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Want cheaper wireless service? Patience is a virtue

CNET's Marguerite Reardon explains how three key phenomena could reshape the wireless industry in the next few years and pave the way for more-affordable mobile services.

The US wireless market is on the cusp of big changes and competitive clashes. Those, in turn, could lead to lower prices and better deals for you.

At least that's how I hope things will play out over the next few years. From Google's Project Fi experiment to build a hybrid Wi-Fi/cellular network, to rumblings about someone finally making use of Dish Network's stockpile of wireless spectrum, to the last major wireless auction for the foreseeable future -- there's a lot of activity in the mobile world. And with luck we'll see additional legitimate options in the wireless business, which could mean more-competitive prices.

In this edition of Ask Maggie, I look at each of these scenarios and explain how it could shape the future of the wireless industry.

How long do I have to wait for change?

Dear Maggie,

I've been reading your articles regarding cell phone bills and upgrades. Clearly, there is a lot of confusion about upgrades right now, and about leasing phones.

I recently called my wireless provider to inquire about a potential phone upgrade on my family plan, since my contract ends in October. I've heard so much about all these great deals, so I was expecting to be able to take advantage of them. What I quickly learned is that whether I sign up for another two year plan, take the leasing plan or buy a phone outright, my total cost is about the same.

Let's get real. They are NOT offering real discounts/incentives. If you read between the lines, the only thing they've promised is to increase your bill. Especially, for those households with teens. How many families can really afford to purchase multiple cell phones these days? It really doesn't matter if you choose a two year contract (if available) or the (AT&T) "Next" plan.

The fact is, we as consumers are being ripped off. To add insult to injury, the phones we currently own seem to self-destruct right around the time our contract is about to end or the phone is fully paid for. It's like the phone makers and wireless companies are in cahoots to make sure you upgrade.

Please tell me something better is coming. When will we see real discounts on service?

Thanks,
Shawn

Dear Shawn,

You seem to have a pretty good read on the market. You're absolutely correct that some of the new no-contract leasing plans don't offer much of a discount, if any discount, over the older contract plans. And you're also right about the plans being confusing. Sometimes I wonder if the complicated plans offered by wireless operators are deliberately designed to confuse people into spending more money because they don't fully understand all the charges.

CNET

But the truth is that over the past year, wireless companies have reported that the average revenue per user has fallen about 7 percent, and total revenue for the entire wireless industry has essentially flatlined, according to equity research analyst Craig Moffett of MoffettNathason Research. This is happening at the same time that consumers have nearly doubled the data usage on wireless networks.

Still, this doesn't mean that every consumer is seeing huge discounts on their monthly bills. As you rightfully point out, some folks may actually be paying more under new plans, and scores of others are seeing no difference in how much they pay each month for phone service. At the end of the day, mobile phone bills are still a big strain on family budgets.

Where are things headed?

I like to think of myself as an optimist, and I see signs that positive change for consumers is coming. We've already begun to see some changes in the industry as the result of growing competition. T-Mobile's Uncarrier strategy, introduced two years ago, has prompted AT&T and Verizon to alter service plans. Sprint has also come out with some aggressively priced plans that have given consumers an alternative to AT&T and Verizon.

Though pricing may not have dropped as dramatically you'd like, consumers in general are getting more services for roughly the same money they were paying before. And some customers are actually paying less for their service.

More changes could be on the horizon. Here are three main trends/events that could reshape the industry and create more competition that would ultimately benefit consumers.

'Wi-Fi first' and the Google effect

Last month Google announced its Wi-Fi-first wireless service called Project Fi.The service is built using a combination of free Wi-Fi networks and leased service from traditional carriers to provide consumers with inexpensive wireless service. Small startups, such as Scratch Wireless and Republic Wireless, have already been offering services based on this model for more than a year.

Juan Garzón/CNET

The idea of Wi-Fi first is that customers of these services can make phone calls, send text messages and access the Internet using Wi-Fi hotspots when they're available. When not, the service automatically switches to a traditional cellular service. In the case of Scratch and Republic Wireless, customers access Sprint's network. Google's Project Fi service will use either T-Mobile's service or Sprint's service, depending on which one offers the best connection.

The benefit is that Wi-Fi first phone services are cheap. Republic's service is only $5 a month for customers who make calls, access the Internet and text over Wi-Fi networks. Scratch offers these basic services for customers on Wi-Fi networks for free. The cost of these services increases when customers roam onto a cellular network. But because most wireless subscribers are within a Wi-Fi network most of the time, cellular roaming is often minimal, which keeps costs low. For instance, Scratch says that two-thirds of its customers every month do not roam onto a cellular network at all.

Google's pricing is not nearly as aggressive as that of Scratch Wireless or Republic Wireless. Its basic service, which includes unlimited talk and text messaging, starts at $20. It then charges $10 more a month for every 1GB of data. Even though Google's pricing is higher than that of Scratch or Republic, the fact that Google has dipped its toe in this market has huge implications for the industry.

Project Fi on its own isn't likely to threaten the dominance of Verizon and AT&T, but the lessons that Google learns and the technology it hones could be useful for the entire industry. And this could help nontraditional telephone companies looking to compete with the big wireless companies get into the market using a similar Wi-Fi-first approach.

For instance, Google could use its technology and clout to push for a more seamless transition between Wi-Fi and cellular -- a transition that hasn't worked so well in the past. That could pave the way for cable providers or other companies with wireless ambitions to create a wireless business to challenge the wireless operators. The cable industry is uniquely positioned for such a disruption, since they could wed cellular service with their own network of Wi-Fi hotspots.

"Google will be an accelerant in a market that the cable companies have already shown interest in," said Spencer Kurn, analyst at New Street Research. "It will help cable companies figure out how to improve the quality of the Wi-Fi service so that it can compete with wireless."

Dish Network: Spectrum hoarder or new competitor?

Satellite TV provider Dish isn't in the wireless service business today. But Chairman Charlie Ergen hasn't kept secret his desire to expand into the area. The company has amassed a healthy war chest of wireless spectrum over the past few years in various auctions and through private deals. That's necessary if you want to build your own wireless network.

Dish Network

The company has talked about getting into the wireless broadband market with a service to rival those offered by the big wireless companies. But so far, it hasn't made a major move other than buying more spectrum assets.

That could soon be changing as the company faces pressure from the Federal Communications Commission to put its spectrum to use. Last week, Yahoo Finance reported it had obtained a "confidential" document that indicates Dish is seeking a chief marketing officer to move into the wireless market.

Though Dish has been tight-lipped about specific plans for its wireless spectrum, the company has tried to strike deals with existing wireless companies. Two years ago it tried to acquire Sprint but lost out to Japanese wireless carrier Softbank. And there's been a lot of speculation over the past year about a merger with T-Mobile or a possible deal with Verizon.

At this point, it's unclear whether Dish will build its own wireless network or if it will strike a deal with an existing wireless player. There's also a chance the company could partner with a nontraditional wireless company to add a new competitor to the market. If the spectrum is put to use to create a new competitor, that could bode well for consumers, who would benefit from another upstart potentially offering some deals.

Last call for wireless spectrum

In early 2016, the FCC is expected to hold the last major auction of wireless spectrum for the foreseeable future. Wireless spectrum is considered the lifeblood of the wireless industry because its radio signals are critical to carrying the data that translates into our phone calls, text messages and YouTube cat videos. Operators need more and more of it to keep up with demand for more bandwidth from consumers. Without enough spectrum in the right markets, competitors wither and die.

James Martin/CNET

The so-called incentive auction scheduled for early 2016 will take unused or underused spectrum in the 600MHz band of frequency used by TV broadcasters and sell it to mobile-broadband operators. The auction will let TV broadcasters take a portion of the proceeds from the auction in exchange for giving up some of their unused spectrum.

This auction is important because the licenses that will be auctioned off are for low-band frequencies, which can transmit data over longer distances and penetrate through obstacles like walls easier than at higher frequencies. It's often referred to as the "beachfront property" of spectrum frequencies.

This spectrum is of particular importance to operators like T-Mobile and Sprint, because it could enable them to extend their networks to more suburban and rural markets.

What this means for consumers of wireless is that T-Mobile could become an even stronger competitor to AT&T and Verizon. Its Uncarrier strategy has already put pressure on the carriers to make changes in their plans, and a stronger network would only help its case. AT&T and Verizon are now offering device leasing options, thanks in large part to T-Mobile's move in this direction. Even though this change may not make services less expensive for all consumers, it offers consumers options. And it could be an initial step toward more change. T-Mobile believes that with this additional spectrum, it can continue to put pressure on the rest of the market, which will ultimately benefit all wireless subscribers.

"T-Mobile is playing a really interesting role that benefits all American consumers by changing the rules in wireless," Mike Sievert, T-Mobile's chief marketing officer, said in a recent interview. "We can continue to do that indefinitely on behalf of the industry's consumers with the right asset base."

Sievert went on to explain that the low-band spectrum that will be auctioned off next year is the key to keeping its competitive momentum going.

"We know that in order for us to take the best advantage of our ability to create real competition in the marketplace, spectrum is the core ingredient," Sievert said. "There is just no question about that."

The bottom line

Pricing pressure from T-Mobile and Sprint has already begun to shake things up in the wireless market. Consumers on average are spending slightly less on service than they were a few years ago. But there's still a long way to go in terms of making wireless service more affordable.

More competition could shake things up further. But the reality is that none of these things will happen overnight. And there's no guarantee that any of them will work out as expected. For instance, Google's service could be a disaster and the company could abandon its efforts. Dish could continue to stall its plans to put its spectrum to use. And larger operators AT&T and Verizon could once again walk away with the majority of wireless spectrum in the upcoming auction and shut out smaller players like T-Mobile and Sprint.

But as I said before, I am an optimist. I'm hopeful that the next 5 to 10 years will bring more competition from new and existing competitors. And that could mean a lighter load on our wallets.