Landline vs.

Wireless 1
Market Analysis: Landline vs. Wireless Phone Services

Reyte On Publishing 2008-2010

 Landline vs. Wireless 2

I. Background

For instance, If you enjoy landline phone service. Your first landline phone will give you a 10 on

the delight scale. Your second landline phone because of convenience may give you an eight.

The third landline phone may have a marginal utility of only four. The more landline phones in

your home, the less you will experience delight for the product (Johnson, 2008). This is Marginal

Utility. Price will tend to be higher when the marginal utility is higher. Demand will also be

higher when marginal utility is higher.

The Market Shows an Important Changing Trend

Information from the US Department of Justice (U.S. DOJ) remarked that wireless services did

not represent any competition to landline access or cost before 2004 (U.S. DOJ, 2008). However

the data from research by Dr. Taylor and Dr. Ware from the International Telecommunication

Society did not agree with the DOJ. Their research through Verizon disclosed that the pricing

trends were showing that consumers were beginning to switch landline for wireless service.

Thereby proving that wireless service was in fact a competitor to landline service ( Table 1:

Taylor & Ware, 2008).

I. Market Analysis

Scope refers to phone service moving away from landline to wireless.

Table 1 shows how the number of wireless service is lower than landline service (averaging

$56.00) This growing number of new wireless customers were discontinuing their landline

service. Choosing wireless over landline (Taylor & Ware, 2008).

 Landline vs. Wireless 3

In looking at the consumer price index for wireless services over the past several years in a study

by Taylor & Ware (2008), we find that in 2004 when wireless services were in their initial stages

and carriers were trying different services to test the market, there was more usage. Elasticity is

positive and revenues for carriers are up. Up until around 1998 landline service was considered a

necessity. It was basically inelastic as regardless of the price charged, everyone had a landline

phone. If they had wireless service, this was considered a luxury. However because it was a new

technology, everyone wanted to try it and the price was right.

Players in the wireless market were horizontally aligned. The competitors were several wireless

carriers such as Sprint, AT&T, T-Mobile. Others that had competitive calling plans offering free

weekends, free evenings, purchasing minutes of air time, carry over minutes from one month to

the next. All these marketing strategies were geared to attract more consumers and it worked

(Figure 1). As each competitor came up with different calling plans the consumer would change

over to the carrier that offered similar convenience to landline useage (Taylor & Ware, 2008).
 Landline vs. Wireless 4

Figure 1 Comparison of Landline or Residence phone service to Wireless Only Households

(Taylor & Ware, 2008).

Landline vs. Wireless 5
 Landline vs. Wireless 6

(3) Table 3 Calculating Income elasticity of demand (IeoD) for wireless services:

Formula

% change in quantity demanded / % change in income = IeoD

Income 2007 wireless $133 billion - Income 2004 wireless $99 billion / Quantity Demanded2004

Formula

%change in quantity demanded =

Quantity demanded 2007 – Quantity demanded 2004/ Quantity demanded 2004

21.5 – 8.4 / 8.4 = 1.6

Formula
 Landline vs. Wireless 7
% change in income= (continued below)

Income 2007 –Income 2004/Income 2004

$133 billion - $99 billion 2004 / $99 billion 2004 = .34

(3)Income elasticity of demand (IeoD) =

1.60 / .34 = 4.7

When income increases from $99 billion to $133 billion the IeoD is 4.7 and income is elastic or
sensitive to demand as income goes up or down. If the elasticity is fairly high, then that means
when subscribers income goes up they are more willing to buy more wireless products and
accessories.
If IEoD > 1 then the good is a Luxury Good and Income Elastic
If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income Inelastic
If IEoD < 0 then the good is an Inferior Good and Negative Income Inelastic
(Moffat, 2002)

However, as the competition expanded in 2007 we notice a drop in consumer wireless use. This

was the point at which wireless carriers begin to get expensive. People were reported at having

wireless carrier bills of $100s and even $1,000s of dollars monthly. Remember the commercials

with a wireless phone bill as thick as the Yellow Pages Phone Book. People started to drop the

wireless services and return to the landlines considering the cell phone a luxury item. In 2007 a

new type of carrier begin to gain ground offering unlimited calling plans and no contracts, other

carriers begin to modify their calling plans as well (Johnson, 2008). Additionally new products

entered the market offering new technology such as Touch screen, camera phones, mp3 phone

services, GPS, and emergency services, and the new Smartphone was born. People begin to

realize that wireless service is more of a necessity and not just a luxury item. Competitors begin

to wise up and realize that demand was increasing and in competing with each other, the prices

begin to drop. The cost of calling plans also begin to drop see Consumer Price Index Base 1997

for Wireless Services from 2004-2009, Figure 2 (BLS, 2009).

 Landline vs. Wireless 8
Figure 2 Consumer Price Index for Wireless Services (BLS, 2009 Seasonally Adjusted):

Concept of Utility

Utility measures the amount of delight the consumer gets from a product. Marginal utility is

defined as the amount of delight for each additional product the consumers purchases. Marginal

utility will decrease with each additional measure of the same product that a consumer purchases

(Johnson, 2008).

A. Price Elasticity Analysis

Elasticity measures changes in revenue. As the price of a product changes, the measure of

elasticity will rise, fall or remain the same based on the price. The product of price and quantity

of a product is equal to revenue. Plotting a demand curve on a graph shows elasticity. When
 Landline vs. Wireless 9
elasticity is positive and greater than one, revenue will drop. When elasticity is negative,

revenue will rise. When elasticity is equal to one, revenue remains the same.

B. The Demand/Supply Curve Analysis

Most people easily understand the concept of demand. Simply put, when a product is

inexpensive and desired by consumers, all things being equal (availability, quality, etc.), more

consumers will want it. On the other hand when a product is expensive, yet desired by

consumers, all things being equal, less consumers will want it.

There is a graphical representation of what is called a supply demand curve. It shows how an

increase in price causes a decrease in demand and increase in supply. It also shows how a

decrease in price, causes an increase in demand and decrease of supply. See Graph 1.

Graph 1.
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 Landline vs. Wireless 10

Demand
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Quantity

Product Description

NetPcs offers unlimited wireless use and no contract. The market is wide open to the millions of

cell phone savvy users wanting wireless service, but not wanting to signup for a long-term

contract.

Subscribers interested in wireless communication without a contract are at about five million for

NetPCS (pseudonym) a wireless service provider according to the Dallas Business Journal

(2009). Since they offer wireless service, the new marketing strategy is to market NetPCS

directly against traditional landline phone service.

C. Target Market Strategy

1) It is a product for age range 18-55 of consumers.

2) Consumers who enjoy the latest technological and telecommunication products and services.
 Landline vs. Wireless 11
3) Consumers who are students, work away from home (commute), or live in states away

from family and friends.

Marketing Strategy

1) Request airtime for commercials during the evening when students, commuters, and family

are most likely to be home.

2) Request airtime for commercials during prime time television shows that are geared toward

these age groups. Situation comedies, talk shows, cable, and sports channels.

4) Promote through major colleges, universities, small businesses, community service

companies (ie. hospitals, public schools) and fortune 500 companies. Offer no charge for

first month of service. No contracts and unlimited calling.

Classifying the Market for Wireless Services: Perfect Competition, Monopolistic

Competition (Bimtech, 2009).

 Landline vs. Wireless 12
The industry for wireless service are players in a competitive market. The idea of a perfect

competitive market is similar to the wireless carrier market. Though this doesn’t exist in real life

due to the market not actually holding the goods in a competitive market (BimTech, 2009). The

closest thing to it hypothetically could be wireless carriers. As the various carriers compete to

offer wireless service Verizon, Sprint, AT & T, T-Mobile, and Cingular to name a few. Here are

the comparisons.

• There needs to be a great deal of companies offering similar services.

• These companies are free due to deregulation to offer their services without intervention by

state or federal regulations.

• Both consumers and vendors generally accept market price.

• The market is open for more carriers to enter as many have lately such as Metro PCS,

Qwest-CAN, and Western Wireless. These firms all offer the same basic services and

products. Many enter or leave the market each year.

• The main purpose of these companies is to profit from providing their wireless services and

products.

However, perfect markets are not 100% though the opposition to their growth and sustainability

is scarce. The demand curves for Perfect Competition is mainly a supply curve. The only

adjustments that have to be made are to meet consumer demands. When the IPhone came into

the market, the carriers had to adjust to supply the products consumers want. The consumers also

can restrict purchases or change to another carrier to control the pricing market. The basic price

remains unchanged with a horizontal demand curve (Rockhold, 2000).

 Landline vs. Wireless 13
Monopolistic Competition

Since Perfect Competition is a hypothetical case. The Wireless carrier market would actually

qualify for monopolistic competition. Here is why:

• Mainly because the products produced by the carriers, different calling plans are not

homogeneous (Bimtech, 2009).

• The plans vary based on individual carrier packaging and differentiation.

• Each carrier has their own individual pricing plans. Changes in their pricing plans does affect

competitors pricing strategies but only in a purely competitive fashion.

• Each carrier advertising their own product and services to attract more customers to their

individual brand.

• There are no restrictions to entering or exiting the market.

• Profits are normalized across the competitive market (Bimtech, 2009).

• The carriers can create substitute services that are close to competition, but are differentiated

from the competition. For example, T-Mobile has Favs service which allows you to quick

dial your favorite or most often called friends, business, or family contacts. Verizon has

Friends and Family which also allows five quick dial, totally free phone to phone services,

while Alltel carrier has a similar service called My Circle.

See Excel file for more on Demand Curves.

How changes in price and quantity influence market equilibrium.

 Landline vs. Wireless 14
Basically changes in price and quality have an influence on market equilibrium because of

increases or decreases in consumer buying. When consumers begin to demand goods that are

scarce because producers cannot produce enough product, this will increase the cost of the

product. Consider the Iphone or Blackberry Smartphones. When the new Blackberry Storm is

about to enter the market according to Hendrickson (2007). It has long been anticipated and

people Consumers are pre-ordering the phone from their carriers and comparing it to the Apple

IPhone in order to determine the best product. The Storm offers a touch screen solution to rival

the IPhone and the Smart Phone users are excited about this new entry. The decision to go with

IPhone 3G or the new RIM Blackberry is one that is tinged with excitement and anticipation

(Hendrickson, 2007). Technical features that point out why you should choose the Blackberry

Storm or IPhone based on usability will be provided to make an informed decision.

 Landline vs. Wireless 15

Price Supply: price

is too high,
demand is
low.

D.

Quantity

D. High Elasticity
Elasticity of Demand
to Demand. Graph 2.are
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very responsive to price. If we end up with large
quantitiesD.
of phone
Iphoneinventory on hand. enter
and Blackberry We willthe market the demand was high and
need to decrease price. Consumers will not buy
some people were willing to pay more for the new technology.
as much product at a higher price.
Eventually however horizontal competition forced the lowering of the
prices.
E. High Elasticity to Demand. Consumers are very responsive to price.
Price was too expensive inventory grew. If we end up with large
quantities of phone inventory on hand. We will need to decrease price.
Consumers will not buy as much product at a higher price.

The consumers that can afford to pay a higher price, will cause the price to increase due to their

ability to pay more to get the goods they want (Graph 2. D). When there is a surplus of a product,

it is generally not in high demand and less consumers desire to purchase this product. There may

also be many producers of the product, competition will also reduce the cost of a good. The

adjustments that occur with the supply and demand of a product will approach an equilibrium

point. Equilibrium is when the price and quantity available to consumers is equal to the supply
 Landline vs. Wireless 16
and demand for the product. There is no surplus of the product and enough is available to meet

demand without exceeding it.

IV. Conclusions

Summary: The necessity of a good and the availability of substitutions affect price

elasticity.

Price Controls and Equilibrium

The amount of elasticity refers to how much the supply or demand curve react to a change in the

price of a good. This elasticity can be influenced by the consumer’s desire for the product and

their need for it. For example in today’s market wireless phone service may not have much

elasticity, as they are not very sensitive to changes in price. This is mainly because consumers

make these purchases in the U.S. regardless of their price. If the cost of wireless service rises,

generally consumers will still make that purchase.

Yet if the price of landline phone services increases, this may have more elasticity because the

need to buy landline service can be influenced by a higher price. Consumers may choose not to

buy landline service when it is too costly. Therefore the need for landline service may be less of

a necessity than the need for wireless. Wireless phone service having less elasticity and being

less sensitive to price whether it goes up or down, it is needed by the consumer. Landline phone

service having more elasticity and being more sensitive to price when it goes up, less consumers

may buy it. A product is thought to be more elastic when a small change in the cost has a large

affect on supply or demand. This is most likely a good that is not a necessity. A product is

thought to be inelastic is when a small change in the cost has little or no affect on supply or

demand. This good in this case wireless service is considered to be a necessity.

 Landline vs. Wireless 17
Producers will continue to enter the market and compete horizontally as wireless carriers

because the demand is huge and growing. Wireless phones, accessories and services will

continue to decrease in price due to the growing competition and options of phone carriers or

producers. Eventually the price will reach equilibrium where the supply and demand are at the

price that consumers will pay and the producers can make a modest profit.
 Landline vs. Wireless 18
References

Bimtech. (2009). Main Market Forms. Foundation Economics. Retrieved August 31, 2009 from

http://www.slideshare.net/siraj2762268/main-market-forms-2009-2

BLS.gov. (2009). Consumer Price Index for Wireless Services. Retrieved August 13, 2009 from

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

Hendrickson, M. (2007). IPhone V. Blackberry: Side by Side, Two Week

Comparison. Retrieved August 13, 2009 from

http://www.techcrunch.com/2007/07/25/iphone-v-blackberry-side-by-side-two-week-

comparison/

Johnson A. (2008). Business Research Analysis Wireless Vs. Landline. Reyte On Publishing.

Moffat, M. (2002). Income Elasticity of Demand. Retrieved August 28, 2009 from

http://economics.about.com/cs/micfrohelp/a/income_elast.htm

Rockhold, J. (2000). Top 10 Wireless Carriers. Retrieved August 17, 2009 from

http://telephonyonline.com/news/telecom_top_wireless_carriers/

Taylor, W. & Ware, H. (2008). The Effectiveness of Mobile Wireless Service as a Competitive

Restraint on Landline Pricing: Was the DOJ Wrong? Retrieved August 13, 2009 from

http://www.nera.com/image/PUB_DOJ_Effectiveness_Wireless_Service_0109_FINAL.p

df

(Thoughtleader.net. 2004). Wireless Revs Up the U.S. Economy. Retrieved August 28, 2009

from http://www.thoughtleader.net/articles/70-wireless-revs-up-the-us-economy.html

U.S. DOJ. (2008).US Department of Justice, Voice, Video and Broadband: The Changing

Competitive Landscape and Its Impact on Consumers (the DOJ Report).