Mobile Sands

August 8, 2009

How Unlimited Voice at $50 or Less May Change Everything

Unlimited Nationwide Voice – Now for $50 or Less

18 months ago, on Feb 07, 2008 Sprint became the first major US carrier to launch an unlimited voice & data plan – for $119.99/month.  Verizon responded within 12 days with a $99.99/month unlimited voice planAT&T  immediately matched it & so did T-Mobile.  On Feb 28, 2008 Sprint lowered the price of its $119.99/month “Simply Everything Plan” to $99.99/month and few days later launched a $89.99/month unlimited voice plan.  Carriers called their offering revolutionary and there was talk of a price war.

In January 2009, Sprint’s Boost Mobile subsidiary launched a $50/month prepaid unlimited voice, text, PTT and data plan. Boost uses Sprint’s iDEN network and Sprint probably offered this plan because there was lot of spare capacity on its iDEN network after several quarters of steep subscriber losses. Within 8 weeks of launching this plan, Boost signed up 764,000 new prepaid subscribers – growth that took everyone in the industry by surprise. It was a game changing event. Boost, of course, is not the first unlimited flat-rate voice service. Both, MetroPCS and Leap Wireless, have been offering unlimited voice for $50/month for years. But Boost is the first one to offer unlimited flat rate on a nationwide network.  Virgin Mobile (a Sprint MVNO) announced a $50/month voice + data plan in April. Though Verizon initially criticized Sprint for halving the price for unlimited voice, it started testing an unlimited plan of its own called StraightTalk with MVNO partner Tracfone (an America Movil subsidiary) in June.

Carriers Use MVNOs and Subsidiaries to Offer Lower Rates

Unlike unlimited voice plans offered by major carriers in 2008, this year’s unlimited plans are being offered through MVNOs or subsidiaries. These MVNOs or subsidiaries use prepaid billing, offer a smaller range of handsets, do not require long-term contracts and do not offer any handset subsidies  High-end smartphones like Blackberry and Palm Pre are not part of the handsets offered by the MVNO, and customers may not get certain features they get on the main network.  Consumer now have a choice – they can go with the expensive “full-service” brand (Sprint, Verizon) or with the “discount” brand (Boost, Tracfone).

Service providers in other industries have tried such strategies in the past – often with limited success. This was the idea behind “Ted from United” and “Song from Delta”. Just like MetroPCS and Leap Wireless were offering unlimited voice service before Sprint and Verizon jumped in, Southwest and Jetblue were offering low-cost airfares before Ted and Song. With Ted and Song,  United and Delta tried to emulate Southwest and Jetblue’s cost structures by using single a class of planes (Airbus A320s for United and Boeing 757 for Delta), charging for in-flight snacks, and paying lower salaries to crews. They tried to differentiate against Southwest and Jetblue by using their national networks and frequent flyer programs. However, by doing so, they could not maintain sufficient differentiation between the discount and full-service versions.   Customers earned the same frequent flyer miles whether they flew Ted or United and were able to use the entire network of the full-service airline. Yes,  there were no first class cabins, but most customers did not care. By 2008, both Delta and United had discarded the sub-brands, and today United and Delta operate more or less like discount carriers.

What’s Next?

Though Ted and Song did not survive, they did help convince United & Delta that majority of consumers really don’t care about their “full-service” offerings; that it is better to charge a lower fare and sell snack boxes on board than to charge more and bundle-in meals. It also forced many carriers to simplify their fleets and re-negotiate labor contracts. The airline business was changed forever and Ted and Song were the harbinger of these changes.

Unlimited nationwide voice offered at half-the-price of comparable services, but through a prepaid, subidy-free, business model qualifies to be a similar disruptive innovation. And its impact is likely to be far-reaching. For instance, it may:

  1. End the current, handset subsidy-based business model
  2. Move from postpaid per-minute billing to prepaid flat-rate billing
  3. Change the set of must-have services. Integration with facebook may become more important than three-way calling.

Such far reaching changes will affect everyone in the wireless value chain – from handset vendors to network equipment suppliers.

  1. If handset subsidies go away, it will force handset vendors to compete on the basis of their brands and cost structures rather than carrier relationships.
  2. As ARPUs fall, operators will push equipment vendors to lower network cap-ex and op-ex, creating opportunities for some and eliminating the business of others.
  3. Change in must-have services will allow technology suppliers to make a stronger case for technologies like VoIP over EVDO/HSPA/LTE or femtocells that offer lower-cost but may notalways offer services parity.

Change is in the air. And though it may not benefit everyone in the industry, it will keep the engine of innovation humming.

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