The Rate Race

These days, simplified pricing is anything but simple. Carriers such as AirTouch, AT&T Wireless, Bell Atlantic Mobile (BAM) and Sprint PCS all are offering their own versions of nationwide single-rate plans, regional single-rate plans, low-cost long distance, no roaming charges and bundled minutes.

The most talked about plans are those similar to AT&T Wireless' Digital One Rate plan in which customers can use their phones anywhere in the country with no additional roaming charges and no long-distance charges. And other carriers are following suit by spinning off a variety of all-inclusive rate plans.

In addition to its 50-state roaming plan, AirTouch launched Digital Traveler specifically for roaming throughout its western region.

"We wanted to make sure the Digital Traveler plan was truly targeted at satisfying customer needs as opposed to just creating buzz in the market," said Lisa Bowersock, AirTouch director of public relations for its western region.

Through customer research, AirTouch found that a $60 price point including roaming and reduced long distance would satisfy customer needs. According to Bowersock, other plans on the market are higher and eliminate a large percentage of potential customers.

BAM took a similar approach with its rate plans.

"At the time we launched (SingleRate East), it was all really high-end stuff," said Debra Carroll, BAM vice president of marketing.

So, along with its SingleRate USA plan, which includes nationwide roaming and long-distance calls, BAM took advantage of its East-Coast footprint and launched SingleRate East. For about $39.99 (depending on the market) customers receive 90 to 100 minutes of airtime, long distance and no roaming charges throughout its East Coast markets. Unlike some all-inclusive rate plans, customers can select any digital phone.

"Anyone can buy this. This is down at a price level where any consumer could be interested in it," Carroll said.

Omnipoint has markets in some of the same East Coast territories as AT&T and Bell Atlantic, but does not offer single nationwide rates. However, it does offer a single rate for all in-network markets. According to spokesman John Grotland, New York customers have the same rate when traveling to Philadelphia. Also, Omnipoint emphasizes its bundled-minute offers.

MORE THAN COMPETITIONThe goal behind these plans is more than just beating competition. It is about getting current customers to use their phones more, attracting new customers who have yet to purchase wireless and shifting wireline minutes to wireless. Carriers are using what historically have been high-end business-type rate plans to lure average consumers. The strategy seems to be working.

According to Julie Rietman, IDC senior analyst, these pricing trends finally are driving wireline minutes to wireless minutes. In 1997, IDC reported that only 1.2% of total telecom minutes of use were wireless. IDC expects that number to reach 4.4% by 2002.

Are networks ready to support this shift? Cristiane Mahler, Yankee Group associate analyst, said it is too soon to tell how the volume and capacity increase will affect network quality.

AirTouch isn't taking any chances. It is expanding digital capacity by moving to second and third CDMA carriers in several of its markets.

"We're well down the road as far as being able to handle increased usage as customers start to do landline substitution," Bowersock said.

But Shea Silidker, Strategis Group analyst, said that although most carriers seem to have their networks under control now, it could become an issue, especially if spectrum caps aren't lifted.

"I've already heard in some markets there are starting to be capacity constraints," he said.

THE BOTTOM LINEUsage growth also affects the bottom line. Carriers offering these plans are seeing an increase in subscribers and in usage, and it's reflecting in their revenues, Yankee Group's Mahler said.

BAM has reported a 100% jump in digital sales since it launched SingleRate pricing plans. According to Carroll, that growth extends beyond attracting new customers. These plans are encouraging people to use phones more, not just when roaming but in home markets as well. So in the total picture, she said, these plans are driving business and revenues.

Although this growth is helping some carriers sustain revenue, analysts doubt that's true for all carriers. According to Mahler, it is fairly easy for AT&T Wireless to sustain profits because it has a large national footprint and can leverage roaming-rate negotiations because a lot of small carriers use its network. In addition, carriers such as AT&T Wireless and Sprint PCS can leverage their long-distance divisions. But if you don't have a large national footprint and long-distance parent, you must absorb the cost of giving away long-distance and roaming services.

It is more difficult for carriers such as Comcast Cellular to hold the bottom line with nationwide single-rate options, Silidker agreed.

"You don't get any incremental revenue from subscribers that you're accustomed to," he said. "Any time one of their customers leaves the area, they have to absorb some sort of roaming cost to offer the plan."

To make matters worse, most of the customers using all-inclusive rate plans are high-end users who will take advantage of these services and roam more than 14% of the time, he added. Compared with normal customer usage and rates, this is expensive for any carrier, including AT&T.

This is why several carriers have implemented twists to the nationwide single-rate concept. Regional plans give customers the benefits of low long distance and free roaming but restrict them to their own networks. For example, Sprint PCS' nationwide free roaming only applies to its networks, so it is still profitable, Mahler said.

Regardless of what twist you take to the simplified pricing concept, the key to making any lower-rate plan profitable has more to do with your day-to-day operations, according to AirTouch's Bowersock.

"During probably a 5-year effort, AirTouch has been driving costs out of the business (operations) to make sure we can continue to be competitive, meet customer needs and do it profitably," she said.

AirTouch has migrated from a decentralized structure to a centralized regional business approach. This provides more synergies internally and drives some of its resources together. AirTouch also has developed joint marketing and operations agreements with companies such as Bell Atlantic to gain scale and scope advantages with handset and equipment purchases. The carrier also hired a consultant for a business audit to identify areas that held unnecessary costs.

As a result, AirTouch has reduced technical and network costs by 20% to 30% a year, just through diligent network deployment management and vendor relationships.

"No. 1, you have to make sure you have the right products and services to satisfy customer needs," Bowersock said. "No. 2, you have to make sure the operation is the most efficient business possible. Then, you can offer needed packages, pricing and promotions profitably."

CAN SMALL CARRIERS COMPETE?Even with tight business operations, some analysts say it will just be too difficult for many smaller carriers to compete through all-inclusive pricing, especially nationwide plans.

"Smaller and regional carriers can't offer 25cents long distance and roaming anywhere in the country without affecting their bottom line," Mahler said. "They just can't do that ... they can't afford these types of plans."

So, how will they compete?

"It's going to be tough," said IDC's Rietman.

According to Mahler, you should leverage as much as you can, just as BAM did with its SingleRate East plan. BAM found that 75% of roaming is concentrated on its eastern network, so it offered lower prices and entry points. That is a better option for someone who mostly travels in the East Coast. Mahler said it comes down to where you have coverage, what your customers want and using that information to decide how you can compete.

Initially, Rietman said smaller PCS players can offer unlimited and bundled minute plans to attract subscribers, but once the network gets loaded, they'll still have to face the pricing issue. You also could focus on value-added services that larger carriers don't offer. Despite these efforts, Rietman expects it all will end with consolidation.

"The little guys will get bought out," she said.

Silidker agreed that many smaller carriers will be acquired, or they will have to establish affiliate agreements in which they offer another brand of service on their own networks.

Omnipoint's Grotland is more optimistic.

"Any carrier, given the right pricing and timing, can implement a (single-rate) plan," he said. "There is still room to compete." It just depends on your ability to negotiate roaming agreements and rates. (See "Realizing Roaming Revenues,")

Mahler agreed there are options.

"Carriers don't have to bring prices down drastically, but (they can) let customers know how much it's going to cost," she said. "(Usually) when you call a carrier, they say it depends on where you are going to roam. They should just give you a flat price everywhere."

Most customers don't use their wireless phones while on the road because they're not sure what they'll be charged, so even if the rate is down 50cents, that is still a big decrease from $3 a minute, she added. People will be more likely to use their phones all of the time with flat-rate pricing.

According to AirTouch's Bowersock, it's critically important that you analyze your own customers, before deciding to follow the latest pricing trends. For example, AirTouch's western region includes rural areas such as Colorado, Idaho and Wyoming. Customers use phones differently in those areas than in Los Angeles. It's important that carriers develop products and service that meet their customers' needs, rather than just offering what the competition is offering, Bowersock said. Maybe your best plan will be a nationwide roaming plan or more of a regional view; maybe it's only free roaming in five states. Regardless, she added, you must develop and offer something that takes into consideration that customers are traveling more with their phones.

WHAT'S NEXT?Carriers will continue to try to push wireline usage to wireless through competitive pricing, but which version will be the key to success? Despite the latest hype over reduced roaming and long distance, Bowersock said the key to wireline migration is bundled minutes. Larger packages of minutes that customers can use everyday, not just when they are traveling, will be the largest driver of changing customer behavior and usage, she said. Giving safety and security users 1,000 minutes at their disposal, "will make the whole concept of migrating minutes from local and home or business to wireless a reality."

As consumers continue the ravenous pursuit of wireless, carriers will have to bring more of the business-type plans to the consumer market, she said. Yankee Group's Mahler said carriers can't decrease prices much more, but bundling more minutes with current pricing plans will help.

Although it's hard to know what the next big pricing trend will be, AirTouch's Bowersock expects more customers will look for bundled packages, use their phones while traveling and increase network usage overall. As customer usage changes, all carriers have to change with those forces.

Carriers aren't giving away any pricing strategies, so future trends are all speculation. But regardless of what turn they take, one thing is for sure -- the rate race will continue.

Are the days of high average revenue per user (ARPU) over? Not necessarily, according to carriers and analysts. Although carriers haven't been realizing the high ARPU they once enjoyed, there is hope.

ARPU is stabilizing, according to Shea Silidker, Strategis Group analyst. Overall, the growing base of safety users had been bringing the rate down, but now it is beginning to stabilize. According to Silidker, even though prices are declining, ARPU is increasing because the average minutes of use is going up.

Although AirTouch's ARPU numbers are proprietary, Lisa Bowersock, public relations director, agreed that over the past three or four years there had been an industry-wide decline in ARPU. But, she said, that is beginning to level off.

"We are even seeing ARPU increase as customers use more enhanced services, more minutes and enhanced directory services," she said.

And as advanced digital services and enhanced services penetrate the market, carriers expect ARPU will continue to rise. Among its digital subscribers Bell Atlantic Mobile's (BAM) ARPU ($80 range) already is twice that of analog.

Bowersock added that carriers will not see the revenue in the minute area as they have in the past. For ARPU to stabilize or increase, carriers will have "to be very good at offering additional products and services."

In a recent speech, Dennis Strigl, BAM group president, agreed that service offerings will be key, specifically low-priced services and larger buckets of minutes. With these trends, he said, ARPU definitely will improve.