What’s behind the price signaling between Verizon and AT&T?

The two largest mobile service providers, AT&T Wireless and Verizon Wireless, are engaging in some serious price signaling. And you don’t have to take my word for it, because the two leaders are not only signaling, they are explicitly saying that they’re signaling.
“The carriers are probably concerned and hoping that if they raise prices the other guy will, too,” Denny Strigl, retired president of Verizon
“Is it going to cost them more money? Yeah,” Lowell McAdam, CEO of Verizon Wireless
“Verizon’s pricing that they announced this morning is exactly what we have been kind of signaling in the marketplace for the last couple of weeks,” Randall Stephenson, CEO of AT&T Wireless
And guess what, this is all perfectly legal. As a marketing guy, I am in awe of this stroke of genius.
Price signaling has always existed between the number one and number two players in any market. Agreeing to not engage in a price war is truly a win-win for the market leaders. Since outright price fixing is illegal, market leaders resorted to signaling to tell the other company their intentions or send a threat about their cost advantages.
But traditionally, it was more like flirting — ambiguous enough that the underlying intentions could be denied. Why are these two not shy about admitting to flirting now? The simple answer is the iPhone.
Not too long ago we worried about running out of talk minutes and paying overage. Service providers offered us tiered plans that offered more minutes for a higher price and unlimited minutes for an even higher price. With the additional revenue flowing directly to their bottom line, these higher priced plans were real cash cows.
For those who have any doubt about the profits from unlimited plans, I’d point out that the costs of a mobile service provider are sunk with zero marginal cost for additional minutes. And texts don’t even consume traffic channels — they piggyback on control channels.
In the five years since the iPhone entered the market, things have changed. Smartphone customers are now happy with the fewest minutes at the lowest price. Our mobile phones have become app platforms. We hardly use them for talking anymore, and there are other alternatives to text.
For wireless service providers, that means customers aren’t signing up for the unlimited plans and the cash cow is on the chopping block.

So what is left for AT&T and Verizon to do? Get rid of the limited talk minutes plan and offer only the all you can talk and text plan at the same total higher price as before. At Verizon Wireless, if you pick a smartphone, your only options are in tiered data plans. You always get unlimited voice and text.
In another genius pricing move, Verizon Wireless is presenting this $100 mobile service plan to customers in a bundle — talk minutes plus data. In the past, around $70 was allocated to talk because consumers valued it more. Now subscribers pay only $40, but they still pay the same $100 total price. This is nothing short of pricing excellence, protecting customer margin while also using strong price signaling to make sure that the next biggest market share leader follows suit.

Why is this signaling legal? There is absolutely nothing wrong in these pricing plans or in their signaling. A marketer is fully within their rights to not offer a certain product version and let other players know about it. I also do not believe lawmakers and regulators should try to dictate otherwise.
One, it does not eliminate competition. There are other service providers who can choose to provide cheaper voice plans. An extreme argument is, smartphones are not a necessity, customers don’t need to buy one at all.
Two, while it may look like this eliminates choices for customers and hence invite regulatory scrutiny, an arbitrage opportunity does exist. Consumers can purchase a regular phone for $40 a month with limited minutes and use a Nexus 7 tablet with $40 for data connection. The trade-off is having to carry two devices for a savings of $480 over two years. But how many will actually take this option? Did you check the line at last iPhone release?
As a customer, you may not like it, but viewed as a product strategy move, this is business at its best.
Rags Srinivasan is a management professional who specializes in product strategy and strategic marketing. He is currently working on big data products. He blogs at Iterative Path and tweets at @rags.