Too many plans

Time & distance. The two basic parameters upon which all telecom service pricing has been based is slowly becoming a dinosaur. Distance has clearly fallen off the map with the cost to call the UK the same as to call California. Time is next.

I distinctly remember the wireline guys looking down their noses at the plummeting prices for long distance. "Well local service is ours forever", they thought. The advent of VoIP and cable competition put a real crimp in pricing with unlimited time and distance calling.

The wireless guys are thinking, "Boy, I’m glad we’re not in that business." Hate to say it but that story is coming to a wireless operator near you. Wireless plans today are built primarily upon how many minutes you use, you effectively buy a monthly bucket, use it or lose it for the most part and god help you if you use more than your allotment (called "breakage") where the operator hoses you for > $0.35 a minute.

For example, the base line Verizon Wireless plan is $39.99 and includes 450 minutes. Which works out to $0.088 per minute. BUT — what they don’t tell you, most people only use 75% of their minutes each month.  Meaning your real cost per minute is more likely $0.118. Step up to a bigger plan 900 minutes is $0.066 (but effectively $0.088). But do the minutes really have much impact to the cost of service.

Reading the SEC filings for the recent IPO of MetroPCS was interesting. MetroPCS offers flat rate unlimited calling plans for the handful of areas they serve. They’re growing fast because they’re plans are simple and work for most people who pretty much live, work and play in a single area. They have about 2.5m subscribers, not big but growing.

MetroPCS indicated that their operating cost is ~ $19.65 per subscriber per month. With an ARPU of $42.77, this is better than 50% Gross Margins. Further, they indicated their costs per minute being < $0.01. Churn is a bit high at 4.7%, but they have pretty low acquisitions costs of $116 per subscriber (good deals don’t require much marketing giveaways).

What does this mean? It means that minutes of usage have relatively little bearing on the underlying cost of the service. I have to imagine that Cingular being 30x the size should be better in terms of operating cost.

Metro is expanding and will put pressure on the bigger wireless operators to offer flat rate pricing. The industry hears this train on the tracks and is feverishly looking for other revenue models.