Wal-Mart, Cell Phones & Mobile Marketplace Pricing Competition

by on October 17, 2009 · 34 comments

WalMartWal-Mart is often cast as a villain by some labor unions, local politicians and small retailers, but for the average consumer Wal-Mart has been a savior: A relentless price-cutting machine that instantly changes the dynamics of every market it touches. Indeed, when Wal-Mart decides to jump into a sector by offering a new good or service in its stores, something akin to “the Southwest effect” on steroids kicks in: That market segment is often transformed overnight in that the good or service Wal-Mart starts delivering is essentially instantly commoditized. For the seller of that good or service, this is both a blessing and a curse: They gain the massive market reach that goes along with being in Wal-Mart’s 8,000 retail stores. On the other hand, they instantly surrender any semblance of pricing power they once had.  And this typically also puts downward pressure on prices not just for the particular good carried in the Wal-Mart stores, but for that entire market segment more generally. [This exact scenario is currently playing out in the book marketplace as Wal-Mart has gone to war with Amazon in cost-cutting bonanza.]

The reason I bring all this up is because, as most of you probably already heard, Wal-Mart jumped into the prepaid cell phone business this week with the launch of Straight Talk:

a new solution in no-contract cellular, exclusively at more than 3,200 Walmart stores nationwide starting October 18, 2009. Straight Talk will bring to the market a new low price for no-contract wireless service with two prepaid plans now available to customers nationwide at $30 and $45 a month. Straight Talk will only be available in Walmart stores and online at www.Walmart.com and www.StraightTalk.com. The average U.S. adult spends $78 on his or her cell phone bill to receive 1000 minutes a month. By switching to the $30 Straight Talk plan, for example, the average 1,000 minutes-per-month consumer could save more than $500 per year and still be on a reliable nationwide network.

I don’t want to overplay the significance of this development, but I really do believe that Wal-Mart’s presence in this field is significant, at least for entry-level mobile phones. While it would be easy for those of us who use more advanced smartphones to shrug off the Wal-Mart announcement, it would be a mistake for reasons made clear by David Worthington over at Technologizer:

As a technophile, it’s tempting for me to point out the short comings of those devices. There are only a few stock applications available, and unlimited data on a flip phone does not translate to the same experience that I have surfing the Web on my iPhone. But that does not matter, because the people who would buy these phones wouldn’t care. …

It’s.. an economical choice for families with shoestring budgets. Leading wireless companies provide family plans, but they aren’t cheap, and usually require a commitment. … A pre-paid plan doesn’t require families to purchase much more than what they want to pay for.

Whether Wal-Mart becomes a viable wireless company or not is up to the market, but its track record is pretty solid. Wal-Mart rapidly became the largest grocery store in the United States after all, and it has more locations than other pre-paid wireless companies. I’m guessing it’ll do well.

You better believe it. Have you seen the stacks of prepaid calling cards that adorn the shelves in every Wal-Mart checkout line?  Do you think they just have those there for decoration?  That’s a huge business, folks. While some of us haven’t touched a prepaid calling card since our college days decades ago, millions of people buy and use such cards every day.  As Worthington notes, prepaid plans mean you don’t have to pay for more than you’ll think you need and for many folks that’s about all they want to hear.  Esoteric inside-the-Beltway debates about tethering, Net neutrality, app stores, etc., are meaningless to most people.  They just want a phone that works at the right price — namely, cheap!

Finally, this development certainly calls into question the asinine theories being bandied about in Washington these days about the mobile marketplace lacking competition and innovation, something recent studies have shown to be complete bunk.  I’m not saying that Wal-Mart’s entry into this sector is going to turn cell phones into the equivalent of the toothpick or napkin market; there will always be room for differentiated phones and plans, especially at the higher end of the market. But as the retailing giant expands its reach in this sector, it’s bound to have an impact — especially for the entry-level devices and plans that low-income consumers might want.  Somehow I doubt this will let the regulation-happy gang over at our current FCC sleep any easier at night, but it should.

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