Why The Wireless Industry Is Moving To Flat-Rate Pricing

from the lower-transaction-costs dept

Tue, Feb 26th 2008 5:02pm — Timothy Lee

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

26 Comments

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Xyro TR1 (profile), 26 Feb 2008 @ 5:14pm

Well..
That's cool. What about data plans, though? I'm still paying overage by the meg...
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robo, 26 Feb 2008 @ 5:48pm

Metro PCS has offered unlimited plans for years for much less,Verizon Wireless, AT&T, and T-Mobile just continue to keep ripping everyone off with huge fees and large profit margins
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Evan Meagher, 26 Feb 2008 @ 5:52pm

Finally doling out unlimited minutes is a wonderful, very belated gift, but $99/month is an exorbitant price, at least in my opinion. Hopefully VOIP services like Skype will gain more market share when people finally decide not to let themselves be raped and pillaged by the telecoms.
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Anne, 26 Feb 2008 @ 6:16pm

T-Mobile Yea - Verizon Will Try To Suck You Dry
I have an unlimited data plan through T-Mobile for $49.99 a month with my PDA. Mobile phone service (400 anytime mins, nites and weekends free) is about the same price per month from Verizon. I needed a PDA for work that wouldn't be interrupted or the battery life drained by incoming/outgoing phone calls, and at the time, T-Mobile was the only company that had an unlimited data plan that met my needs.

What I've noticed is that Verizon is scratching and grasping at every last dime. Through my T-Mobile, I can access Google Maps for free, turning my almost 3 year old PDA into a GPS-enabled device. Verizon wants an extra $5 a month if I sign up for GPS mapping services through them.They also charge per megabyte if you want to use the internet on your cell phone.

Verizon also attempts to charge a sucker's fee for all kinds of optional services. I wouldn't mind paying for a single ringtone, but instead of letting me cough up the .99 cents for the stupid thing, they want to charge me the .99 cent fee PLUS a monthly subscription fee, PLUS an annual fee to renew the ringtone after 12 months.

Now, I haven't been able to discern yet how to hack the phone in order to upload my own ringtone, but I'm still trying. It's the principle of the thing, and once this Verizon contract is up I won't renew it, because I find this nickel and diming crap to be very distasteful. If I wasn't an experienced techie, I can also see where it would be very easy to accidentally sign up for some extra service on your Verizon cell phone.

T-Mobile has none of these little sucker tricks. Their pricing structure is clear with no bullshit.
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Xanius, 26 Feb 2008 @ 6:43pm

Re: Well..
It's an extra $30/month with some carriers or $15/month with sprint and the rest. Same goes for text messaging.

I think that sprint is going to release a slightly less expensive deal that has unlimited voice/data/texting here in a little while. They've been testing the unlimited plans in a couple of cities for several months now they are just being slow to release it wide because they wanted to see what the others would do so they could undercut it.
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Anonymous Coward, 26 Feb 2008 @ 7:11pm

Re:
Metro who?

I'm sorry, but I've *never* heard of Metro PCS. Where do you live? I've never seen an ad for them on TV, in the paper, or online.

They don't exist in the Pacific Northwest for sure, and I'm not certain about parts of California. What about the mid west?

Verizon, AT&T, and T-Mobile I *have* heard of. They have pieces of network in every state for the most part.
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Anne, 26 Feb 2008 @ 7:21pm

Re: Re:
I'm pretty sure that I've seen display ads in 7-11s for Metro PCS - I'm in Los Angeles.
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Iron Chef, 26 Feb 2008 @ 7:29pm

Re: Re:
Metro is actually real big. Look into them, leap is another. If those two were to combine (there have been discussions in the past) it would probably put at least one mid-tier company like Sprint/T-Mobile out of business, or force further consolidation of some sort.

A concern for T-Mobile is that they still haven't launched 3G, when other companies are now discussing 4G.
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Coffee.RF, 26 Feb 2008 @ 8:04pm

Or perhaps.....
It could also be related to the assertion in this story that the US wireless market is the most competitive in the world.

Sorry for the cached version, msnbc isn't hosting it anymore;

http://64.233.169.104/search?q=cache:XUkQqHRdPqcJ:www.msnbc.msn.com/id/23123040/+U.S.+wi reless+market+one+of+most+competitive+worldwide&hl=en&ct=clnk&cd=1&gl=us&client= firefox-a
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DREi22, 26 Feb 2008 @ 8:28pm

Re:
And what the h*ll is MetroPCS?
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DREi22, 26 Feb 2008 @ 8:31pm

Re:
I see what you all are saying they are really huge being only ion 6 states. GTF out of here with that BS!
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Robfactory, 26 Feb 2008 @ 8:32pm

Metro Piece of SH*T! aka Metro PCS
Metro services major metropolitan areas.(like 7)
They do not service all of the US. They relay on Sprint's older technology to run their service.
So obviously it does not run on a GSM Network.
Asides from getting hang up calls (which they have gotten better at), you are very limited to their network range.
Mind you, they have a $40 all you can talk; however, their services are limited to (local calls) If you want text or long distance you have to pay extra.
I remember when AT&T before cingular had a $99 all you can talk mobile plan. It will be good for certain people who spend all day on the phone.
As far as T-Mobile, they usually have the best plans and the cheapests. I have a 3 line fam plan and I pay $10 for unlimited text and video text on all 3, not each.
BTW here is a link of what Amazon is selling
http://www.amazon.com/gp/feature.html/ref=amb_link_6375702_1?ie=UTF8&docId=1000200921&pf_r d_m=ATVPDKIKX0DER&pf_rd_s=center-4&pf_rd_r=09DA3ZMMA7JG1ZQRP8YA&pf_rd_t=101&pf_rd_p= 366619501&pf_rd_i=301185
It compares all of the 3 major networks plan. T-Mobile throws in Messaging for free :-)
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Jeremy, 26 Feb 2008 @ 9:25pm

Re:
Yes, and you can't use MetroPCS outside of where they offer service. I realize there are some people who never go ANYWHERE but the vast majority of Americans want to be able to go anywhere and use their phone, and that is going to cost a bit more than $49.99 a month.
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Anonymous Coward, 27 Feb 2008 @ 1:57am

Re: Metro Piece of SH*T! aka Metro PCS
Why should technology be a factor in a purchasing decision?

For example, if you buy a car, you buy it to fill a need of transportation.

If you buy a phone, your need is communication.

To bring technology in as a major purchasing factor during the sales process is like buying a car based solely on the fact of if it runs on Unleaded or Diesel. Granted, each type of technology has pluses and minuses, step back and ask, does it really matter to 90% of the population?

To rephrase: at the end of the day, who really cares if your phone runs on GSM/CDMA or your car runs on Unleaded or Diesel.

If you can't make it to your appointments, the car is useless.

If you can't communicate, your phone is useless.
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Twinrova, 27 Feb 2008 @ 3:52am

Re: Re:
And now you know why you've heard of those others and not Metro PCS.

After all, who do you think PAYS for all those ads so you do know who they are?
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Twinrova, 27 Feb 2008 @ 4:00am

Ironic how a "Free" topic and this topic conflict.
So, Mike, I take it you don't read comments?

No matter. Hey, with this $99/mo, do customers get anything for free (besides the peace of mind of tracking minutes)?

Oh, wait! That's the next step, isn't it? Get free unlimited texting with every $99 plan purchase! Not enough? How about 5 free ringtones? Hell, how about free unlimited wallpaper, music, and ringtones.

It's coming, but not until those suckers who pay $99/mo stock up the revenue for Verizon (et al) to do this.

You said it yourself, there's less cost for them to go flat rate but now that the basic rate has been raised, those "free" elements are inclusive and thus, zero cost to the customer. They're still paying for them with the base fee.

Welcome to the "free" world.

Oh, and read Anne's post. See how long businesses stay around when they truly do try to offer free.
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Jim, 27 Feb 2008 @ 4:06am

$45/mo unlimited, effectively
I already effectively have $45/mo unlimited -- because I don't call hardly at all during the day, when my meter runs, and my free nights and weekends begin at 6 pm. So why should I pay an extra $54/mo?
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Killer_Tofu (profile), 27 Feb 2008 @ 5:38am

Re #16 Twinrova
Hey, you do realize that Mike did not write this blog post, right?
Notice the name up there on the left side of the page?
It says "Timothy Lee" as in NOT Mike Mesnik.

Anyways, the articles do not conflict at all.
Once you have the plan for all you can eat for phone for 99$, if that includes data, then yes, you should be able to download ringtones, wallpapers, etc for free.
It just makes sense since data in already included.
But that is only if data IS included in the all you can eat for 99$/month. If its not, well, then it doesn't apply.

So no, the economics of free, and this article, are in no way conflicting.
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Anonymous Coward, 27 Feb 2008 @ 5:43am

Re: Re:
ya, here in South Georgia, those of us that are transplants and real humans, call that service ghettoPCS because it is aimed at the shitpo crackheads that live here in the south. Most of them think that cheaper is better. Not always when you don't get a good choice in phones.
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Anonymous Coward, 27 Feb 2008 @ 6:18am

Fact is the vast majority of cell phone customers never come close to using up their alloted minutes. Cranking up the all you can eat to $99 really won't change anything for the vast majority of customers because they were not using up their 400 or 500 that they had at cheaper rates.
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Spike, 27 Feb 2008 @ 7:04am

Not as "flat" as it sounds
I called up AT&T to switch to flat-rate for my three phones on the Family Plan. Right now, I pay $120/month for 2000 minutes across the three phones (excluding the free nights and weekends and within network minutes). Surprise, surprise - the flat rate applies to only one phone and there is no family plan, so it would cost $300 for unlimited minutes. I haven't seen this on any of the announcements about "flat" rate...
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Angry Dragonz, 27 Feb 2008 @ 7:56am

Still Way too High
NIce idea but a hundred a month plus "taxes and fees" is a rip for cell service but I like that this is gonna create more competition to lower their unlimited bundle prices. I'll wait till it drops to 50 since thats what I currently pay and dont come close to using all my alloted minutes.
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solak, 27 Feb 2008 @ 9:04am

back in the day, i had this bank account
The debate between detailed charges and flat rate is not new.

A few decades ago, I had an account at a bank that paid the highest interest rates of any in the area. It seemed great on the face of it, but then we discovered how hard it was to balance our checkbook against the statement. Not only were there additional little deposits of interest into our accounts, but there were little withdrawals of fees for everything: new checks, register tablets, teller services, and every ATM transaction (withdrawals, balance inquiry, etc.) was another dime or quarter gone. This was before the WWW, or else I would have been surprised that they didn't charge a fee for the paper statement.

The time we had to spend to add and subtract all these numbers far exceeded the value of the higher interest they were paying us, and we didn't even get to keep that money, considering all the debits they charged in fees. We switched to the lower-interest, free-ATM bank.
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Robfactory, 27 Feb 2008 @ 9:14am

Unlimited for $99
Well this price plan is obviously guided at a certain market. I do not know why people are crying in this forum. I know people who pay over $100 for 4000+ minutes. Obviously, this will benefit them enormously. That and it will benefit the business traveler or person who pays over $100 monthly.
As far as mocking the unlimited sms services, well at least it's a savings of $15-20. From the reg. saving you'll get with the flat fee.
For the person who doesn't have a house phone and spends over $100 in their plan this will benefit them greatly.
For the person who stay within the home area, well obviously Metro PCS is better for you. But I think now-a-days most people travel outside of their home region.
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Anonymous Coward, 3 Mar 2008 @ 11:06pm

Ampd mobile had 99 plan 2 years ago but they went broke
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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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