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How low can unlimited voice prices go?
THE VERY LIMITED NATURE OF “UNLIMITED” VOICE
January 27, 2010
Over the past two weeks, RCR Wireless covered the dropping rates of unlimited voice cellular plans. Verizon launched the first salvo on Jan. 15 , and it took AT&T less than a day to respond in kind. U.S. Cellular followed later last week, and it seems clear that a new price ceiling for top brand, post-paid unlimited voice has been set at $70 per month.
I should give credit where it's due, and note that some other brands have been ahead of Verizon: Pre-paid plans like Boost, Straight Talk, Tracfone, and offers from Sprint and T-Mobile are often cheaper than Verizon, but don't carry the same national coverage, range of services, or brand value.
Customers now have a decreased incentive to restrict their “anytime” phone use, others will substitute fixed lines for mobile, and the average monthly minutes of use (already very high in the U.S.) will grow even further – all while the revenue upside is capped at $70. So why is it carriers are continuing to lower the price on their cash cow, even as they remove limits?
The reason is that voice is a relatively painless thing to give away, and it is decreasing in strategic significance as it becomes clear that data traffic is the future for the wireless industry. And as data becomes more promising, voice has become much cheaper to deliver, and in fact is rapidly becoming a small portion of the total data carried by mobile and fixed networks.
Verizon's strategic reliance on data revenues is evidenced by their recent push into smartphones, and their pricing strategy of requiring every smartphone subscriber to at least get the $10/25 megabyte data plan.
Over the years since cellular telephony emerged, voice traffic has become digitized, compressed, and sent as packets over a shared frequency. Thus it no longer ties up a dedicated pair of radio channels for each conversation. And while an individual subscriber's data use may grow and grow without bounds, voice traffic has a natural upper limit: There is only so much traffic one can send over a voice circuit in a given month, even if they stayed on a phone call for the whole month!
Let's calculate the natural limit:
Bitrates
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CDMA uses EVRC codec at < 9.6 kilobits per second
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GSM uses GSM/AMR at < 12.2 kbps
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Fixed phones use G723.1 at < 6.3 kbps
So, let's say that the average bitrate of a compressed call is about 8 kbps.
Voice monthly throughput
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There are 2,592,000 seconds in a month (60 x 60 x 24 x 30)
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The most a phone call will consume, if left active for the entire month, is: 20,736,000 Kilobits (2,592,000 seconds x 8 kbps)
This is 2.47 gigabytes (20,736,000 x 8 x 1024 x 1024)
So, a voice call, left connected for an entire month non-stop, would only create network traffic of 2.47GB. Thus, even “unlimited voice” is capped! From a network operator's perspective, fixed, 3G, or 4G mobile, that is not a huge amount of monthly traffic. And that is a figure that neglects a good network trick of not transmitting silent moments, and the fact that most people will not talk that much! With 2.47GB as the upper limit, it's easy to see how a company like Verizon Wireless can offer an unlimited voice package for $70/mo – especially when we contrast this to Verizon's EV-DO data package, which costs $60 per month and is capped at 5GB. Hmmm, let's see, the data package costs $12 per GB while the voice package costs $28.34 per GB. Admittedly, this is a simplification, because handling voice has other costs, too: termination fees, 911 costs, number allocation fees, etc. But the general point stands.
So at a time that carriers are positioning to implement data caps and tiers on consumers with little patience for caps and tiers, they have the luxury on the voice side of a natural cap to voice traffic. The risk of unlimited voice is thus, completely known and managed. There can be no “bandwidth hogs” on the voice side. The contrast with data traffic is night and day: a user could run a video camera server on a data connection, and suck up all available bandwidth. As bandwidth improves, the customer could add a second camera, or increase resolution. There is no limit to how much data a customer can consume in an “unlimited data” model.
Ominously, the roots of the recent “unlimited” movement have been visible for a while. Carriers have been willing to give away unlimited voice, under specific conditions for years: consider free nights and weekends, “Rollover minutes”, in-network free calling, “Fave five” plans and the like. Clearly, carriers weren't so much worried about someone being on the phone 24x7, but more worried about cannibalizing their high-ARPU subscribers. In a competitive world, though, if you don't cannibalize yourself … someone else will!
So the trend in voice is clear. The marginal cost of flinging bits of voice calls is dropping to near zero. As economics suggests, the price in a competitive market will follow the marginal cost. Thus, price per minute has gone to zero. Pick up your phone and tell someone your life story.
by Derek Kerton
Principal Analyst, The Kerton Group
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