Thursday, January 21, 2010

Fake Price War Between AT&T and Verizon Hides Real Costs

A terrific piece on cnet breaks down the new cell phone plans being offered by Verizon and AT&T:

No big surprise, but Verizon and AT&T's recently announced "cuts" in cell phone rates really mask rate increases. Cnet breaks it down nicely. For most customers, rates will increase. (So why should we believe AT&T and Verizon execs when they promise that tiered pricing would mean lower rates for most customers?)

Also, as it's no big surprise that AT&T's rates and Verizon's rates are almost identical in every way. (How do you spell, "collusion?" Kind of like you spell price fixing.) Of course, the pricing packages are put together in as confusing a way as possible to make it difficult to compare the real costs of service (not even including taxes, etc). But the short of it is that Sprint costs on average $20 less a month than AT&T or Verizon and T-Mobile $40 less a month.

So what does one get for the extra money you pay to Verizon or AT&T? Verizon claims to have a better network. AT&T claims to have the best. Neither are much different. As far as I can tell, Spring and T-Mobile customers are just as happy, if not more, with their coverage. AT&T, of course, has the worst customer service ratings.

So right now the only thing AT&T has to offer for that extra $40 a month is that if you have an iPhone, you'll have no choice but to use their service. That seems likely to change soon, and real rate decreases will happen if you can move your iPhone service to T-Mobile over the coming year.

Until that happens, lets talk about why rates are confusing. Despite what AT&T execs and Verizon execs claim about "data" hogs and wanting to price cell phone service like "water" or "electricity" (how about pricing it like gold?), the real costs of cell phone service are in… service. It costs money to put the phones in stores, to sell them, to bill you, to answer questions, solve problems, all those things that require actual people (and sophisticated software created by people). Yes, you also need towers and electricity and computers and networks, but once those things are in place, the costs per customer don't vary much whether someone uses their phone a lot, or a little. It's pennies, not even nickels. Obviously, it costs to build capacity, it costs to expand coverage, but once that coverage and capacity is in place, flat pricing makes the most sense. Not only because the difference in a high use customer and a low use customer is marginal (pennies) but keeping track of all those "minutes" or data usage costs more in paperwork and computer time than the actual cost of use.

Unless, of course, you're charging a lot for that imaginary extra cost. For example, it probably costs $20 or so just to provide national cell phone service to a customer, whether he uses his cell phone a lot or a little. Then real difference between a high use customer and a low use customer might be as little as 30 cents in electricity. Keeping track of exactly how much each customer uses might cost an extra buck in paperwork, so you're losing money just bothering. That is, until you charge $30 more to the customer who's only costing you 30 cents more. Get it?

This is why all true low cost providers usually drop tiered pricing and go quickly to flat rates. It's not worth the paperwork unless you can convince people to pay extra for it. This is why in the early days of the internet, within a few years, all providers went to unlimited data plans. But big telecom has been fighting this ever since, because there's money to be made in the illusion that "data hogs" cost more. Thus, it's important for bills to be as confusing as possible.

But low cost providers like T-Mobile, calling cards, Skype, Vonage, are making it harder and harder to convince people that cell phone "minutes" are worth paying extra money for. So "unlimited" plans are becoming more and more common (notice they never call them "flat rate") for voice service. AT&T and Verizon can't continue to charge $40 more for the same voice service without offering something else.

So these big Teleco's are shifting the pricing away from voice and focusing on data plans. The new pricing really is about charging people for mandatory "data" plans. People with midrange phones that have lousy internet features now have to pay to use them. Whether they want to or not. Of course, maybe if people get used to using midrange phones for internet, they won't need iPhones and AT&T can stab Apple in the back. Hey, it probably won't work, but why not try?

The Holy Grail for AT&T and Verizon would be if they can somehow shift from charging for imaginary "minute" costs and charge for imaginary "data" costs. But customers scream whenever they bring it up. So in the meantime, they charge separately for extra services. $50 for voice, $20 for texting, $30 for internet, etc. Once again, these are imaginary distinctions. The costs of servicing a cell phone are about the same, whether someone uses texting or voice or data. But the illusion of providing extra service is something these big companies can demand extra money for. Here's a great piece by Stacey Higginbotham on Verizon's confusion in trying to figure out how to charge customer's for data:

So when are these companies going to stop playing games with customers by trying to rip them off with imaginary services? Why not offer "actual" real services that people would pay extra for? I would pay extra for a cell phone with switchboard services, meaning it could use more than one phone number and manage messages from more than one line. This is very technologically possible, but nope, no one offers it. There are businesses that would pay to have a live person take messages, why doesn't AT&T offer that option to the average customer? What about offering concierge service? How about some exclusive content? How about data storage? (Why can't I send old messages from my iPhone to a long term message storage site?) I would pay extra for tethering my iPhone tomorrow, but AT&T lied about providing that service a year ago. Why can every other iPhone user in the world tether but not AT&T customers?

Instead, what we get are announcements of "price cuts" that hide price increases. Maybe these huge corporations will keep getting away with this, but I suspect it's going to catch up with them eventually. Someone will provide real competition some day soon, and they simply won't know how to respond until it's too late.

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