Lowenstein: Is TracFone the new Southwest Airlines of wireless?

With little fanfare, a new service was announced this week that I think is a signature event for the U.S. wireless industry. TracFone has launched a new brand called Straight Talk, which offers 1,000 minutes, 1,000 texts/MMS, and 30 MB of data over Verizon Wireless' network for $30 per month. Service is nationwide, and can be purchased on a month-by-month or recurring basis. There are three handsets ranging from $30 to $100. For the time being, this service can be bought via the Web or through Wal-Mart, and is available in select major markets such as Chicago, Atlanta, Dallas, Las Vegas, Denver and Phoenix.

What's the significance? First, as a simple, low-cost, no-frills service plan for individuals, it is the best deal in the business. Decent phone, the benefits of the Verizon network--clearly branded on the box--and a price package that is dramatically lower than comparable plans available from T-Mobile USA, MetroPCS and Boost Mobile.

Second, this represents a shift in course by Verizon. The company has historically eschewed prepaid, wholesale and the lower end of the market. But with 80 million (mostly postpaid) subscribers (the majority of whom are on family plans), industry penetration of nearly 90 percent, and a tough economy, the carrier has to get a little more surgical about where growth and subscriber wins are going to come from. This is an acknowledgement that the category represented by MetroPCS, Leap Wireless and more lately Boost Mobile has become meaningful. With Straight Talk, Verizon appears to be setting a new threshold in wholesale price per minute (can you say 2 cents, anyone?). Verizon is apparently prepared to accept a lower margin for its TracFone business than AT&T in order to win over the 70 percent of TracFone subs who use AT&T's network.

Third, with consolidation among the facilities-based operators, we are seeing growth in so-called "flank brands," which are far more prevalent in other geographies than they have been in the U.S. wireless market. But there is historical precedent here, going back to the long distance business where brands such as 10-20-220 were proxies for MCI's discounted long distance service. Verizon must take great care to not cannibalize its main brand, which is associated with a premium overall experience. And between unlimited mobile-to-mobile with 80 million subscribers and the Friends & Family option, Verizon's core service is getting closer to "flat rate" on the voice side, albeit at a higher entry level.

Fourth, it's clear we are entering a new world with respect to capacity and network economics. On the one hand it is possible to have a profitable voice business with wholesale rates of 3 cents or less, while on the other hand Randall Stephenson, AT&T's CEO, states that wireless operators are "not prepared for the onslaught of data traffic brought by smartphone growth and other connected devices." Hmm... (On a related note, I wrote in a recent Lens that we need a new framework for mobile broadband pricing.)

This increased activity in the areas of prepaid, wholesale and differentiated distribution is also a sign that the wireless industry is finally getting more sophisticated about market segmentation. For better or worse, there are comparisons to the airline industry. "First class" is represented by premium devices, services and experiences--for example iPhone, Blackberry and other smartphone "products" that generally require a contract and minimum $75 monthly commitment. Full-fare coach is represented by the "branded" postpay offering of the leading operators, with the expected level of customer service, free "on-net" calling, and some unique, branded content or service such as ESPN MVP, MediaNet, Sprint TV, Rollover and so on. Then there's the Southwest Airlines approach of a TracFone--same basic service as the main guys but no frills (i.e. we'll get you to Chicago for less but no seat assignments, no food, no movies).

What effect will this have on the competitive landscape? Initially, you won't see this show up that much in the numbers. Straight Talk is initially being offered in limited geographies and distribution, with very little marketing. But I think it's a sign that wireless competition is now being fought on two fronts: at the high-end, it's much more focused on devices like the iPhone, BlackBerry, Android, Palm Pre, etc; and at the lower end, it's focused on prepaid and sub-brands. (TracFone alone has four in the U.S. The New Yorker recently published a terrific profile of Carlos Slim, chairman of America Movil, which has 200 million subs and owns the TracFone brand.)

Certainly MetroPCS and Leap, which have expanded into more core markets in the past year, are inviting a more direct response from the major operators. I also wonder how this will affect T-Mobile, whose "full fare coach" offering is inferior across many parameters (network, device selection, content), and whose reputation as low-priced provider is being nibbled away by the Metro/Leap/Boost crowd.

Wholesale is going to be a more distinct and important part of the wireless market going forward, and will be a focus of experimentation with business models, as we have seen with the Amazon Kindle. Winners will be those that understand market segmentation and/or bring something unique to the table. TracFone understands prepaid like Apple understands the user experience.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, including a recent piece on the need for a new framework for mobile broadband pricing.

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