U.S. Mobile Price War Just Heated Up

Though a few seem to believe there really is not a price war going on in the U.S. mobile market, Verizon Wireless just lowered prices to match AT&T Wireless shared plans, in particular the “headline” offer of 4 phones, with a shared 10 GB of mobile data, for $160 a month.

Some have predicted the biggest price war in U.S. mobile history. Others have argued there is in fact no price war going on. But one might argue that a price war is indeed under way, despite evidence that U.S. mobile service provider revenues and profit margins have not been affected.

One might well argue that has been true, up to this point. But one might expect to start seeing more evidence in the coming quarters, as Verizon Wireless, which some had perhaps hoped would not participate, now seems to be responding to AT&T’s price attack in the key shared user plans.

Average monthly revenue per postpaid customer across the U.S mobile industry rose 2.2 percent to $61.15 in the fourth quarter of 2013, according to New Street Research.

That is up more than $5 per user from the first quarter of 2010, when the same measure was at $55.80. That is one reason some think there actually is no price war going on. But with Verizon Wireless now moving to match AT&T Mobility’s lower prices on shared plans, the possibility of declines in average revenue per account now is growing.

To be sure, Verizon prefers to count only “revenue per account,” not revenue per user. In the end, the impact of a pricing war should appear, no matter which approach is used.

But there are lots of moving parts. More users are opting for smartphones, which almost always carriers a significant revenue boost in the form of new mobile data fees. U.S mobile user adoption of smartphones is about 65 percent, so there is still some room to run in terms of adding mobile data revenues.

And that will disguise some of the price cutting. But it is fairly clear that Verizon Wireless would not have matched the AT&T Mobility pricing on shared plans were AT&T not getting traction with the offer.

Yes, there is a price war going on, and it appears to be escalating.  

Does the Internet Actually Improve Productivity?

Most of us instinctively believe that applying more computing and communications necessarily improves productivity, even when we can’t really measure it. High speed access and smartphones provide examples. We just figure those tools make us more productive.

Whether that is the case or not actually is questionable, as counterintuitive as it might seem.

The point is that investments do not always immediately translate into effective productivity results. This productivity paradox was apparent for much of the 1980s and 1990s, when one might have struggled to identify clear evidence of productivity gains from a rather massive investment in information technology.

Some would say the uncertainty covers a wider span of time, dating back to the 1970s and including even the “Internet” years from 2000 to the present.

Computing power in the U.S. economy increased by more than two orders of magnitude between 1970 and 1990, for example, yet productivity, especially in the service sector, stagnated).

And though it seems counter-intuitive, even the Internet has not clearly affected economy-wide productivity. Some might argue that is because we are not measuring properly. It is hard to assign a value to activities that have no incremental cost, such as listening to a streamed song instead of buying a compact disc.

Still, “revenue” might be decreasing, even if usage is growing, in many industries. That’s the paradox, even in a time when the Internet seems so obviously to be providing higher value.

A productivity gain, by definition, means getting more output from less input. Perversely, very large productivity gains will shrink an industry, in measurable terms.

Also, how people use high speed access is more important than “how fast” they can use it, at many levels.

In other words, it is “how” technology is used productively that counts, not the amount of raw computing power or connectivity.

It is one thing when high speed access is applied effectively to “work” processes. It might be something else if those connections are used to watch entertainment video. Some might point to historical precedents, such as the fact that electricity took 40 years to change productivity in measurable ways.

By that measure, we should start to see measurable gains, soon, many would argue. Some would argue we already are seeing the gains. Economists just cannot measure the gains, is the argument.

In Mobile, Sometimes the First Winds Up Last

Mobile networks never remain constant, in terms of capacity, end user demand or coverage. Within any 24-hour period, demand will shift even on any single operator’s network as people move about.

Operators add new capacity, while the number of users of data bandwidth also changes virtually daily, so demand and supply are dynamic.

That means any snapshot of how fast a mobile network might be, or how extensive its coverage, will change over time. The latest study by Open Signal of Long Term Evolution networks globally shows how fluid speeds are, over time.

Some networks “got faster,” while others “got slower,” a function of supply and demand. Networks that got faster likely added supply, but did not see a commensurate increase in usage.

Networks that got slower probably “suffered” because users were added to existing networks faster than supply investments, increasing contention for available bandwidth.

So it is that U.S LTE networks, overall, showed slower average speeds in the second half of 2013, compared to the first half of 2013, with “average speeds” decreasing 32 percent.

Among the possible reasons, one might argue, are saturation of some cell sites operated by Verizon, growing demand on all the networks and relatively slow performance on Sprint’s network, for example.

MetroPCS averaged just 2.4 Mbps; Sprint 4.2 Mbps, for example. Verizon averaged 7.6 Mbps while AT&T averaged 8.9 Mbps.

Likewise, U.S. consumers are rapidly approaching smartphone ownership levels of the United Kingdom, an early leader in smartphone adoption.

According to eMarketer, 65 percent of U.S. mobile phone users have smartphones, compared to 66 percent of U.K. users.

The point is that communication markets are dynamic. As much as European policymakers might worry about “Europe falling behind,” it wasn’t so long ago that the U.S. market was considered “behind,” on several measures of mobile adoption.

Things change. A perception of “being behind” will spur investment. Also, there is a tendency to be crudely deterministic about correlations between attributes such as broadband speed and other economic outputs.

How people use high speed access is more important than “how fast” they can use it, at many levels.

In other words, it is “how” technology is used productively that counts, not the amount of raw computing power or connectivity.

How Will Users Rank Speed and Cost When Comparing Wi-Fi and LTE Access?

With the caveat that "averages" typically conceal as much as they reveal, where it comes to Internet metrics, Long Term Evolution mobile networks, on a global basis, now offer "average speeds" faster than Wi-Fi, according to Open Signal.

That might explain recent data suggesting that reliance on LTE access has caused a decline in Wi-Fi access in South Korea, for example, where "average" LTE speeds are close to 19 Mbps. 

Speed was one reason many users started using Wi-Fi instead of 3G. But price is the other key variable. Using Wi-Fi usually occurs with no incremental cost, and without usage against a cap. 

If Wi-Fi experience starts to be perceived as slower than mobile access, users will rethink their behavior, at least to some extent. And that will set up an interesting test: to what extent will users use mobile access, instead of Wi-Fi, even if it "costs more," because LTE offers a better experience?