Would a Verizon iPhone trigger a price war?

Talk of iPhone carrier competition has people wondering about potential price cuts. A look at the U.K. market shows what we might expect.

Apple

Rumors of the iPhone coming to Verizon Wireless may have some consumers in the U.S. wondering about resulting cost savings for the device. But will more competition really mean lower prices?

Six months after the iPhone market opened up in the United Kingdom for the iPhone , prices have only dipped slightly. But compared to prices from AT&T, the iPhone's exclusive carrier in the U.S., Brits are still getting a much better deal than Americans.

When Apple announced its exclusive contract for the iPhone with O2 Wireless was expiring in the U.K. last September, the British press was almost giddy at the prospect of a price war.

"Orange's success in breaking into O2's exclusive deal to stock the iPhone is expected to lead to a Christmas price war with the cost of the Apple handset coming down for U.K. consumers," the Guardian newspaper wrote on its technology blog in September 2009.

But Orange resisted temptation to spark an iPhone price war. Instead, the company decided to match O2 in price in many tiers of service. Vodafone, another major wireless operator in the U.K, began offering the iPhone in January 2010. And it, too, kept prices in sync with O2 and Orange. Discounts, even modest ones, didn't appear until Tesco, a major supermarket chain in the UK, started offering the iPhone.

iPhone pricing, U.K. to U.S.
Compare how much iPhone users in the United Kingdom and the United States are paying for voice and data service per month, as well as for their hardware upon initial purchase.
Tesco 20 pounds ($30.55) 35 pounds ($53.47) 45 pounds ($68.74)
Contract period 12 months 12 months 24 months
Minutes of voice 250 minutes 750 minutes unlimited
Text messages unlimited unlimited unlimited
Web access unlimited for 12 months unlimited unlimited
16GB version 320 pounds ($488.81) 200 pounds ($305.50) free
Orange 25 pounds ($38.20) 35 pounds ($53.47) 45 pounds ($68.74)
Contract period 24 months 24 months 24 months
Minutes of voice 75 minutes 600 minutes 1,200 minutes
Text messages 125 messages unlimited unlimited
Web access unlimited unlimited unlimited
16GB version 189 pounds ($288.70) 89 pounds ($135.95) free
Vodafone 25 pounds ($38.20) 35 pounds ($53.47) 45 pounds ($68.74)
Contract period 24 months 24 months 24 months
Minutes of voice 75 minutes 600 minutes 1,200 minutes
Text messages 250 messages unlimited unlimited
Web access 1GB 1GB 1GB
16GB version 189 pounds ($288.70) 89 pounds ($135.95) Free
O2 25 pounds ($38.20) 35 pounds ($53.47) 45 pounds ($68.74)
Contract period 24 months 24 months 24 months
Minutes of voice 100 minutes 600 minutes 1,200 minutes
Text messages unlimited unlimited unlimited
Web access unlimited unlimited unlimited
16GB version 249 pounds ($380.28) 89 pounds (135.95) free
AT&T $70 $90 $100
Contract period 24 months 24 months 24 months
Minutes of voice 450 minutes 900 minutes unlimited
Text messages not included* not included* not included*
Web access unlimited unlimited unlimited
16GB version $200 $200 $200
*AT&T texting plans start at $5 a month for 200 messages. And unlimited texts cost an additional $20 per month.
Source: CNET Research

So what does this have to do with the U.S. market? Well, up until December, when Orange started offering the iPhone, Britain was one of the few countries where the sale of iPhones was still limited to a single network. Today, the U.S. is the only iPhone market, out of the original four markets in which Apple launched the phone with just one operator, that still has only one provider. The German and French markets now also have more than one carrier offering the iPhone.

Looking at what has happened in the U.K. market over the past six months could provide a good preview of what American consumers might expect when AT&T's stranglehold on the much-beloved iPhone finally expires.

One competitor isn't enough

One lesson from the iPhone opening up in the U.K. market is that a single competitor might not be sufficient to result in prices dropping significantly. While it would be illegal for carriers to collude and fix prices, it's not difficult to match each other on pricing and still keep things legal.

More competitors are typically needed in a market to exert pricing pressure. This is especially true in the mobile phone market, where wireless operators are keenly aware that prices on services and technology typically head in only one direction: down. So it benefits everyone in the industry to keep prices steady.

In the U.S., Verizon Wireless, which has long touted the merits of its network, rarely competes on price. In fact, AT&T and Verizon, the two largest wireless operators in the country, have been embattled in dueling advertising campaigns with Verizon claiming a wider 3G footprint and AT&T highlighting its faster network speeds. In general, the two companies match each other on pricing.

Earlier this year, each carrier lowered the price of its unlimited voice plans in separate announcements only days apart. Meanwhile, Sprint Nextel and T-Mobile, the No. 3 and No. 4 operators in the U.S., have typically competed against the two dominant players on price and value.

What this means for potential iPhone subscribers is that it's more likely that prices on service will fall if Sprint and/or T-Mobile get the iPhone in addition to Verizon Wireless.

The U.K. as an example

Adding a value-oriented competitor in the U.K. is what finally brought better deals for consumers. Once Tesco came on the scene, it began putting pressure on the major wireless companies by doing three things.

First, it offered consumers a 12-month contract with a hefty phone subsidy. The shortest contracts O2, Orange, and Vodafone offer are 18 month contracts.

The second thing Tesco has done is that it lowered the monthly price of service for the iPhone. So while O2, Orange, and Vodafone offer a 25-pound ($38.20) service, Tesco offers one that is only 20 pounds ($30.55) a month on a 12-month contract. The cost of the phone is higher. But for consumers willing to dish out more cash upfront for the phone, the cost is worth it considering the contract period is considerably shorter.

The third way in which Tesco is competing aggressively with wireless rivals is that it's offering more value to customers who sign up for longer contracts.

For example, each of the four wireless operators offering the iPhone in the U.K. offer a 24-month contract service for 45 pounds ($68.74). Plans offered by O2, Orange and Vodafone are almost exactly the same with a few exceptions.

At this price and commitment level, all four operators offer consumers the iPhone for free. And they each offer unlimited texting. But Tesco provides more value to customers by also offering unlimited data and voice minutes at the 45-pound ($68.74) price.

By contrast, O2 and Orange offer unlimited data, but they only provide 1,200 voice minutes at this price level. Vodafone also offers 1,200 voice minutes for a 45-pound plan, but it puts a 1GB limit on data usage per month.

For customers willing to spend a little more each month, Tesco offers a better value. This scenario could easily play out in the U.S. market.

Sprint and T-Mobile often compete in a similar fashion. Sprint's Any Mobile, Anytime plan and Simply Everything Plan costs $69.99 a month , and it allows subscribers to call any cell phone in the U.S., regardless of the carrier, for free. It also offers unlimited text messaging and data services. Subscribers also get 450 voice minutes for calls to landlines.

Succumbing to pressure from Sprint and T-Mobile, which has also reduced pricing on flat rate services, AT&T and Verizon have each reduced the price on their unlimited voice plans. The plans have dropped from $99.99 to $69.99 per month for individuals.

But unlike Sprint, these plans to do not include unlimited data, nor do they include unlimited text messaging. For a smartphone, like the iPhone or a BlackBerry device, unlimited data costs an extra $30 a month and unlimited texting is $20 more a month on each of these operators.

It's difficult to say exactly what effect competition will have on data prices for the iPhone when AT&T's exclusivity contract with Apple ends. But consumers can be sure of two things: the more competition there is for the iPhone, the more likely it is that prices will fall. And if prices don't come down, it's very likely more value will be added to existing plans.

The other thing that we know for sure is that American iPhone subscribers are paying far more today than their British counterparts on plans with fewer options. Just take a look at the comparison chart in this story.

The chart doesn't even list all the options available to subscribers in the U.K. British subscribers get the choice of pay-as-you-go service, 12-month, 18-month, and 24-month contracts. The subsidy on the iPhone varies based on the contract length and monthly expenditure. And in some cases, the iPhone is free for longer contracts.

In the U.S., AT&T offers a two-year contract and it just recently allowed customers to buy the phone at full price and pay monthly for service without a contract. But it doesn't offer a pre-pay option for the iPhone. And regardless of how much a customer spends each month on the service, the subsidy for the iPhone is the same.

What's more, in the U.K., unlimited texting is almost always included in the monthly price of service. In the U.S., unlimited text messaging from AT&T costs $20 extra a month.

So the for bargain hunters who really want the iPhone, the best option may be moving to the U.K. or some other market that charges less than AT&T.

 

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