UPDATE: New Low Wireless Rate Reignites Fear Over Price War
July 02 2009 - 4:28PM
Dow Jones News
The latest salvo from the wireless industry's increasingly
aggressive price war threatens the profits and heightens the
competition for the carriers who rely on low-end consumers for
growth.
The wireless industry was rattled by the recent introduction of
a $45 pre-paid flat-rate calling and text-message plan by Tracfone
Wireless Inc.'s Straight Talk service. The rate undercuts the
former benchmark of $50, which Sprint Nextel Corp.'s (S) Boost
introduced early this year.
The move reignited concerns over a stepped-up price war and
underscored the growing difficulties in winning over new wireless
customers. With most consumers already packing a cellphone,
carriers are eyeing each other rather than any pools of untapped
customers.
Straight Talk represents a dangerous threat to the other
pre-paid players such as Boost, Leap Wireless International Inc.
(LEAP), MetroPCS Communications Inc. (PCS) and Virgin Mobile USA
Inc. (VM). They've enjoyed success recently because their plans are
cheaper, and they don't require a credit check or lengthy service
contract.
"We believe that the $45 Straight Talk plan could substantially
slow the growth of the unlimited carriers," said Phil Cusick, an
analyst for Macquarie Securities.
In addition to Tracfone's Straight Talk, MetroPCS Communications
last week launched an unlimited international calling plan as a $5
add-on option. On the wireless-data side, Comcast Corp. (CMCSK) is
offering a bundle of cable Internet and wireless WiMax access for
$50. The plans follow the introduction of $99 flat-rate plans by
the major carriers last year.
"Taken together ... (the new plans) are a not-so-subtle reminder
of the inherent instability of the U.S. wireless market today,"
said Craig Moffett, an analyst at Sanford C. Bernstein.
Tracfone's Straight Talk hurts Boost the most. Sprint's pre-paid
service - which rides off of the extra capacity from the Nextel
network - saw staggering growth after it unveiled its $50
all-inclusive plan. It's the key growth driver for the No. 3 U.S.
carrier, which has been losing valuable contract customers for
nearly two years.
In recent trade, Sprint was down 3.7% at $4.44; MetroPCS was off
4.4% to $12.08; Leap fell 4.3% to $29.24; and Virgin Mobile fell
3.5% to $3.61.
The other players were dismissive of the new plan.
"This is much ado about nothing other than a new headline," said
Virgin Mobile Chief Executive Dan Schulman.
Boost's plan competes well with Tracfone's Straight Talk, said
Boost President Matt Carter. Boost offers a higher selection of
phones, is available at more locations and doesn't charge
additional fees, he added.
MetroPCS, for its part, believes its plan compares well against
Straight Talk. "Our $45 plan has far more value to the consumer
than the (Straight Talk) plan," said MetroPCS Chief Operating
Officer Tom Keys. "We don't consider the (Straight Talk) plan a
truly unlimited plan."
Leap spokesman Gregory Lund said: "For us, it's another
competitive issue to deal with."
He noted that there were "extreme differences" like
international access.
With so many pre-paid players in the market, there will likely
be a renewed call for consolidation. The most commonly talked-about
deal is a merger between MetroPCS and Leap.
Given the aggressive pricing, it's unclear how profitable the
service is.
"Can Tracfone make money on this? We doubt it," said William
Power, an analyst at Robert W. Baird. He estimates that the monthly
cost for the service is $40 a month, which leaves little for
customer acquisition costs and general expenses.
Tracfone, however, has been known to run an efficient operation.
With roughly 12 million customers, it's by far the largest pre-paid
provider in the U.S.
A company spokesman wasn't immediately available for
comment.
Despite the increased competition, there remains much interest
in the pre-paid market, as evidenced by the participation of
Verizon Wireless. Tracfone, a unit of America Movil S.A.B. de C.V.
(AMX), is using Verizon's network. Verizon Wireless is a joint
venture between Verizon Communications Inc. (VZ) and Vodafone Group
Plc (VOD).
While the deal is structured as a wholesale agreement, it flies
in the face of Verizon's insistence that it remain focused on the
post-paid market.
It can be taken as a sign that with growth in the wireless
business slowing, the carrier can ill afford to ignore the pre-paid
market, Macquarie Securities' Cusick said.
-By Roger Cheng, Dow Jones Newswires; 212-416-2153;
roger.cheng@dowjones.com