Thursday, July 21, 2011

Wireless Cost Per Minute and Consumer Behavior

           It has become a largely unquestioned “fact” that U.S. wireless consumers enjoy remarkably low per minute costs rivaling what the poor in Africa and Southeast Asia pay.  Sponsored researchers recently chided the FCC for failing to state unequivocally how effectively competitive the U.S. wireless market is, largely by reciting the low cost mantra, counting carriers and heralding evidence of market entry.  See, e.g.,  Gerald R. Faulhaber, Robert W. Hahn and Hal J. Singer, Assessing Competition in U.S. Wireless Markets: Review of the FCC’s Competition Reports (July 2011); available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1880964.
            The low cost claim can be validated by certain assumptions, most notably that subscribers consume all or nearly all available minutes of use per month.  So one way to goose the cost statistics would be simply to take the maximum available minutes of use, e.g., 450, 700 or 1200—remarkably identical for the Big Four national carriers—and divide it by the monthly subscription rate, conveniently forgetting to add the extra 20-30% in fees, taxes, surcharges and pass throughs.   A slightly more valid analysis would use some national consumption average rather than the maximum allotment.
            So if you come close to the allocated maximum minutes of use, or if you take the carriers at their word and robustly consume on an all you can talk, text or surf basis, you certainly have low per unit costs.  It makes absolute financial sense to get on a texting rate plan at $10 a month—no make that $20 a month, raised in lock step by the Big Four—if you have nimble thumbs and one or more teens in your household.  U.S. carriers don’t need sponsored researchers to tout lowest global texting rates when the average teen makes over 3300 a month.  
Rather than prove the U.S. wireless marketplace is robustly or even effectively competitive, such uncalibrated calculations of cost do nothing more than confirm certain rather obvious facts about consumer behavior.  When presented with a large basket of minutes, or better yet a buffet-style, unmetered service, many consumers push their consumption to maximize the perceived value.  When I consume a buffet meal—especially those grand affairs at hotels—I consume well past a normal level of satiety.  Call it wasteful, unhealthy and an encouragement of “overconsumption.”  Call it unfair, particularly to people with small appetites who must subsidize their gluttonous, big appetite counterparts.  But recognize that the low per minute rate results less from competition and more from a pricing strategy shared by all carriers offering post-paid plans. 
Becuase the majority of U.S. wireless subscribers have post-paid plans with unlimited or large baskets of minutes, researchers can tout low per unit costs only if monthly consumption is high.  Users of metered service are far more attentive to their usage and their cost per minute cannot drop simply by talking and texting more. 
The availability of low cost per minute wireless rates in the U.S. for subscribers with large baskets of minutes or unlimited use says little about whether competitive necessity forces low rates.  Nor does it “prove” a market driven need to price rates low. 

3 comments:

Steve Crowley said...

This makes sense. On down the road, as operators implement Wi-Fi offload in a seamless manner using the 3GPP Generic Access Network specification, more minutes will be on "free" or much lower cost networks, reducing the average cost per minute. I think this Wi-Fi offloading phenomenon has implications for a competition analysis as well, since the smallest local operator will now be able to have its network accessed nationwide.

Nicolas Martin said...

Doesn't Mr. Frieden know that one can use a no-contract plan available at Walmart that offers either 1000 minutes each of voice/text/web for $30/month or unlimited of each for $45/month? A perfectly good refurb phone for this service is $10, and the service piggybacks on either AT&T or Verizon's network. Do we need to pretend that the "big four" are the only options?

My wife and I use two of these no-contract phones since our Verizon contract recently expired. We have the same number of voice minutes that we had with Verizon, but we now have web and text. Our monthly bill has dropped from around $150 to $60.

Cheaper options are available, and it is up to consumers to locate them and drive down costs. Welcome to the real world.

Rob Frieden said...

Mr. Nicholas:

Thanks for your comments. Yes, of course cheaper resale options are available. But please understand that wireless facilities-based carriers decided whether to allow resale margins to exist. Vz and T could decide tomorrow to eliminate the margin. So while I accept the resale option provides a competitive alternative--and I too use a prepaid service--these ventures resell the minutes of a Big Four carrier.

And just how long do you think one of the Big Four will allow resale to cannibalize too many customers that would otherwise take the more expensive phone and service?