May 5, 2009, 10:05 am More Signs of a Coming Wireless Price War By Saul Hansell NY Times
http://bits.blogs.nytimes.com/2009/05/05/more-signs-of-a-coming-wireless-price-war/?pagemode=print Considering the devastating nature of the economy, the cellphone business had a pretty good first quarter, but all signs are pointing to dark days ahead. Dark days for the carriers, not their customers. Sprint was the last of the major phone companies to release its financial results. As the distant No. 3 in the market, Sprint’s first quarter wasn’t pretty. It lost $594 million and a net of 182,000 customers in the quarter. But across all companies, the total number of wireless subscriptions increased by 4.4 percent from a year ago, according to statistics compiled by Craig Moffett, an analyst at Sanford C. Bernstein & Company. (Leap Wireless, a relatively small player, has yet to report its first-quarter results. So Mr. Moffett’s figures include his estimate for Leap’s results.) Underneath that total, however, is a great deal of turmoil, as low-priced prepaid plans lure customers from much higher-priced plans, called postpaid, that commit customers to contracts. Mr. Moffett’s figures show that of the net increase in wireless subscriptions in the quarter, 80 percent of them were prepaid. That is a rapid and radical change in the dynamic in the market. In 2008, the percent of new subscribers that were prepaid never was higher than 51 percent in any quarter. What changed, of course, is that most of the prepaid wireless providers, including Sprint’s Boost Mobile brand, started offering a $50-a-month unlimited voice, text and data package. Sprint itself was able to add 674,000 new prepaid subscriptions in the first quarter. It had lost prepaid customers all last year. “It may be a sign that in these economic times, a large group of customers are being enticed by larger lower-priced prepaid plans and are trading down from contract service,” Mr. Moffett said. There are a lot of reasons why the shift to prepaid is only beginning. Many people, of course, are on one-year and two-year contracts so they can’t switch until those contracts expire. Moreover, the marketing behind the $50 offers was just ramping up in the first quarter. So Mr. Moffett worries that the large carriers, which now charge $100 a month and up for unlimited service, will have to ratchet down their prices. The economics of the prepaid business are tough. Not only are prices lower, but prepaid customers use the phone for calls and text more than postpaid customers, reflecting the chatty nature of young people who have been particularly attracted to the plans. To compensate, prepaid carriers invest less in customer service, and in some cases do not have as extensive networks Sprint can profit where other big carriers can’t because it has a relatively underused network it acquired from Nextel, which it is now using for its prepaid business. Dan Hesse, the chief executive of Sprint, said in a conference call with investors, that the sour economy is encouraging people to move to prepaid plans, both for the low price and the lack of commitment: “Post-paid is a form of de-levering where customers will say I’m not as interested in committing myself for two years, I don’t want a contract, I’m willing to pay the full price for the phone and not have that obligation,” he said. “The question is will that trend continue or is this a permanent trend regardless of the economy of moving toward prepaid? I don’t know that.” So far, more of Sprint’s Boost customers have come from other prepaid carriers than from postpaid accounts, he said. And some still are getting their first cellphones. Mr. Moffett said that the growth of prepaid business presents quite a challenge for the AT&T and especially Verizon, which has the lowest share of prepaid customers of all the major carriers. They have higher cost structures in part because they have more expensive voice and data networks, making deep discounts more difficult. Even more, the big carriers don’t want to undercut the prices they charge to business customers, even as they are tempted to offer discounts to keep the growth going. (That problem has helped create the inscrutable airline price structure.) But as Mr. Moffett reads the tea leaves, there may not be many good options over the next year or two. “The evidence suggests that we are nearing saturation of the market and it is becoming a zero-sum game where the battle is for market share and not market growth,” he said. “Unfortunately for the providers, that is typically a game that is won and lost with price.” -- ================================ George Antunes, Political Science Dept University of Houston; Houston, TX 77204 Voice: 713-743-3923 Fax: 713-743-3927 Mail: antunes at uh dot edu *********************************** * POST TO [email protected] * *********************************** Medianews mailing list [email protected] http://lists.etskywarn.net/mailman/listinfo/medianews
