Cellular Bills – Getting Serious

I was reading an article called “The Cellular Money Pit” in the Wall Street Journal recently, and the opening line has stuck with me for days: “Cellphone plans are fast becoming the collateralized debt obligations of the consumer world, complex and chock full of unpleasant surprises.” If you’re not familiar with CDOs, let’s just say they are one of the financial instruments that nearly brought down the world’s economy during the current crisis that’s almost over, really, any day now, no foolin’ this time. The analogy in this case, however, isn’t entirely fair, as cellular service plan pricing is nowhere near as complicated as amorphous, highly-leveraged debt vehicles of indeterminate value. But they are complex and confusing enough to give one pause: is the wireless customer really getting a good deal these days?

In a properly-functioning capitalist economy, assuming zero inflation (or constant currency) and for any given good (other than a commodity) or service in increasing demand, prices decline while the quality of service improves, both over time, and up to eventual limits determined by the marketplace. This is the most obvious result of competition, a Darwinist process that rewards those who do the best job of serving the customer, as measured by the customers themselves. Thus successful firms see top-line growth, and, if they manage properly, bottom-line returns as well. Product differentiation, even just in marketing, can also make a big difference in results. Apart from a small amount of government regulation to reign in the possible excesses of capitalism, all should be well.

So why is an article like this one in print? Well the article starts by noting AT&T’s stealth data-plan price increase, and then the fun fact to know and tell that, according to JD Power and Associates, the average cellular plan has risen from $88/month in 2005 to $107/month today. The theory here is that we’re buying way more than we need – but cellular pricing plans have in general encouraged this, partially via the fear that one might go over one’s allotment and be hit with a bill the size of the GDP of emerging economies, and the use-it-or-lose it of cellular pricing in general. And the carriers price their plans to maximize revenue. Why 700 minutes month, for example, in some plans? Why, the article notes, it’s because the average family use 735 minutes a month, and that overage pushes them to buy more minutes than they need – way more minutes than they need, in fact. Ditto for data plans – it’s 200 MB/month, or 2 GB/month. Pretty big gap there, wouldn’t you say?

Look, you can’t blame the carriers for attempting to maximize their revenues. And I’m all in favor of their making a profit, so we can have all those cool new services we need and want. And, lo and behold, it is possible to get a better deal. First, if you’re a big company, you get to negotiate your plan. Do so with vigor.

And if you’re a mere mortal, be of good cheer. The advertising channels are filled with interesting deals from MVNOs and second-tier carriers, like Boost Mobile, Cricket Communications, MetroPCS, Net10, and Virgin Mobile. Plans here are cheap, although there are occasional gotchas and coverage may be limited. The biggest problem here, though, is handsets – the handset you want may not be available with the plan that’s best for you. And MVNO phones may cost more, although this is mitigated by lower plan costs and, in many cases, no contracts. Prepaid may also make sense for many users, especially those who don’t talk much. Believe it or not, that’s me. But I can saturate a data plan pretty quickly, so prepaid is out here at Farpoint Group.

Still, I will repeat my previous requests to the regulators. First, carriers must carry (“network neutrality”). Someone needs to be the big dumb pipe, just as someone needs to be a bank as opposed to an investment-services firm. Antitrust regulations need to be enforced if it appears all of the carriers are up to shenanigans when it comes to contract terms. There needs to be a separation of handsets and network services – no exclusive deals (“open access”). We need a competitive market in handsets just as we need one in services. Yes, handset prices could go up, but monthly service costs should more than correspondingly go down. There would be no need for complex lock-ins, penalties, and all manner of fees. And the market might even grow under these conditions, as lower prices and simpler deals tend to attract customers otherwise put off by high prices and arrogance – everyone could go home happy.

In the meantime, check your bill, think about what you really need, and shop around. The cellular world is often irritating, but nowhere near as bad as the WSJ thinks.