DENVER, United States-May marks the first anniversary of the introduction of AT&T Wireless Services’ Digital One Rate plan, which has dramatically changed the face of the U.S. wireless industry.
In an effort to leverage its national presence and win lucrative high-use and business customers, AT&T eliminated roaming and long-distance fees and offered customers large buckets of minutes for a flat rate. On the high-end plan, customers pay only 10 cents per minute for calls made from anywhere in the United States to anywhere in the United States.
Just weeks before AT&T introduced its new pricing plan, many analysts believed the pricing wars that had characterized the increasingly competitive U.S. wireless market were over. The entrance of PCS carriers into what was a duopolistic cellular market had sent prices in a downward spiral as competition heated up.
Many carriers were offering large buckets of minutes to attract customers to their service. PCS carriers used lower prices to compensate for lack of coverage.
By April of last year, however, average prices had decreased by no more than 2 percent since the beginning of 1998, according to a report authored by Robinson-Humphrey Co. analyst Perry Walter. That represented the smallest price decrease the company had observed in more than a year of conducting quarterly pricing surveys.
Digital One Rate frenzy
AT&T’s revolutionary new pricing plan turned that stability upside down.
The Digital One Rate plan includes three pricing options: 600 minutes for US$90, 1,000 minutes for US$120 and 1,400 minutes for US$150. The plan also brought back contracts, which had been dropped by many carriers as a tool for attracting more customers.
The strategy has been extremely successful for the company. Customers have flocked to the Digital One Rate plan in such large numbers the company has had some difficulty keeping up with demand both in terms of handsets and network capacity.
At a time when most incumbent cellular carriers were watching their net subscriber additions drop off, AT&T’s numbers began to rise. Just four months after launching the plan, AT&T had more than 500,000 customers using Digital One Rate and was adding an average of 100,000 customers to the plan each month. By the end of 1998, AT&T said it had 850,000 Digital One Rate subscribers.
“I thought we did a double or a triple, and now, not only have we hit a home-run, we’ve hit a grand slam,” said Dan Hesse, chief executive officer and president of AT&T Wireless, in December. “Digital One Rate continues to be a positive surprise every month … It continues to be better than our business case.”
Competitors respond
Other carriers were forced to react. Bell Atlantic Mobile, Sprint PCS, AirTouch Communications and trunked radio operator Nextel Communications are just a few of the carriers that have adjusted their pricing to fall in line with Digital One Rate.
Most carriers cannot match AT&T’s plan, particularly the elimination of roaming charges, without risking serious loss of revenues. AT&T itself took a serious gamble that the plan would be financially viable. Analysts worried AT&T would lose money on the plan because it would pay between 35 cents and 55 cents per minute for roaming, while generating as little as 10 cents per minute.
AT&T said it believed most of its customer roaming would occur on its own networks, and it was prepared to eat the losses on off-network roaming. It would be difficult, if not impossible, for carriers without a national footprint to match the Digital One Rate plan.
Bell Atlantic last September unveiled new pricing plans, which included a high-end plan of 1,600 minutes per month for US$160. That plan eliminated roaming and long-distance charges. The company also introduced three additional plans that eliminated roaming and long-distance charges within the company’s East Coast footprint. Bell Atlantic said about 60 percent to 70 percent of its customers roam only within the boundaries of its footprint.
By the end of last year, Bell Atlantic said its new pricing plans had contributed to a 100-percent increase in its digital customer activations.
Side effects
Rather than lowering pricing overall in the U.S. wireless industry, some analysts say all-inclusive rate plans have served to raise prices, particularly in local areas. Robinson-Humphrey’s Walter in November said carriers have moved away from offering local calling plans in an effort to introduce one-rate plans that eliminate long-distance and roaming charges attractive to high-end customers.
“Our survey results show that many carriers are taking advantage of the shift to this new battleground to discontinue or limit promotional pricing for local service pricing, the type of plans that we believe appeal to over 90 percent of wireless users,” said Walter.
The high-end, one-rate plans served to raise prices considerably in most markets, said Walter.
Digital One Rate has been credited with causing several side effects, including an increased migration of analog customers to digital technology as well as increased awareness of wireless service in general. Digital One Rate also is seen as something that has contributed to a consolidation frenzy in the United States as carriers scramble to fit together the pieces of a national footprint.
Some industry observers also believe all-inclusive plans could contribute to a trend of landline replacement.
