Feature Article

August 22, 2012

How Big of a Gamble are T-Mobile USA, MetroPCS 'Unlimited' Plans?

Within a single day on Aug. 21, 2012, MetroPCS and T-Mobile USA did what underdog firms often do, namely shake up retail pricing in an attempt to reverse flagging sales or market share. In this case, both firms announced “unlimited” data plans for smartphones.

Those moves come against an industry backdrop of movement away from unlimited, flat rate data plans that threaten to erode profit margins as well as limit gross revenue opportunities.

There are a few fundamental questions one might ask. First, are such plans sustainable, by these two contestants (which is a different question than whether unlimited plans are sustainable by other competitors).

Also, related to that question, is the issue of whether the new offers will change the cost structure of T-Mobile USA and MetroPCS in some qualitative way, for better or worse.

Both of those questions relate to the larger question of what happens if both carriers find the plans are popular enough to dramatically change the number of customers each serves. In other words, if the offers are mostly marketing platforms that wind up affecting sales volume very little, both firms can afford to offer the plans.

But if either carrier should experience wild success, dramatically changing the volume of customers each now serves; it is conceivable the plans could pose some danger to either revenue or operating costs, profit and revenue, as well as basic user experience, if the supplier networks are overwhelmed.

Both companies are probably hoping for “reasonable” success, not “wild” success. In other words, the new unlimited offers are more marketing platforms that provide distinction in the market than they are tools that will dramatically alter either company’s subscriber base.

On the other hand, smart marketers sometimes can manage to offer high perceived end user value that actually does not “cost” the supplying firm too much.

You might argue that is precisely what T-Mobile USA and MetroPCS are attempting. Consider the problem of network loading. No matter how much bandwidth a carrier has, having lots of customers will tax those resources.

Conversely, a service provider with lower market share, and therefore fewer customers, sometimes can offer “big plans” at “reasonable prices” precisely because it has few enough customers that bandwidth consumption is not the biggest problem; gross revenue is the problem.

That is part of the thinking here. Both T-Mobile USA and MetroPCS have been struggling to add net new customers over the past several years, so net customer adds are more important than the risk of overloading the network.

But there’s another angle as well, namely that most users don’t actually consumer much bandwidth at all. In other words, a supplier can safely offer unlimited use of some feature that it knows the overwhelming percentage of users do not actually consume at high levels.

For all the worry about bandwidth consumption growth rates, typical smartphone users do not actually consume all that much bandwidth.

That is less true for customers who buy dongles or use personal hotspot features to connect their PCs, but marketers know how to model the different demand curves for PCs and smartphones.

If the T-Mobile USA and MetroPCS gambits work, both will get lots of attention, and will sign higher numbers of new customers, but without overtaxing their networks. Moderate or reasonable success, in other words, is the intended goal. Wild success would create new problems.

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Edited by Brooke Neuman

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