The Rise Of The $5 Phone (VZ)

Something like a billion handsets are sold worldwide every year. That is good news for the large phone companies with big cellular businesses. Wireless handsets, calling plans, and data charges have built new revenue for them at a remarkable pace.

But, now the sales at telecom firms are hitting two walls.

The first  is that cellular handset sales are slowing in developed nations. In the US, by some estimates, there are more handsets than people. The same problem has hit carriers in Japan and the EU.

The other issue is that because the growth in cellular has been so successful, people are cutting off their landline service. Revenue from that business has been supporting phone companies since the days of Alexander Graham Bell.

As landline sales have dropped, telephone companies have lost some of their most profitable business. Most landline infrastructure was installed years, and in some cases decades, ago. That means that the cost of delivering landline service is inexpensive.

With cellular growth slowing and landline business shrinking Verizon (VZ) has come up with a novel idea–$5 a month landline service. According to The Wall Street Journal, “Verizon believes the plan could help slow the rate of landline customers cutting the cord, so to speak. The company lost 3.7 million access lines, or 9.3% of its base, in 2008.”  The phone will take incoming calls and limited calls out. People will have to pay for additional telephoning at a modest price. Of course, smart people may use their cell to call out and take calls on their landline.

If the Verizon plan works, most of the phone companies in countries including the US, much of Europe, and Japan will probably follow with their own super-cheap plans. None of them can afford to lose wired home phones at the rate they are today. The $5 phone may not be as profitable as old landline products, but it is better than nothing.

Douglas A. McIntyre