By Julien Bouyssou
With the proliferation of smartphones, the largest nationwide service providers like Verizon and AT&T have made millions in profits over the past couple of years. And it was at the customers’ expense: in the US, individual cell phone bills increased by 31% between 2009 and 2011, according to J.D. Power & Associates.
But the cell phone market has now reached a turning point, where the increasingly intense competition could lead to a price war from which customers would highly benefit.
FROM THE LANDLINE PHONE TO THE SMARTPHONE
Since its creation, the US cell phone market has been facing a total transformation.
When the first cell phones got commercialized in the early nineties, the number of subscribers in the US was less than 10 million based on statistics from CTIA. Unlimited plans did not exist yet and the devices used were nothing compared to the ones of today. The typical user profile was a high-income man in his forties living in a large city.
In the mid-2000s, the cell phone market exploded and became a mass market: the number of US cell phone users jumped to over 200 million by 2005. The user profile had also changed a lot, by becoming affordable to pretty much anyone, from the middle class to college students to lower income households. The significant decrease in the price of devices was the main driver, whereas the cost of the plans actually did not change much: the monthly rate for a cell phone plan was around $60 on average in 2005.
But when the smartphone got introduced, the market got revolutionized forever. Forget about the simple widget that would merely allow the user to call from anywhere. Mobile phones were then taken to a new level, with the combination of a phone – camera – media player – GPS – video game console – etc. And along with this product, a brand new era of plans were introduced to the customers: the combined talk-text-data plans. And this transformation had a direct impact on the plan prices: individual cell phone bills in the US increased by 31% between 2009 and 2011, according to J.D. Power & Associates.
At first, data limited plans were the only option. But with the success of this new market, service providers quickly understood that the best way to gain market share was to offer even more to their customers: from unlimited talk and text plans, to free phone with 24-month contracts, to family plans…
Attracted by this highly lucrative market, many new companies tried to penetrate. But the cost of the infrastructure required to offer a decent nationwide coverage was a strong hurdle for any new entrants.
As of 2014, only 4 large carriers were left standing: two leaders (Verizon, AT&T) with more than 65% of the market share, and two runners-up (Sprint, T-Mobile) sharing another 30%.
THE SMARTPHONE MARKET ENIGMA
Despite a fierce competition between these carriers and the regulations to avoid positions of monopoly, it became pretty obvious that customers would not benefit from what a free market usually comes with.
Indeed, almost any market follows a four-stage cycle:
- The Introduction stage: a new product gets introduced to a targeted customer segment, ready to pay a high price for this new service or product. Because it costs money to create this new product offering, the companies usually make no profit or actually encounter losses.
- The Growth stage: as the number of customers increases and the companies benefit from economies of scale, the prices start decreasing in an effort to both attract new customers and to maintain market share. Indeed, at this stage, the acceptance of the product is proven which often leads to a proliferation of new competitors.
- The Maturity stage: at this stage, customers who needed or wanted this product or service already bought it. If there is still some room for innovation, it is mainly around some small changes like an improved feature or a look-and-feel customization. So except for replacement and recurrent purchases, at this stage companies have only one way to generate additional sales: they need to steal customers from their competitors through marketing and most importantly price reductions.
- The Decline stage: sales start declining and the market faces some exits or consolidation.
With 182 million of subscribers in the US, the smartphone market has undeniably reached the Maturity stage. In 2015, 65% of Americans own a smartphone, and 91% of the adult population own some sort of mobile phone according to a research from the Pew Research Center’s Internet & American Life Project. The new features offered by the latest versions of the iPhone and Samsung Galaxy are not revolutionizing anymore. The main carriers offer a similar 4G network that covers most of the territory, and unlimited talk and text plans. Marketing investments still show a very high pace, with omnipresent TV ads and on-going promotions to attract new customers.
However, the base prices paid by existing customers have not declined over the past years. Even worse, according to a Consumer Reports study, wireless bills have increased at a scary annual 7% rate since 2011.
So why didn’t customers see the price decline that normally accompanies the maturity stage of a market? Reasons are numerous, but the main one seems to be the high level of loyalty that customers show towards their carrier. “Mobile phone customers are very loyal to their carrier” said Josh Lowitz, Partner and Co-Founder of CIRP. “Almost four out of five customers stay with their current mobile phone carrier when they buy a new phone.” Why would carriers decrease their prices if they know their customers will stick with them anyway?
THE GOOD NEWS
There is still a ray of hope for customers though, as some European companies show a high interest in entering the US market, with a low-price positioning that all of the dominant US carriers have refused to follow so far.
Customers would therefore benefit from much lower prices, similar to what is offered to European households today. A recent article from the New York Times showed that for a comparable plan including voice, text and data, a US customer pays on average $41.50 a month more than a British customer. Sascha Meinrath, founder of the Open Technology Institute at the New America Foundation, explains that “the United States lacks meaningful competition in its cellular market sector, which leads to higher cell plan prices than a growing list of other countries.”
If some new entrants managed to make a breakthrough on the US market, this would very likely disrupt the dynamic of the current well-established carriers’ hierarchy, which would highly benefit the customers.
So you may see your cell phone bill decrease by 50% within 2 to 3 years. But in the meantime, well, I am afraid you have to tolerate your current high-price plan.
About Julien Bouyssou
Julien Bouyssou is the co-founder & CEO of BillXperts.com, the leader in bill negotiation. You may contact him through his company’s website at https://www.billxperts.com/ or by email at firstname.lastname@example.org.