Most of us recall the "pre-divestiture" days of the Bell System where the business model was to crank up revenues from business customers, mandatory equipment rentals and pricey long-distance services. That kept to cost of unmeasured residential POTS down and still maintained a healthy profit margin for the company.
Well, the wireless business is not all that different. Quoting from a Newsweek article which appeared last July (and which I posted to Telecom Digest at that time):
According to the latest data, the U.S. "adoption rate" for mobile phones stands at 85 percent. . . . But for wireless providers, it's a mixed blessing. With fewer new customers to bring online, the industry's subscriber base grew by just 8.8 percent in 2007. To keep revenues rising, the big carriers are focused mostly on stealing each others' existing customers and getting mobile users to spend more on ringtones, streaming music and other add-ons.
To keep basic monthly fees attractive and to be able to offer low-cost voice calling on a national basis, the wireless carriers generate significant revenue from high-margin optional services such as downloads of music, games, ring-tones and other applications -- and from email, web browsing and SMS text messaging.
Unfortunately, there is no such thing as a free lunch. Casual text message users (those who pay 20-cents per message rather than a take-or-pay monthly text plan fee), are paying much more than the carriers' costs.
But is that rare customer who signs up for the minimum cost monthly voice plan with the "free" bare-bones handset going to produce enough revenue to allow for the maintenance and development of a carrier's infrastructure?
This kind of at-cost or below-cost basic pricing with high-margin options was pioneered by American automobile companies and has found its way into consumer banking, air travel, cable television, and the price of beer at the ballpark.
I don't always like the way the system works, but I can understand it.
Regards, Will