mobile, verizon wireless


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  1. identicon
    Jim, 4 Mar 2008 @ 12:48pm

    Data Services are killing Cell Carriers

    Until AT&T and Verizon Wireless gain access to additional spectrum (as in the 700Mhz) and or the new LTE technology they will struggle with bad Latency and Upload speeds that will kill their chances against any new WiMAX Broadband Service Provider offering open standards based Data/Video and VoiceIP type services,especially any that gain access to the new 700Mhz Spectrum or the emerging White Space.
    The White Space spectrum really is a concern for these Carriers. Especially if the FCC allows Unlicensed access to the spectrum, which the FCC will focus on after the 700Mhz Auction is over.I predict that AT&T and VW will go out of their way to buy as much of the main market spectrum in the 700Mhz auction, as well as most of the Lower Band A Block to sideline these prospective WISP and allow them to deploy upgrades to their Narrowband Services.
    Unlimited VOice is a joke-amazing that all the big Carriers responded within days of each other. It will be what they will be able to deliver in the Data world using 3G technology that will kill them. They have until end of 2009 to make changes in this Data Space.

    Jacomo

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