Wireless service costs too much, and all but the carriers agree

Sharp criticism of wireless industry mounts over pricing, exclusivity

Criticism of U.S. wireless carriers has reached a peak during the dog days of summer, with cries that carriers are charging too much for wireless voice, data and texting even as consumers have benefited lately from cheaper smartphones.

The outcry against wireless carriers follows recent plans by government agencies, including the Federal Communications Commission and Congress, to investigate exclusive smartphone deals by the carriers, including AT&T Inc.'s sale of Apple Inc.'s iPhone.

Consumer groups, such as the nonprofit Free Press in Washington, have linked exclusive smartphone deals to helping carriers justify higher wireless prices to customers. Higher prices are charged even at the same time that network technology investments by carriers have decreased overall, Free Press argued.

"We have a lot of concerns over voice and data plan costs, not just that they are too high, but there is demonstrated evidence that as the wireless carriers' revenues are rising, their wireless capital investments are decreasing," Free Press Policy Counsel Chris Riley said in an interview. "Wireless carriers are charging more, but not improving the quality of network service with network buildouts and coverage."

While rural areas clearly need better wireless coverage, Riley said there are some "pretty glaring limits on coverage" in major cities. Government needs to inject more competition into the wireless industry to improve things, he said.

The anti-carrier rhetoric got more strident this week with an opinion piece in the Wall Street Journal by Andy Kessler, a former hedge fund manager, who accused AT&T of overcharging for voice calls and stifling innovation. Kessler also called for radical reforms in the cell phone industry, such as ending device exclusivity and stopping carrier licensing of the airwaves.

New York Times columnist David Pogue also launched a broadside in July against what he called the "irksome cell phone industry," condemning wireless double billing by the carriers, (where both calling parties pay for a call instead of one party, as with wired calls), a doubling of text message costs by all the major carriers to 20 cents per text in two years, dead coverage zones and exclusive device deals.

Computerworld columnist Mike Elgan also entered the fray, with a recent column, "Wireless carriers: 10 things I hate about you," in which he argued that wireless carriers overcharge customers and are "laggards" in adopting new technologies, among other criticisms.

Elgan noted that while surveys consistently show that the top concern of wireless customers is a lower price for wireless service, the U.S. is one of the top three most expensive countries for wireless service globally, along with Canada and Spain. That high U.S. ranking, from a survey by the Organization for Economic Cooperation and Development, was roundly criticized by the main wireless industry association in the U.S., the CTIA, which noted that the U.S. still has the lowest per-minute wireless calling rate globally.

AT&T spokesman Mark Siegel, in an interview, defended AT&T and the industry in general on pricing, innovation and exclusive deals. "The U.S. has the lowest per minute voice price of 5 cents per minute in the industrialized world, and it's hard to argue with a system that has produced the highest level of innovation in the world," he said. He noted that smartphone prices are dropping, making it possible to buy an iPhone for $99.

AT&T is also spending $18 billion in network upgrades. "We feel really good about where we are," Siegel said.

To some extent, wireless consumers have themselves to blame for not arguing against monthly service prices or lobbying harder for other changes, said Riley and several industry analysts. Millions of customers in the U.S. have lined up to buy the iPhone and other new smartphones because the technology is exciting and powerful, they said, but customers seem to have forgotten that $70 a month for the minimum iPhone voice and data plan from AT&T results in $1,680 over a mandatory two-year commitment.

"People do get caught-up in the whiz-bang of new technology, while the carriers have been generating extraordinary profits," Riley said.

"The criticism of the wireless carriers is starting to build, but it's still not enough, and I think not enough consumers are aware that the problems they face with wireless service can really be fixed," Riley said. "The fact that wireless service is expensive can be fixed."

Some customers recognize the costs and want relief. One such customer is Al Ferrer, a nuclear engineer in Wellesley, Mass., who recently bought a BlackBerry Tour from Verizon Wireless. Ferrer said he spends $350 a month on wireless services for his family, getting part of it reimbursed by his company for his usage.

While his wireless service is critical to his work, Ferrer said he would not want the monthly total cost to rise to $500 or more, and urged the carriers to start offering discounts, such as dropping a $30 monthly charge for tethering a cell phone to a laptop.

Anne-Marie Kenney, an assistant dean of student life at Lesley University in Cambridge, Mass., said in a recent interview that she bought a Palm Pre, sold exclusively by Sprint Nextel Corp., over other new smartphones on the market, partly because she felt Sprint was offering the best deal on monthly costs.

And Jorge Mata, the CIO at the Los Angeles Community College District, which encompasses 250,000 students attending more than 10 colleges, said dryly that he hasn't noticed any student protest rallies over wireless service costs by the many students who carry smartphones and conventional cell phones.

However, he said consumers are't getting much value for what they pay. "They are paying $800 a year sometimes, and that's a lot of money in this economy, especially for a student," he said. "But people are not getting what they are paying for, and there hasn't been enough competition in the industry, but the public concern hasn't reached the point where everybody is worried enough to do much," he said.

Still, Mata said it's ironic that a home DSL connection can cost as little as $13 a month, while an average wireless bill can exceed $60. Meanwhile, a wireless user arguably gets far less usage from the wireless smartphone per month than the home computer on the DSL. At the same time, the carriers are likely incurring lower costs to support a wireless infrastructure than it costs to support a wired one, Mata said. "If you do the math, the mobility option is not worth it," he said.

The college district where he works, however, invests heavily in all manner of wireless networks and services, and has worked out affordable costs with carriers for its staff who also share laptop broadband cards to save money. Average consumers and small businesses can't do what a big organization can do to reduce costs, Mata noted.

Free Press and many analysts say the way to contain wireless costs is by forcing more competition on the industry. Riley noted that the major carriers are all fairly similar in pricing, and he cited the increase in texting costs as the "poster child" for how all the companies first raised a text price from 10 cents, to 15 cents and now 20 cents. "It all happened at about the same time, although I'm not saying they met in a room in Washington to decide on it," Riley added.

The unlimited texting fees that carriers offer might seem fairer to consumers, Riley said, but unlimited texting fees tend to make customers purchase more texts than they really need only to avoid the "artificially inflated" 20-cent cost per text.

Jack Gold, an analyst at J. Gold Associates, said wireless prices will only come down, or won't go up further, with more competition. "But we don't really have true competition, even with multiple carriers, and we have something like price fixing where all the carriers know they don't want prices to go down so they can continue to earn good revenues," Gold said.

What is needed, he said, is "true disruption in the market," the way Toyota and Honda introduced car innovations in the U.S. car market, which was dominated by GM, Chrysler and Ford. In theory, the competition could be with a technology such as WiMax networks from Clearwire Inc., which could sell voice over wireless smartphones at lower costs, in the same manner that Vonage and various cable companies have offered Voice over IP calling over wired networks. Or cable operator Cox Communications Inc., which is setting up its own cellular network, could inject more competition, he said.

Gold said one reason carriers haven't taken steps to lower prices is that doing so would attract more users too quickly, flooding networks with data from users who download videos and other data-rich applications that could slow down performance. The same reasoning has been used for why AT&T has not turned on multimedia messaging (MMS ) on iPhones, although it has promised to by the end of the summer.

Short of a massive market disruption with new technology or new players, Gold said carriers need to have more incentives, probably from the government, to lower costs, so they can charge customers less. "Is anybody really looking over their shoulders to say they are charging too much?" he asked.

Copyright © 2009 IDG Communications, Inc.

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