USA - mobile price wars

Say Hello to Unlimited Minutes

Verizon Wireless offers unlimited calls for $100 a month, others follow suit, and Wall Street shudders at the prospect of a price war

As a communications consultant, Carlyn Taylor knows her way around a wireless bill. So when her mobile-phone provider, Verizon Wireless, began offering unlimited calling for $100 a month, it didn't take Taylor long to figure out that the new plan would have sliced more than $500 from her bills in the past six months.

Taylor quickly made the switch, and she reckons that a slew of wireless consumers may soon do the same math. The Feb. 19 price change by Verizon Wireless was swiftly matched by AT&T Mobility (T) and T-Mobile USA. In all, 5% to 15% of the combined customer base of these three of the four largest U.S. cell-phone service providers will probably save by converting to the all-you-can-talk calling plans, says Taylor, who heads the communications and media practice at consultancy FTI (FCN).

The moves fueled concern that the U.S. mobile-phone industry would become locked in a price war and sent mobile-phone company stocks lower. Indeed, service providers could lose 25% to 40% of the revenue from some of their most lucrative customers, and more attractive wireless plans will probably entice consumers to disconnect traditional phone services, Taylor says: "There's no question they are trying to lure people away from landlines."

A Bigger Problem for Cable Companies

Shares of Verizon Communications (VZ), the majority owner of Verizon Wireless, shed 7.8% the day the price change was announced. AT&T suffered a 10.1% two-day decline through Feb. 20. Once Verizon Wireless made its move, rivals had little choice but to follow suit. "It's a very competitive industry, and we want to be responsive," says AT&T spokesman Mark Siegel.

But for all the harm these price cuts may inflict on the wireless industry, experts say they may exact an even bigger toll on cable companies such as Comcast (CMCSA) and Time Warner's (TWX) cable division, which for years have been luring phone-company customers with service packages that bundle calling, high-speed Internet access, and hundreds of TV channels. "We have to look at it beyond wireless" says Roger Entner, senior vice-president at consultancy IAG Research. "We don't want to look at mouse traps when we are hunting for elephants. [With these plans], you can beat the cable guy."

In recent years, growing numbers of consumers have dropped residential phone lines with phone companies in favor of cheaper Web-calling services from cable providers. Comcast recently became the nation's fourth-largest phone company, with 4.4 million digital voice subscribers. Verizon's landline revenue dropped 1.3% in 2007 alone. The shift has been expected to accelerate this year as Comcast takes aim at 24 million homes that don't even have TV.

Cable Partnership with Sprint Moving Slowly

But with a wireless plan that promises unlimited calling for one price, not only do customers have greater incentive to disconnect land lines, but they've got far more reason to resist switching to cable. Today, a cell-phone bill averages $55 a month. A phone service from a cable company adds up to another $40 a month, bringing the total to $95. But for $100 a month, people can now buy unlimited wireless—a service that can be used on the go and at home—and by and large can't be matched by a cable company. Add in the TV services being offered by phone companies and the customer has even less cause to move.

Sure, cable companies are trying to provide wireless calling through a partnership with Sprint (S), but those programs are only just getting off the ground in a handful of markets, such as Portland, Ore. "If the telecom providers play it right, this is a big plus for them," Entner says.

That's a big if, of course. Wild card Sprint could try to undercut everyone. The company has been testing an unlimited plan in San Francisco, Minneapolis-St. Paul, Philadelphia, and Tampa since last year. Its package of unlimited voice, as well as data and text messaging, sells there for $120 a month—on par with the new wireless plans, which don't include data. "We are continuously evaluating our market offerings but are not disclosing any future plans at this point," Sprint spokeswoman Emmy Anderson wrote in an e-mail. Unless Sprint at least matches its rivals' unlimited plans, though, the company risks losing subscribers to Verizon Wireless, AT&T, and T-Mobile, says Michael Mahoney, managing director at Falcon Point Capital.

Mobile-phone providers will also need to ensure their networks can handle the added call volume that's likely with unlimited plans. If they can, they'll no doubt be happy with keeping fickle customers on board, and maybe even luring a few back from cable competitors.