Inside the Phone-Plan Pricing Puzzle; complex plans make comparison shopping nearly impossible, a tool that discourages customers from jumping ship

July 31, 2013, 7:52 p.m. ET

Inside the Phone-Plan Pricing Puzzle

An Analysis of Some 700 Wireless Options Underscore the Complexity and Confusion in the Market

THOMAS GRYTA

To understand how confusing wireless plans have become, just walk into an AT&TInc. T -0.49% store. The second largest U.S. carrier offers far more plans than its rivals—nearly 30 combinations alone for individuals, and many of its packages contradict one another. For example, customers can sign up for 900 minutes of talk, unlimited texts and 300 megabytes of data for $100 a month. But a “mobile share” plan that is $30 cheaper offers unlimited talk and texts and the same amount of data. The muddled pricing isn’t unique to AT&T. The four major carriers offer a total of nearly 700 combinations of smartphone plans—a family of five alone would have more than 250 options to choose from, according to a Wall Street Journal analysis of smartphone plans offered by the four biggest U.S. carriers. “It is always a cumbersome, somewhat root canalish experience,” said Erin Riordan, of Naperville, Ill., who has five children and manages an account with six lines from AT&T that produces a $495 monthly bill. She has considered switching carriers, but has been overwhelmed by the detailed service contracts, network coverage, the multiple plan options and whether moving will actually save her any money. “I consider myself to be pretty educated but it makes me want to stick a fork in my eye,” Mrs. Riordan said. Confusing plans are as old as the cellphones themselves, although there is some hope that the structures may simplify as competition in the industry heats up.AT&T and Verizon Wireless dominate the industry as they hold more than three-quarters of the total contract subscribers among the four major carriers. But Sprint Corp. S -0.57%recently sold a majority stake to Japan’sSoftBank Corp., 9984.TO +1.78% which shook up that country’s wireless industry, while T-Mobile US Inc. is pitching itself as the “un-carrier” and bucking some traditional practices like service contracts.

But for now, the complex plans make comparison shopping nearly impossible, a tool that discourages customers from jumping ship.

“If it really was just one number for consumers to compare, no one would ever voluntarily pay the higher price,” said Michael Grubb, an assistant professor of economics at Boston College who has researched wireless pricing and consumer behavior. “But when there is a number of gigabytes, the overage charge, the monthly fee and a little bit of math to do, suddenly it is not so easy to pick the contract that is a better value.”

Carriers are now pushing tiered plans that require subscribers to guess at the amount of data they might use each month. Voice minutes and texts are easy to count, but few people instinctively know what makes up a megabyte.

An analogy to predicting data is estimating monthly water usage: It will depend on the consumption of different appliances in your house and your habits. It can also fluctuate with each month, even if your behavior is relatively unchanged.

Mr. Grubb’s research shows that when presented with such choices, consumers tend to be overconfident in their ability to estimate their usage. The average U.S. consumer used 733 megabytes of data a month in the first quarter, according to Nielsen. But that isn’t necessarily what they’re buying.

Earlier this month, AT&T said it has about 4.3 million accounts on its shared-data plans—including about 13 million subscribers—with a quarter of those accounts choosing plans of 10 gigabytes of data or higher.

Turned off by the uncertainty, some people might gravitate to the unlimited data plans such as those offered by T-Mobile and Sprint, which tend to be cheaper than many of the tiered plans offered by AT&T and Verizon. But that doesn’t mean it is simple.

Sprint recently cut the price of a plan offering unlimited data, talking and messaging to $80 a month. But it continues to offer the original plan—with the exact same benefits—for $110 a month through its stores or by calling customer service.

Robert Lane, director of pricing strategy at Sprint, said a “focal point” for the company is the new $80-a-month plan, but it wants to continue offering older options rather than simply replacing them.

An analysis of AT&T’s contract “family” plans—which include more than 500 smartphone-plan options for two to five lines—shows about 40% of them are the same price or more expensive than “mobile share” plans but offer fewer voice minutes and the same or less data.

AT&T spokesman Brad Burns said the company recommends its shared-data plan for customers, depending on specific needs.

Mr. Burns said “independent third-party” research shows that network quality matters more than three times as much as price when it comes to wireless customer satisfaction.

AT&T said it offers a number of ways for customers to determine the best plan for them, including being able to track their ongoing usage online or from their device. Like other carriers, it sends text messages as users approach their data limits, offers an online data calculator and lets customers track more than year of historical usage online.It also stressed that customers can change plans at any time and at no cost.

Mike Sievert, chief marketing officer at T-Mobile, said the company has been trying to simplify the structure of traditional wireless plans offered by larger carriers. In an effort to make monthly charges more predictable, the carrier has structured plans so there are no overage charges, he said.

Verizon declined to comment.

Jodie Griffin, senior staff attorney at advocacy group Public Knowledge, said the service plan structures show a lack of industry competition.

“They don’t really have the incentive to make sure that this is something that is really easy and accurate for customers to figure out for themselves,” Ms. Griffin said.

However, there are signs of movement. Sprint said its recent price cut was an attempt to simplify its options, and T-Mobile has streamlined its plans, along with launching marketing attacks on the complexity of rivals plans.

Jeff Blyskal, a senior editor at Consumer Reports, said plans have become more straightforward, especially when compared to the early days of cellphones that included home regions, roaming charges and peak pricing, all along with a monthly allotment.

“I don’t think there is the intention of confusing people,” he said. “There are a lot of ways for companies to offer these services.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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