Free «Cell Phone Service Industry in the United States» Essay
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An Introduction about the industry
The initial deployment of cellular mobile phone services network in the early 1980s in the United States marked a major milestone in the evolution of the telecommunications industry (Pahlavan & Levesque, 2005). The development of the cellular systems concept and the widespread deployment of cellular service networks provided an efficient integration of radio technology with the vast public switched telephone network thus providing customers with the mobility and convenience of access to at least basic telephone service (Pahlavan & Levesque, 2005).
A brief history and evolution of the Industry in the US -Some key facts and figures
Pahlavan & Levesque (2005) indicated that the “first generation cellular networks provided basic voice service using analog FM transmission were followed in the early 1990s by second generation networks employing digital voice coding and digital transmission” (p. 24). They also noted that the cell phone service providers of the second generation networks provided increased traffic handling capacity, improved voice quality in poor signal environments and provided a means for wireless data transmission.
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The first commercial cellular system in the United States known as Advanced Mobile Phone Service (AMPS) went into operation in 1983 in Chicago and the demand for cellular telephone service grew rapidly in part stimulated by the growing popularity of cordless telephones (Pahlavan & Levesque, 2005). Therefore Pahlavan & Levesque (2005) says that “we see evolution of successive cellular service industries as meeting the steadily growing demands of cell phone service subscribers wanting to have mobile access to the PSTN” (p. 24). They also said that service industry has undergone dramatic changes to meet the demands for greater system capacity and for new features and services including data services.
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The cellular telephone service industry in United States grew very rapidly as cellular network coverage and service quality steadily improved as costs to consumers declined due to advancements in integrated circuit technology (Pahlavan & Levesque, 2005). Service prices also fell in response to industry competition. In the year 2000 studies indicate that many citizens embraced cellular technology and therefore penetration rate towards 2005 reached about 75%. This enormous penetration results from the impressive growth of the wireless industry. This is shown in the figure below:
DiJulius (2008) says that standard customer turnover in the cell phone service industry in the United States is 25% a year. This heavy turnover increases the amount of money that needs to be spent to replace these customers through aggressive marketing and advertising. In the 2005 the United States cell phone service industry spent more than $6 billion on advertisements.
Virgin Mobile USA entered in the cell phone industry in 2002 with an unusual customer focused strategy: pay as you go pricing plan with no hidden fees, no time of day restrictions, no contracts and straightforward reasonable rates (DiJulius, 2008). Due to the above strategies and in only a few years Virgin Mobile in 2005 already had succeeded 5 million subscribers and a retention rate considerably higher than the rest of its competitors.
Alltel Corp is the sixth largest cell phone service provider in the United States. Polishuk (n d.) says that Alltel currently provides fixed line telephone services in 26 states and wireless services to about 8.4 million subscribers. According to Polishuk (n d.) the cell phone service industry is witnessing significant mergers. The major competitive force when Cingular Wireless completed a $41 billion acquisition of AT&T Wireless it created the nations largest service provider company in US.
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Fransman (2002) says that by mid 2000 AT&T wireless was only the third player in the US cell phone service industry. At this time AT&T Wireless had less than alf the subscribers of the leader, Verizon Wireless. AT&T Wireless revenue was just over half that of Verizon Wireless.
According to Ireland, Hoskisson & Hitt (2005) Michael Porter developed a framework for classifying and analyzing the characteristics of an industry’s environment. This frame work can also be applied in the cell phone industry in the United States. These five forces models can be applied in the cell phone industry in the United States examine competitive forces that influence the profitability potential of this industry. Ireland, Hoskisson & Hitt (2005) continue to say that firms competing in the cell phone industry want to understand these forces so that they can position themselves in the industry to maximize their ability to earn profits.
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Threat of new potential entrants to the cell phone industry in United States is threat to firms already competing in the industry. Ireland, Hoskisson & Hitt (2005) say that “potential entrants also pose a threat to existing competitors because they bring additional production capacity which can lead to overcapacity in the cell phone service industry” (p. 61). Overcapacity reduces prices for consumers of cell phone services but results in lower returns for industry firms. For example Information Gatekeepers Inc (n d) indicated that “new entrants in cell phone industry forced ALLTEL to start offering wireless web access in 1999” (p. 61).
Substitute products in the cell phone service industry also have the potential to influence the industries profitability potential. Ireland, Hoskisson & Hitt (2005) says that introducing other services that perform similar functions to the ones offered by the cell phones for example Voice over the internet protocol has reduced the profitability of this industry in the United States. Ireland, Hoskisson & Hitt also indicated that the service performance relative to the price is the relevant concern especially if the incumbent firm’s services lack switching costs (2005). Information Gatekeepers Inc (n d) says that AT&T wireless and Nextel initiated substitute service known as wireless web access. Both service providers continued to develop and enhance their offerings during 2000.
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Bargaining power of suppliers according to Ireland, Hoskisson & Hitt (2005) determines the supplier’s actions to reduce the ability of firms to earn profits while competing in the service industry. In this context Ireland, Hoskisson & Hitt (2005) says that if a supplier can either increase the price of its product or reduce the quality while selling it at the same price, the effect on established firm’s profitability is negative. For example there are many cell phone suppliers such as Nokia and its competitors who are competing against one another to supply wireless phone services such as sprint. As a result these industry suppliers do not have much power and therefore do not negatively affect the profitability potential of cell phone service companies in the United States.
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Bargaining power of buyers indicates that cell phone firms selling their services want to increase their profitability while the customers want to buy high quality services at lower prices. With this strategies Ireland, Hoskisson & Hitt (2005) says that buyers try to reduce their costs by bargaining with service firms for lower prices, higher quality and greater levels of services. For example as buyers cell phone carriers such as Verizon and Sprint in the United States have been gaining power over cell phone manufacturers such as Motorola. As a result Phone service companies often lure customers with cell phone giveaway programs; customer’s indifference to cell phone brand makes this possible (Ireland, Hoskisson & Hitt, 2005). Verizon Wireless offers customers a plan for $2.99 per month to send and receive 100 messages and a plan for $7.99 per month for 600 messages. Information Gatekeepers Inc (n d) says that with both plans additional sent messages were $o.10 and received messages were $0.02.
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Competitive rivalry is the set of actions and reactions between competitors as they compete for an advantageous market position. Ireland, Hoskisson & Hitt (2005) says that competitive rivalry between cell phone service providers is highly visible in the United States. For example when Sprint lowers its price by 30% in the market the action is likely to affect a competitors business in this industry. Ireland, Hoskisson & Hitt further commented that “competitive rivalry is likely to be based on dimensions such as price, quality and innovation” (2005, p. 66). Besides this it was noted that as of 2001 Sprint PCS offered 18 Internet ready phones to its customers more than any other carrier. Also it was noted that during the first quarter of 2001, Cingular Wireless and ALLTEL offered free wireless web service for a limited time to new customers.
Grant & Meadows (2006) says that “with the invention of the 3G wireless technologies which will give rise to packet based networks. The growth of the wireless telephone will further transform from a person to person communication device into a convergent communication and entertainment platforms” (p. 254). It is also expected that there will be a greater push for commercializing the cell phone which will come from wireless carriers and advertisers (Grant & Meadows, 2006). Advertisers will also be eager to explore the personal, interactive and ubiquitous features of the cell phone to increase the effectiveness of their advertisement campaigns beyond the use of traditional media channel.
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In addition the commercialization of the cell phone has been set in motion. Grant & Meadows (2006) says that in the United States it is expected that one in three users will be advertising on their cell phones. They continue to say that the spending on mobile advertising is expected to reach at around $2.5 billion by the end of 2011. Industry reports estimated that advertisers will spend more than $11.3 billion by 2011 on mobile marketing.
In conclusion the future of wireless telecommunications technology is 4G, which will boost the data to 20mb/s. Grant & Meadows thus concludes that recent developments suggest that 4G will not likely be a single universal standard. In this context AT&T and Verizon will for example chose long term evolution (LTE) standard as their common access platform for their next generation 4G networks in late 2011 (2006). This means that subscribers will be able to use their phones to roam around the world.