Flat Rate Pricing in Mobile - a Tricky Bet

Implications: Flat rate pricing of mobile services can work for the industry as long as a price war does not begin.

Analysis: All-you-can eat voice has come to the US mobile industry with Verizon Wireless’s $99.99 unlimited mobile plan.  Within 24 hours of Verizon’s announcement, AT&T and T-Mobile announced comparable unlimited calling plans.  Sprint has yet to announce an unlimited plan, and it is worth noting that Dan Hesse, who was AT&T Wireless’s CEO in 1998 when it rolled out its revolutionary “One Rate” plan, became CEO of Sprint Nextel in December 2007.   

After years of rapid subscriber growth, the mobile industry is looking at new ways to maintain profitability.  Data revenue expansion is the leading candidate, with several initiatives in place, but voice still represents roughly 85% of service revenue.  One positive trend is the so-called “landline substitution” effect, where millions of consumers have traded in their home landlines and opted for cellular-only communications.

With a $100 fixed rate, all-you-can-eat plan, mobile operators are forgoing overage charges and subscription fees for high-end subscribers, who represent less than 10% of their subscriber base.  These operators are betting that the incremental revenue from converted customers who previously spent $50-$100 and customers who eliminate their landlines altogether, offset the lost revenue.  As long as the fixed price remains well above the ARPU (Average Revenue Per User) of roughly $50, and usage does not spike, mobile operators should fare well.  The fear, however, is that if a price war ensues resulting in a price reduction, mobile operators will be hurting their profitability.