How flat-rate pricing changes the future of cellular

Less cost, more service bundles in the future

People of a certain age may remember typical long-distance calling rates of dollars per minute. In the past couple of decades, however, long-distance rates have dropped to pennies per minute.

Recently announced flat-rate cellular calling plans will lead to similarly dramatic changes for wireless customers, many believe. AT&T, Verizon Wireless and T-Mobile last week announced unlimited calling plans for about $100. Sprint Nextel Corp. has yet to respond.

"Initially, there won't be much impact," said Tole Hart, an analyst at Gartner Inc. "But we're just seeing the beginning." Hart and others predict that flat-rate cellular pricing will launch at least four crucial trends that will have a strong impact on all cellular subscribers.

Trend 1: Lower prices

For now, flat-rate cellular plans for $100 per month will only affect a handful of users, experts agreed.

"There aren't many customers at the $100 level," Hart said. "It won't impact family plans, which is about 50% of all subscribers. And it won't impact the corporate market because most companies aren't paying $100."

However, the flat-rate plans will have a big impact on some users right away, according to Derek Kerton, principal of Kerton Group, a telecommunications consulting firm. He noted that $100 previously bought about 2,000 minutes per month, which is just about 33 hours.

"That's just over an hour a day," Kerton said. "Picture a sales guy on the road -- it was easy for that person to burn through an hour a day. For now, these flat-rate plans are for people like that."

Hart and Kerton agreed that flat-rate plans are likely to cost far less before long. Still, they said, cellular pricing will never reach the bargain-basement prices charged by today's long-distance suppliers. One reason: The old AT&T, which once had a near-monopoly on long-distance, suddenly faced strong competition from many new vendors, a situation that is unlikely to occur in the cellular industry.

"It won't be like long distance because the [cellular] operators have more control," Hart said. He predicted that flat-rate pricing schemes will eventually be priced at a maximum of $40 or $50 a month.

That, Kerton said, will make consumers happy, and not just because they'll potentially get more service for less money.

"Consumers like predictability, and that's one of the key features [that flat-rate pricing] offers," Kerton said. "That's particularly true in the U.S., where we have all-you-can-eat buffets and flat-rate pricing for cable and land-line calls. That's what people will use."

Trend 2: Sprint launches a price war

For now, the wild card in the movement toward flat-rate calling plans is Sprint, which hasn't yet announced a flat-rate plan. But it is under pressure to do so because, while the other three national carriers have been gaining subscribers and increasing profits, Sprint has been suffering significant customer loss and decreasing profits.

Given its difficulties, many industry analysts have strongly suggested that Sprint will be compelled to offer a flat-rate plan that will be significantly less expensive than those of its competitors.

"They would increase their customers, which would please Wall Street," Kerton said. "And the CEO knows he has to do something radical."

"I think they'd have to be at least at $70 or $80 [per month] to make an impact on the market," Hart said. "Anything more than that won't make much of an impact." And, they could even go lower, Hart and the others said.

While a price war is possible, Gartner mobile analyst Ken Dulaney said that AT&T, Verizon and T-Mobile may not follow suit if Sprint goes too low.

"They won't follow Sprint," Dulaney said. "They believe they have other attributes that will keep Sprint at bay. AT&T can say, 'look at all our phones, and we're worldwide.' And the typical Verizon customer typically uses them for their coverage."

Trend 3: Abandoning land lines

Dulaney pointed to a major trend that flat-rate pricing could help accelerate: users abandoning their land-line phones and using only cell phones. That should start occurring after flat-rate prices come down.

"Ninety-nine dollars is a bit steep for a lot of people," Dulaney said. "But these plans are definitely another step toward the replacement of wired phones with wireless phones."

At $100 a month, "you won't see big changes," Kerton said. "At $60, all kinds of people will drop their land lines."

Another reason that flat-rate plans will encourage abandonment of land lines is that younger subscribers don't necessarily expect to have land lines.

"Most [young people] today grew up with wireless phones," Dulaney said. "They're more used to wireless. It's the kind of thing the younger generation wants. They're done with wires."

He added that, besides lower-cost flat-rate plans, the other thing necessary for this trend to take off is more widespread availability of femtocells, which are router-size boxes that boost indoor reception of cellular signals. A handful of cellular operators, including Sprint in the U.S., are starting to sell femtocells, and more carriers are expected to start making them available later this year.

Interestingly, AT&T Inc. and Verizon Wireless, which led the charge into fixed-price plans, still have a huge, but diminishing, business in land-line phones. Dulaney said the switch to wireless-only subscribers makes sense to those companies, too.

"They're probably interested in moving people off land lines because they get more money per minute with wireless," he said. "In any case, they want to make sure they keep customers regardless of where they may be."

Trend 4: More voice and data bundling

Dulaney noted that flat-rate cellular plans play into another trend in the cellular industry: the increasing reliance of cellular operators on revenue from data plans.

"It dovetails into what we're seeing on the data side, where we're seeing unlimited data plans," Dulaney said. For instance, he said, customers can get an unlimited data plan for a BlackBerry for $45 a month.

The transition to data is important, Dulaney said, because revenue per voice subscriber has been decreasing for a long time.

"The operators have discovered e-mail, and they're making money, finally, from data," Dulaney said. "Over time, we'll see more bundles of data and voice for a flat rate." The purpose of these bundles is to help the carriers retain their existing customers. Customer turnover, called "churn" in the industry, is expensive for cellular operators.

The bottom line, the analysts said, is that while the first crop of flat-rate cellular calling plans won't attract many customers, they will over time lead to significant changes in how we acquire and use mobile services.

Copyright © 2008 IDG Communications, Inc.

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