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.
Sprint Nextel May Follow Suit
AT&T and Verizon Wireless are not alone in charging low prices for unlimited talk. T-Mobile USA offers an unlimited talk plan for $60. On Jan. 12, MetroPCS (PCS) announced a $40 plan that includes unlimited talk, text, Web access—and even regulatory fees and local and state taxes.
More price declines may follow. Sprint Nextel (S) may reduce prices, says Todd Rethemeier, an analyst at Hudson Square Research. "I suspect Sprint will probably have to respond, as well; you need something to attract attention," he says.
"We're always looking at our pricing and evaluating whether changes are needed," Emmy Anderson, a spokeswoman for Overland Park (Kan.)-based Sprint, says in an interview with Bloomberg News. "The plans that we offer right now, we really feel are giving customers the best value in wireless."
In the next one to two years, unlimited-plan prices may drop by another 25% to 30%, Sharma estimates. At some point, the revenue additions from increased adoption of data plans may become smaller than the revenue lost in the cuts. Industrywide revenue per user may drop 2% this year, compared with 1% in 2009, Rethemeier estimates.
The continued price pressure may encourage further consolidation in the U.S. wireless industry. Analysts have often speculated that Leap Wireless (LEAP) and MetroPCS may combine or that T-Mobile USA may ally with Sprint. T-Mobile and MetroPCS declined to comment, while Leap didn't respond to a request for comment. "Until we see more consolidation, we won't see more stability in pricing," says Michael Mahoney, senior managing director at Falcon Point Capital, who says he's steering clear of wireless carrier stocks. "Unfortunately, price wars are awful to margins," Mahoney says. "I can't bring myself to buy these stocks when price wars are going on."