AT&T and Verizon Mobile Data: A Product Category Maturing

timjsmith

Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published December 1, 2010

In the past six months, both AT&T (NYSE:T) and Verizon (NYSE:VZ) have altered their mobile data service price structures.  First, they added a metered fee based on the megabytes of traffic.  Now, Verizon is considering a price structure based on the speed of traffic provided.  With all these new forms of charges, some have feared customer backlash:  defection, brand betrayal, and a public relations nightmare.  Yet they needn’t worry much.  Both these titans are in well traversed territory.

In this article, I will argue from the product lifecycle trajectory that the structural price adjustments made by AT&T and Verizon are within expectations of a normal healthy industry growth.

The Facts

In June of 2010, AT&T eliminated their unlimited mobile data plan in favor of a two-part tariff price structure.  The entry fee for mobile data was set at $15/month for 200 MB of data, or $25/month for 2 GB (10 X more data).   Heavy users could pay a metered fee of $10 per 10 GB.

While the change in pricing structure was framed in terms of ensuring network quality, the strategic effect was one of expanding the number of products available on the market.

Then, in November 2010, the WSJ reported that Verizon is “exploring methods of charging consumers based on the speed of the wireless data connection in addition to the amount of data they use”.  In effect, this would add a tiered layer within the pricing structure.

Again, the change in price structure was framed in regards to an improvement in service as Verizon deploys a 4G network, however the strategic effect was one of expanding the number of products available on the market.

The variety of mobile data services being marketed is expanding as the technology matures.  This isn’t the first product category to evolve towards maturity, nor is its evolution particularly unique.  Rather, the expansion of services and price points is entirely in-line with expectations.

The Theory

As product categories mature, new products are introduced into the market.  Some of the newer products will have more benefits, others will have fewer.  The effect is one of expanding the number of spaces occupied within the potential product landscape, and therefore expanding the product benefit space.

As the product benefit space expands, so too should the pricing space.  Price should reflect benefits.  If the benefits increase, so too should the price.  Alternatively, if the benefits decrease, or even if the relative benefits decrease in comparison to newly introduced alternatives, so should the price.

This trajectory of prices and benefits is well known in technology driven markets.

Early in the market development, a revolutionary product is launched which defines the new category.  In its launch, it defines the expected benefits and price point for customers to enter that market.   In a price to benefits map, we can call the early generation of product Generation i.

As the market expands, new product positions become viable.  Call them Generation i+1 and Generation i+2.  Each Generation may have multiple products.  Since price should reflect value, we can also expect that some of the products will be priced higher, and others will be priced lower. Within any given market generation, products will generally be positioned such that customers face incremental price increases for incremental benefit increases.

Technological developments contribute to their viability, but they are insufficient for describing their market viability.  Simply consider the age of the technology associated with wrist watches and the extremely wide variety of products within that market to realize that technological development alone does not contribute to product variety.

Rather, the viability of a market sustaining multiple product positions is crucially determined by the variety of customer demands.  In general, as new customers enter a market, the variety of customer demands will naturally expand. When these new customers contribute to new market segments, and when these new market segments grow to a size sufficient for profitably delivering a product specific for their demands, new product positions become viable.

Size is a critical feature of these new market segments for a firm to profitably maintain a product tailored to the segment’s needs.  As may be obvious, each new product within a product line-up is associated with its own fixed cost structure which must be covered by the sales of that product line.  More importantly but perhaps less obvious, each new product launched into a market will cannibalize sales from the other products within that market.  Firms should only launch a new product variety into a market if they believe the profit improvements delivered through their market expansion with the new product outweigh the profit destruction of intra-product cannibalization.

The Application

We see this predictable trajectory within the mobile data market both on the market growth side and the product variety expansion side.

First, we have market growth.  Mobile data services went from being a newly important product category in 2008 with the launch of the iPhone; to being the fastest growing market offering that, as of December 2010, contains approximately 25% of the US mobile customer base; towards becoming a dominant mass-market product that attracts a supermajority of mobile customers.

Second, we have product variety expansion.  The mobile data market went from $30 buffet pricing in Generation i, to two-part tariff pricing in Generation i+2, and is now moving towards speed-based tiered pricing in Generation i+3.

Product evolutions in growing competitive markets follow a predictable pattern.  Markets expand.  New products are offered.  Some at a higher price point.  Others at a lower price point. The theory predicts a proliferation of products positioned at different prices and benefits.  It can’t predict the specific nature of how the benefits are delivered or how the price is determined.  But from this theoretical framework, we can tell that the structural price changes undertaken by both AT&T and Verizon are well within expectations of healthy industry growth.

References

  • Roger Cheng and  Shayndi Raice, “Verizon Rethinks Pricing: Executives Say 4G Shift Creates Option to Charge More for Faster Wireless Data,” Wall Street Journal (Eastern Edition), 18 November 2010,  p. B.3.
  • Andrew Dowell and Roger Cheng, “AT&T Moves Away From Unlimited-Data Pricing,” Wall Street Journal (Online),  2 June 2010,  retrieved 28 November 2010 http://www.proquest.com.ezproxy1.lib.depaul.edu/ .
  • Richard A. D’Aveni, “Hyper-competition: Managing the Dynamics of Strategic Maneuvering,” New York, NY: The Free Press, 1994.

Note: At the time of writing, the author is not currently a direct consultant to nor investor in any of the firms listed in this article.

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About The Author

timjsmith
Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.