Prices going up for phones, Net

Carriers are shifting from rock-bottom rates to mid-priced bundles with more features

February 01, 2007|By James S. Granelli | James S. Granelli,Los Angeles Times

After enjoying years of falling prices, customers are starting to see monthly bills for phone service and high-speed Internet access rise again.

The nation's dominant telephone and cellphone companies have competed on price for much of this decade, packing calling features into low-end offerings.

With industry consolidations, faster networks and technologies that let phones, TVs and computers work together, the carriers are focusing on mid-priced packages - the $40, $50 and $60 bundles that most customers buy.

The lure? Sell services such as call waiting, voice mail and text messaging - priced as low as a few dollars a month each. Think car dealers boosting profits by selling a sport package with a sunroof and alloy wheels.

Telecommunications giants AT&T Inc., Verizon Communications Inc., Sprint Nextel Corp. and T-Mobile USA are adjusting plans and prices in efforts to increase their customers' average monthly payments. Cable TV providers, a growing competitor to the phone companies, have long used this "value" strategy.

Competition and cost-saving technologies have steadily driven down phone and Internet prices, much to the chagrin of telecom investors.

Even pay-TV customers enjoyed a small price drop last year - in the few regions where phone companies offered TV service in competition with the cable industry.

Subscribers aren't complaining. Discounted rates have become the most important factor in all buying decisions, according to a recent study by Forrester Research Inc.

"Consumers increasingly think price is more important than brand, and they are less likely to pay more for products that save them time and hassles or for products that they feel are consistent with an image that they like," the report by Forrester analyst Bruce D. Temkin says.

But really cheap phone deals may be going the way of the rotary dial. The low introductory prices that do remain probably won't last as long as they did a year ago. Analysts say the floor has been hit, and prices are heading up.

The typical bundle of local phone, long-distance and digital subscriber line service, for instance, cost about 3 percent more in the last three months of 2006 than it did in the comparable period a year earlier, Banc of America Securities reported late last month.

It was the first year-over-year increase the investment bank's researchers had seen in phone and Internet pricing since they began tracking it in 2003.

Entry-level prices for stand-alone DSL - the phone companies' high-speed Internet service - rose as much as 34 percent. And AT&T and Verizon have bumped up pay-TV prices, even though they have made few inroads in that market.

"It's too early to draw a conclusion, but it appears that competition is not leading us to a race to the bottom," Banc of America analyst David W. Barden said.

Instead, he said, a duopoly is emerging where cable and phone companies can avoid provoking price cuts in their core services. Carriers, for instance, can discount DSL service while keeping prices up on phone service, and cable firms can drop prices for phone service but maintain higher pay-TV rates.

That's good news for the carriers and their investors, who have wondered whether competition would drive dirt-cheap phone prices down further. Calls already are pennies a minute, and many Internet services are free.

But it's bad news for customers, who are increasingly price-conscious.

The Forrester study, which surveyed consumer buying attitudes over three years, found that half of respondents said the price of goods was most important to them, up from 46 percent in 2003. And the percentage of people who said they would pay more for products that saved time and hassles dropped to 34 percent, from 43 percent.

AT&T and Verizon are following cable's lead in adding more features to mid-level and high-end products as they try to generate more revenue per month from each customer - a measurement that analysts and investors watch closely. And bundles of services are proving popular.

"Overall, average revenue per user has been flat," said analyst Julie Ask of JupiterKagan Inc., a research and consulting firm. "So how do we grow revenue per customer? Part of the strategy is to make a la carte expensive so that customers buy packages."

Wireless carriers also are increasing prices on such stand-alone features as text messaging, effectively pushing customers into buying a bucket of data for a monthly fee.

Low-end calling plans, which generally cost less than $30 a month, have been stripped bare of extra features, but carriers are piling features into their $40 to $60 offerings - for "people who don't want the cheapest plan but don't want to pay a lot more either," said Barden, the Banc of America analyst.

Customers who refused to pay an extra $15 a month last year for, say, unlimited text messaging are now willing to pay $5 more for a package of 400 or 500 short messages, opening the door to a variety of lower-priced add-ons.

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