 | Issue: | Latin America II 1997 |
| Article no.: | 10 | |
| Topic: | Wireless Service Pricing Innovations:Redefining User Composition and Usage Behaviour | |
| Author: | Peter Nighswander | |
| Title: | Senior Consultant | |
| Organisation: | The Strategis Group, USA | |
| PDF size: | 36KB |
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Article abstract
To understand the changes resulting from a new spate of competition due to increased market liberalisation and additional licensing of PCS, the US wireless market provides an interesting blueprint of possible events that can follow. Although these trends may or may not be replicated in the region, it is useful to observe how factors like pricing can impact usage behaviour and create a newly defined target market.
Full Article
The Latin American wireless market is poised to enter the next stage of competition -with increased market liberalisation and additional licensing of Personal Communications Services (PCS). To understand the changes resulting from this new spate of competition, the United States wireless market provides an interesting blueprint of possible events that follow. Fundamental changes are afoot in the US wireless industry that will forever alter the competitive landscape and create new user segments and consumption patterns. These changes are directly related to the increasingly competitive character of the wireless industry resulting from the introduction of Personal Communications Services (PCS) and the associated service price declines. Few would argue that increasing competition reduces prices and therefore increases aggregate demand, but it has not been clearly understood how these conditions impact the structure of wireless demand. The Strategis Group has measured the impact of the pricing of the early US PCS markets resulting from the increase in competition. This article will discuss these price changes and how they are expected to generate new users not previously predisposed to wireless and to stimulate overall wireless usage. Expensive Handsets In the early years, the cost of handsets, not service pricing was the major barrier to purchasing cellular. With phone prices above US$1,800 in 1984, it is no surprise that cellular was often reserved for consumers who were not typically price sensitive. Within five years, however, cellular phone prices dipped significantly resulting in a corresponding increase in new subscribers. As shown in Figure 1, the cellular industry witnessed impressive subscriber growth from 1984-1990 as phones became more affordable to the mass market. An even higher subscriber growth phase from 1993-1995 can be seen owing largely to the continued decline of handset costs and deregulation of service and equipment bundling. For the most part, cellular handset costs no longer influence the consumer’s purchase decision as most phones are subsidised. The Strategis Group estimates that handset pricing was the dominant barrier to purchase from 1984-1991. Today airtime price represents the barrier to purchase for a growing share of potential users. The cost of airtime is ultimately what will drive subscriber growth in the increasingly competitive wireless market and additional competition from PCS will invariably force prices downward thereby making services more affordable to a wider range of potential consumers. PCS and Cellular The 1996-1997 timeframe has been an interesting milestone in the history of the wireless industry as true competition has become realised in the marketplace. Multiple PCS carriers have launched their respective networks throughout the US catalysing what was already a burgeoning wireless industry. The central question is, with more wireless competitors to choose from (in some cases, four), is there an observable difference between cellular and PCS pricing? The Strategis Group examined different wireless markets where PCS has been introduced to compare wireless costs between cellular and PCS providers. Using what is known as a least-cost service pricing index, lowest price per minute can be determined at every usage level. As shown in Figure 2, The Strategis Group found that PCS cost as much as 30% less than cellular service at low usage levels. At usage levels above 340 minutes per month cellular actually costs less than PCS. Only 6% of wireless subscribers use over 340 minutes per month and would benefit from having a cellular service instead of PCS with these price structures. While pricing is vital to effective competition, it should be noted that the wireless carriers may provide other value added propositions to the customer. For example, PCS carriers typically have offered more free enhanced services than cellular carriers at this early stage. Likewise, PCS digital networks provide users with improved sound quality and increased security over analogue cellular. Cellular provides its subscribers with a far greater coverage area than PCS and the ability to roam nationwide. Cost of service is overwhelmingly the most important consideration to consumers, but it is also necessary to consider the other components of service to determine the true value to the end user. Sprint Spectrum – Washington, D.C. As more competitors enter the wireless market, overall pricing will tend to decline. Typically, PCS carriers will enter at prices slightly lower than cellular and cellular carriers will respond either by lower prices, offering enhanced services or multiple free minutes. In either case, given this competitive scenario, the effective cost to the consumer should be reduced. One of the more interesting case studies where this can be observed is in the Washington, D.C.-Baltimore market where the first US PCS network was launched by American Personal Communications (known as Sprint Spectrum). When Sprint Spectrum entered the Washington, D.C. market in November 1995, their cost of service was set at approximately 15 to 20% below that of the incumbent cellular carriers at all usage levels. Since the introduction of PCS competition, the cellular carriers have virtually matched the price decreases introduced by Sprint Spectrum and even replicated other Sprint initiatives such as no required service contract and free in-bound first minute. These adjustments have resulted in a fairly level playing field among the three carriers where service is provided at nearly identical cost at every usage level except for 20 minutes or less where Sprint Spectrum maintains a significant advantage. Figure 3 shows the comparable cost of service among the three carriers. As mentioned above, as the market becomes increasingly competitive, it should follow that overall price declines are realised. Looking back at the Washington, D.C. market just prior to the introduction of competition and 18 months later, there is an observable cost of service decline of approximately 20% at nearly all usage levels as shown in Figure 4. What is interesting to note is that for consumers at either the high or low usage levels, the cost differences are more pronounced while cost of service per minute at middle usage levels did not decrease as significantly. Aggressive pricing and particularly the introduction of low end “safety” plans by the incumbent cellular carriers to ward off encroachment from Sprint Spectrum can easily explain this phenomenon. Innovative Pricing Plans PCS has had over a year and a half to gestate in the marketplace and become a viable competitor to cellular. The first half of 1996;showed little activity in terms of new operational networks with only three carriers providing service (Sprint Spectrum, Western Wireless, and Bell South). The last half of 1996 and the first half of 1997 has been an absolute jamboree for the PCS industry with all of the major PCS carriers except AT&T Wireless having deployed the first phase of their respective networks. What has been interesting to observe is how these PCS carriers try to position themselves as an alternative to cellular. For those carriers with both cellular and PCS properties and/or significant brand equity (e.g. AT&T Wireless, Sprint PCS), this task will not appear as daunting as it will for those carriers who are lesser known. The bottom line for the consumer is what is the ultimate cost? As such, PCS carriers have adopted pricing strategies and promotional plans to give PCS greater ethos: · Powertel PCS – a regional PCS provider in the Southeastern United States has introduced flat rate pricing of US$50 per month until the end of 1997 throughout its entire service area of 180,000 square miles with no roaming charges to attract new customers. · Sprint PCS – is one of the largest PCS carriers and has introduced a series of charter subscriber programmes in selected markets in order to capture first time customers. In San Diego, California, for example, new subscribers will pay US$0.35 per minute for airtime without having to pay a monthly access charge. In Pittsburgh, Pennsylvania, Sprint is offering a plan where new customers receive 800 minutes of airtime for six months for a flat monthly rate of US$40. · Pacific Bell Mobile Systems (PBMS) – has launched services in California and Nevada and is targeting local area calling habits with a “call home” plan to include multiple monthly minutes of free calls to the customer’s home number. · Aeriel Communications – owns PCS licenses in six major US markets consisting of over 28 million population equivalents and was the first carrier to introduce per second billing to ensure customers pay for what they truly use. In addition, Aeriel has introduced & customer service initiative known as Personal Needs Assessment and Value Check where Aeriel employees consult with the customer to select a service package and price plan to suit the customer’s lifestyle. If an alternative plan is more economical for the customer, then Aeriel would recommend a change. Looking Ahead If we examine the demographics of the typical wireless user in 1997, this person is usually 35 years old, college educated with an income of approximately US$55,000 and no children. In addition, a slight majority of these users are female. Furthermore, the trend in recent years has been a steady increase of low-end “safety” marginal users contributing to overall declines in wireless usage and subscriber revenues. The Strategis Group has found that, among those most interested in purchasing wireless, approximately 50% are between the ages of 18-29, of which less than 15% are actual subscribers. These users are also more inclined than other groups to be high intensive users of wireless. These facts reveal a significant target market which has been vastly overlooked by the wireless industry. As competition increases and prices decline further, within the next few years, the wireless industry will experience significant structural changes in its customer base as an increasing number of these younger users (popularly known as Generation X) accept wireless as a means of communication. Coupled with this shift in user demographics, price declines will make wireless service more affordable and therefore stimulate usage among all user groups. This may be particularly true among the young Generation X crowd who are more accepting toward wireless. As mentioned earlier, usage among cellular subscribers has been declining as safety users comprise a significant percentage of the base. Conclusion If priced and marketed correctly, PCS can introduce a whole new dynamic to the wireless market, resulting in significant subscriber growth and increased revenues to the entire wireless industry. These trends in the US may or may not be replicated in the Latin American wireless market depending upon a number of demographic, economic, and competitive factors. However, it is important to observe how pricing can impact usage behaviour and create a newly defined target market.
