AT&T announced recently that it would start reducing early termination fees by $5 per month ($60) per year off its current $175. Sprint apparently is (will) do the same and Verizon made similar changes in 2006.
Until recently, the wireless carriers told customers 1-2 year contracts were necessary to subsidize handset discounts. With the exception of higher-end mobile handsets--smartphones and PDA's--this is deceptive and untrue. Carriers who supply a cheap flip phone handset pay virtually nothing at wholesale from their suppliers. And customers, who choose higher-end smartphones and PDA's, amply reimburse carriers for handsets in less than six months based on over-priced data plans. Moreover, increasing numbers of customers now purchase their own unlocked GSM or CDMA phones on the Internet. Read my MarketingBeyond post for background on cell phone pricing strategies.
Carriers lock customers into contracts for only one reason--the guaranteed revenue stream. The average cell phone customer in the U.S. pays about $55 per month. A two-year contract, based on that price, generates a minimum of $1,320 over a 24 month term. While customer acquisition, marketing and operational costs eat into carrier gross profits, locking customers via contracts is unethical and a poor pricing strategy to recover these costs. (Satellite TV companies, such as DirecTV, whose upfront installation costs for dishes and receivers, have a legitimate reason for contracts.)
Carriers, realizing that the U.S. cell phone market is saturated (250 million active handsets, mostly used for voice services) recently introduced unlimited voice plans at $99 (Verizon and AT&T Mobility) for two reasons. First, average individual or family plan contract customers rarely exceed the 400-1,400 maximum minutes and, if they do, carriers usually write-off the excess minute charges when customers threaten to change carriers. As long as carriers' networks can handle the additional traffic, they don't incur higher fixed costs.
Encouraging customers who primarily use their mobile handsets for voice to buy data plans is the main reason for the change to unlimited voice plans. Monthly data plan charges vary from Sprint's $15 basic Internet package to Verizon and AT&T's $50 for Enterprise-level BlackBerry service, producing an additional $360 to $1,200 over a 24 month contract.
To ensure continued profitability, carriers are marketing data plans to consumers, predicting enough users will opt-in, as mobile customers in Asia, Europe and the U.K. have done for years. "On-Deck" data applications and Web access--the news, weather, sports, horoscope and applications provided by carriers and their partners--produce the highest profits. "Off-Deck" applications, encouraged by the Google Android initiative and accessed through the mobile Web, bypasses carrier control and is less profitable. Carriers only charge for data usage. As innovative off-deck applications reach the mobile market, carriers will compete for application revenues to increase profitability.
Download my ideal Android phone PDF on MarketingBeyond for a glimpse into the future of mobile telephony.
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