Has Sprint Started a New Wireless Price War?

January 15, 2009, 5:56 pm
Has Sprint Started a New Wireless Price War?
By Saul Hansell

Cell Phones

If you you pay $100 a month or more to AT&T or Verizon Wireless on your wireless bill, don’t expect your bill to drop in half quickly. But the new $50-a-month unlimited wireless calling plan from Sprint’s Boost Mobile brand may well set off some significant price-cutting by wireless carriers.

Sprint is starting a price war as a way to wring value from the underutilized network of Nextel, the wireless company it disastrously bought in 2005. Nextel’s claim to fame was its push-to-talk feature that let people communicate with other Nextel phones without paying per-minute rates. Now that most wireless operators offer plans that let people call anyone else on their network at no additional charge, demand for this feature is dropping. The limited selections of phones that use Nextel’s iDen technology also has discouraged customers.

Boost Mobile is Sprint’s brand that mainly sells prepaid wireless service meant to appeal to young people, who talk a lot but are very price-sensitive. Boost had 3.9 million customers at the end of last September. (Prepaid service is less expensive to operate than more traditional postpaid service, where customers get a monthly bill for use after the fact, because there are no credit losses. In addition, carriers don’t subsidize the purchase of handsets and often spend less on customer service.)

Last year, the four largest wireless carriers introduced $100-a-month postpaid wireless calling plans. Sprint includes text message and Web surfing at that price, while AT&T, Verizon and T-Mobile charge extra for those features.

So far, these plans, which cut the bills for some very heavy talkers, haven’t led to price cuts for more typical users. The average revenue to wireless carriers for each user has been increasing slightly as more customers buy data and text-message services. The revenue from voice calling has been falling, largely because more customers are buying family plans with more users sharing a bundle of wireless minutes.

Prices have been falling, however, in the market for prepaid wireless service, which has mainly appealed to young people in urban areas. Two growing regional carriers, Leap Wireless and MetroPCS Communications, have been offering prepaid unlimited wireless service at prices around $50 a month, but Sprint’s network is much broader. Shares of Leap and Metro PCS fell sharply today as investors worried about the competition.

Boost, which has 3.9 million customers, is promising a heavy marketing campaign that will try to broaden its appeal to customers who have been using postpaid plans. Its $50 offer includes voice, text messaging, wireless Web surfing and most taxes, making it a better value than most of the entry-level postpaid plans, which often start at about $40 a month before including taxes, text messages and data.

“We believe the offer we have in these challenging economic times will make people take a harder look at Boost … and we believe that will open us up to a much broader piece of the population,” Matt Carter, Boost’s president, told The Associated Press.

The discount may attract customers from Sprint’s main brand and from T-Mobile, which have been a bit more price-competitive than the market leaders, AT&T and Verizon. But the bigger carriers will be under some pressure to fight back with cheaper plans.

Craig Moffett, the telecom analyst for Sanford C. Bernstein, says that AT&T and Verizon are in a bind because they want to keep individual subscribers, yet they don’t want to undercut the pricing to business accounts.

“The worst of all possible outcomes would be for the big guys to cut their prices to match Boost,” he said, thinking about the situation from the perspective of investors. “But it’s not a picnic if they leave prices alone and lose subscribers to Boost either.”

Mr. Moffett says the shift in the market to flat-rate, all-inclusive price plans will ultimately increase competition because such plans make it easier for consumers to shop around.

“For years, the wireless industry had a halo of price protection because users had no idea what price they really were paying,” he said, noting that it was hard for people to figure out which calls were included in various buckets of free airtime, etc. “Once you cross the Rubicon of flat-rate pricing, there is no going back.”