22 Comments

Summary:

Until recently, revenue from unlimited voice and text plans were profit drivers for mobile service providers. Now, the two largest providers, AT&T Wireless and Verizon Wireless, are engaging in some serious price signaling. Rags Srinivasan looks at what’s driving this explicit communication.

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The two largest mobile service providers, AT&T Wireless and Verizon Wireless, are engaging in some serious price signaling. And you don’t have to take my word for it, because the two leaders are not only signaling, they are explicitly saying that they’re signaling.

“The carriers are probably concerned and hoping that if they raise prices the other guy will, too,” Denny Strigl, retired president of Verizon

“Is it going to cost them more money? Yeah,” Lowell McAdam, CEO of Verizon Wireless

“Verizon’s pricing that they announced this morning is exactly what we have been kind of signaling in the marketplace for the last couple of weeks,” Randall Stephenson, CEO of AT&T Wireless

And guess what, this is all perfectly legal. As a marketing guy, I am in awe of this stroke of genius.

Price signaling has always existed between the number one and number two players in any market. Agreeing to not engage in a price war is truly a win-win for the market leaders. Since outright price fixing is illegal, market leaders resorted to signaling to tell the other company their intentions or send a threat about their cost advantages.

But traditionally, it was more like flirting — ambiguous enough that the underlying intentions could be denied. Why are these two not shy about admitting to flirting now? The simple answer is the iPhone.

Not too long ago we worried about running out of talk minutes and paying overage. Service providers offered us tiered plans that offered more minutes for a higher price and unlimited minutes for an even higher price. With the additional revenue flowing directly to their bottom line, these higher priced plans were real cash cows.

For those who have any doubt about the profits from unlimited plans, I’d point out that the costs of a mobile service provider are sunk with zero marginal cost for additional minutes. And texts don’t even consume traffic channels — they piggyback on control channels.

In the five years since the iPhone entered the market, things have changed. Smartphone customers are now happy with the fewest minutes at the lowest price. Our mobile phones have become app platforms. We hardly use them for talking anymore, and there are other alternatives to text.

For wireless service providers, that means customers aren’t signing up for the unlimited plans and the cash cow is on the chopping block.

So what is left for AT&T and Verizon to do? Get rid of the limited talk minutes plan and offer only the all you can talk and text plan at the same total higher price as before. At Verizon Wireless, if you pick a smartphone, your only options are in tiered data plans. You always get unlimited voice and text.

In another genius pricing move, Verizon Wireless is presenting this $100 mobile service plan to customers in a bundle — talk minutes plus data. In the past, around $70 was allocated to talk because consumers valued it more. Now subscribers pay only $40, but they still pay the same $100 total price. This is nothing short of pricing excellence, protecting customer margin while also using strong price signaling to make sure that the next biggest market share leader follows suit.


Why is this signaling legal? There is absolutely nothing wrong in these pricing plans or in their signaling. A marketer is fully within their rights to not offer a certain product version and let other players know about it. I also do not believe lawmakers and regulators should try to dictate otherwise.

One, it does not eliminate competition. There are other service providers who can choose to provide cheaper voice plans. An extreme argument is, smartphones are not a necessity, customers don’t need to buy one at all.

Two, while it may look like this eliminates choices for customers and hence invite regulatory scrutiny, an arbitrage opportunity does exist. Consumers can purchase a regular phone for $40 a month with limited minutes and use a Nexus 7 tablet with $40 for data connection. The trade-off is having to carry two devices for a savings of $480 over two years. But how many will actually take this option? Did you check the line at last iPhone release?

As a customer, you may not like it, but viewed as a product strategy move, this is business at its best.
Rags Srinivasan is a management professional who specializes in product strategy and strategic marketing. He is currently working on big data products. He blogs at Iterative Path and tweets at @rags.

  1. Give me the option for data only on my smartphone and pay per minute/text and I’ll be a happy camper.

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    1. Try T-Mobile unlimited 4g plan. $30 for 5g data at 4g speed + 100 minutes free. You can purchase additional minutes if you need on pay per minute anytime.

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  2. “this is business at its best”

    And that’s what’s wrong with business. Instead of providing a service that directly competes with the alternatives and incentivizes customers for choosing you, raise your prices for no reason hoping that your competitors will do the same thing.

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    1. Idon't Know Sunday, July 8, 2012

      Plus you can depend on articles like this one cheer leading the move hoping for advertising from the carriers.

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  3. i did not think there was a cellular data option for the nexus 7 ??

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  4. Got a Nexus for my son and on the T-Mobile $30/mo 100 talk mins, unlimited text/data. It’s great.

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  5. I’m afraid you’ve overlooked a few relevant facts. Verizon and AT&T are operating on public airwaves. By using different wireless spectrum and technologies and contracts they have strategically eliminated the possibility of customers freely migrating from one to the other as would be the case in a truly open market. Moreover, no wireless provider has full coverage so in many locations there is limited choice even from among the big four. Yes, the wireless providers are clever businesses, just not in the way you are arguing.

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  6. blarneystoner Sunday, July 8, 2012

    This is bad business because it is so transparent. Verizon and AT&T aren’t the only game in town and when one does a 2 second price comparison, you quickly find that there are other/better options.

    The way to work around these awful pricing plans from Verizon is to not buy from them. Buy a phone and go month to month with one of a myriad of companies who offer unlimited talk/text and a good amount of data for $50 to $60 per month (i.e., Simple Mobile, Cricket, H20 Wireless, etc.)

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  7. blarneystoner Sunday, July 8, 2012

    Any analyst suggesting this is “good” business is an analyst not worth the fees they are charging. It is a transparent money grab by a big lumbering company that only seeks to protect their user fees.

    The quick and obvious work-around is to buy your phone (yes, buy the darned thing!) and take it to a month-to-month provider (there are many) and then bask in the love that is unlimited talk/text and a good amount of data for $50 to $60 per month. Simple Mobile, Cricket, H20 Wireless, Walmart, etc.

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    1. Yes, the opportunity to buy your own cheaper phone and choose pre-pay option does exist. If customers insist on a specific device like iPhone, service providers are merely taking their share of perceived value to customers.

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      1. Idon't Know Sunday, July 8, 2012

        Your article and comments make it sound like you work in PR for the carriers.
        IPhones can be bought unlocked and without a contact btw. Just one of many things you got wrong.

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      2. Agree with “Idon’t know”. I bought a Galaxy S2 in Europe and I use H20 Wireless !! Good service, but anyway, those carriers don’t have the money to invest on expensive network, so they “rent” those networks to AT&T or Verizon. Double win for AT&T and Verizon !!

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  8. John Crawford Sunday, July 8, 2012

    They’re like drug dealers, they get people hooked then they cut services and hike prices. They’re all crooks, laughing all the way to the bank. I say, them and the horse they rode in on. Yeah!

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  9. Benjamin F. Klahn Sunday, July 8, 2012

    Hey Rags,

    The nexus 7 does not require a data plan and in fact has no need for one. It does not have an appropriate radio. You can see the devices stats on it’s google play page here:

    https://play.google.com/store/devices/details/Nexus_7_8GB?id=nexus_7_8gb

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    1. I am done with the data plan on the carriers. I switched my family to feature or old smartphones that do not require a data plan. I have unlimited talk and text and if I need web information or gmail I can get it for free at work or home or anywhere there is free wifi (Starbucks). I am saving over $1,000.00 a year. The tide is turning for cell data. Tech is enveloping us where cell data plans will be pushed out. Google are you there? I hope your new phone lineup has talk/text and wifi together.

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    2. Benjamin
      You are correct. I read the Nexus initial reviews and did not check data sheet. That could be substituted with any other 7″ tablet that supports Wifi and costs ~$249-$299 (far less than full price of iPhone).
      There is arbitrage opportunity for customers to go with a regular (dumb?) phone and a smaller cheaper tablet.

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      1. Actually, my son and I are on a Verizon Family plan with 700 shared talk minutes, only use like 200 mins. I have the Verizon Nexus grandfathered into the $30 unlimited data plan, my son has an LG featurephone. My son wanted a Nexus, so instead of tying him to limited Verizon data, I got him the unlocked Nexus S and the T-Mobile $30/mo 100 talk mins, unlimited text/data. He carries 2 devices- the LG featurephone and the Nexus. He wanted a device that easily fits in the pocket, so no tablet, and yes Nexus S.

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      2. The other 7″ tablets that supports Wifi and cost ~$249-$299 don’t have appropriate radios either. Please do your research.

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  10. Reblogged this on vijaya prasad.

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