Telecommunications January 20, 2010, 12:17AM EST

Verizon Wireless-AT&T 'Price War' May Boost Revenues

Increased use of data plans could follow the mobile-phone service providers' moves to cut prices on unlimited calling plans

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Don't be fooled by the latest round of price cuts by Verizon Wireless and AT&T. The two biggest U.S. mobile-phone companies said on Jan. 15 they'll cut monthly prices on unlimited voice calling packages by $30.

While the decreases make voice calling cheaper, they and other price moves announced the same day are designed to get subscribers to opt for data plans that typically carry higher price tags and fatter margins for mobile-phone service providers. So the net effect may be increased revenue, analysts say. "We could see a move upwards rather than downwards," says Jennifer Fritzsche, an analyst at Wells Fargo Securities in Chicago, who recommends buying shares of AT&T (T) and Verizon Communications (VZ), co-owner with Vodafone Group (VOD) of Verizon Wireless. "Any kind of voice pricing is very much a commodity," Fritzsche tells Bloomberg News. "Data is the future."

Verizon Wireless, for example, may sacrifice $540 million in voice revenue while generating an additional $630 million in data plan sales, according to Credit Suisse (CS) analyst Jonathan Chaplin. That suggests a net gain of $90 million. Only about 2% of wireless subscribers will see lower bills as a result of the price changes, according to estimates by JPMorgan (JPM). Effective Jan. 18, Verizon Wireless and AT&T will charge about $70 apiece for unlimited voice calls.

In some cases, lower prices on voice plans may make users more comfortable paying the extra fees for data plans. At the same time, the carriers introduced policies designed to encourage customers to sign up for non-voice services from the get-go. New AT&T customers who buy certain non-smartphone devices, for instance, will now be required to spend at least $20 a month on unlimited texting or data plans. Those customers weren't required to buy data plans before.

Targeting "Feature Phones"

Verizon Wireless is forcing more subscribers to pay for data, as well. New and renewing Verizon Wireless customers who buy certain multimedia phones, such as the LG enV3, must now buy a data plan, ranging from $10 to $20 a month. Previously, owners of all but two of the carrier's non-smartphone devices could forgo data plans.

Smartphone users at both carriers are required to pay mandatory data charges already.

Many of the new data plan requirements apply to so-called feature phones, which can access the Web but aren't technically smartphones, and are among the most popular mobile devices sold today. Fewer than 10% of users of these phones buy data plans, estimates wireless consultant Chetan Sharma. "There's a significant number of consumers out there who like the idea of a cutting-edge handset but not of paying for services," says Michael Nelson, founder at Nelson Alpha Research.

By doing away with one of its data plans, Verizon Wireless effectively hiked prices for some feature-phone owners who are heavy users of mobile Web browsing, video, and e-mail.

While getting customers to pay more for data can boost a carrier's bottom line, the added use of Web surfing and other non-voice services adds to demands on already strained wireless networks. That in turn may push carriers to boost investment in network equipment.