How low can unlimited pricing go?

The price war among the unlimited prepaid carriers intensified last week when TracFone Wireless undercut its competitors by introducing a new prepaid, flat-rate calling and texting plan called Straight Talk for the low price of $45 per month. Previously, the going rate for unlimited prepaid calling had been $50 per month, a price established earlier this year by Boost Mobile and matched by MetroPCS, T-Mobile USA and others.  

TracFone's new $45 per month rate plan includes unlimited text messaging and 30 MB of data. The service, which uses Verizon Wireless' network, is available at participating Wal-Mart stores. While some analysts have predicted that TracFone's $45 price point will have a big impact on the unlimited prepaid space, I'm not sure competitors will follow TracFone's lead and drop their prices--at least not initially.

The real question is: How low can unlimited prepaid wireless rate plans can go and still make money? Reselling wireless service has always been a low-margin business and the reseller road is littered with many disasters. Anyone else remember back in 2002 when WorldCom wanted to sell its wireless reseller business and no one wanted to buy it? At that time, it had about 2 million customers across several operator networks. WorldCom eventually ended up selling its customers back to the original network operators at a much reduced rate.

One way players like TracFone keep their costs down is by carefully managing their marketing dollars and their billing and customer care costs. "If marketing is a huge segment of your cost, you can't keep going lower in price and still advertise," says Ken Hyers, senior analyst with Technology Business Research. I suspect that TracFone relies on its placement with distribution partner Wal-Mart to attract many of its customers.

Boost, of course, operates on Sprint Nextel's iDEN network and has the advantage of being able to use Sprint's customer service and billing system. Hyers thinks that because of those advantages Boost may actually end up being the low-cost leader.

Nevertheless, I wouldn't underestimate TracFone; the company has long been a leader in the low-cost MVNO space. However, I do think we are at (or very near) the price threshold. I don't think many carriers can drop to $45 per month or lower and still make money selling wireless service. How low can prices go? I think we've hit the bottom. --Sue

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