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June 16, 2005

The Virgin Pagoism Problem

We've decided to get M11 a cellphone for his fifth grade graduation. And in doing so demonstrate our appreciation for his maturity and tie another leash around him. And now to the Dad question. How much is this going to cost me?

Virgin Mobile has a pay-as-you-go system that looks attractive for a low priced entry. We can get him a $25 phone without a contract. Seems nice. There are two plans, but which to choose? Plan A costs 25 cents a minute for the first ten minutes a day and 10 cents a minute for the rest of the day. Plan B costs 10 cents a minute all day plus 35 cents a day.

It sounds like a fairly simple math problem, however I am at a loss to understand how to put it into a function and determine the crossover point. I know how to develop a simulation in Excel, but having done so, I still don't know how to characterize the breakpoint at which one plan cost more than the other. Virgin, in their ad says that the breakpoint is at 200 minutes per month, and they are truthful in their advertising, but I'm distrustful of the number and I want to know the scheme under which they developed the revenue model.

Here is my spreadsheet which allows you to enter a factor (the bolded number) which drives a 30 day simulation of daily calls. You can see that Plan A is cheaper if you call just a little bit, but you can also see that there are months where you could call less than 200 minutes and Plan A would still be more expensive than Plan B.
Download file

Clearly, M11 is going on Plan B to start. He'll make a mountain of calls when he first gets it and then he'll slow down. When he slows down to a trickle, we can switch to Plan A. Virgin's pricing is unique - I like it. I can also clearly see that this plan is way more affordable than that of Boost Mobile which is a straight .25/minute and .15/minute on nights and weekends.

The 'nights and weekends' pricing schedule was clearly developed around demand schedules of the first pricing revolution started by MCI in the 80s. I've got to believe that the capacity of the cell network has far outstripped that of those days. That's why Cingular has introduced 'Rollover' and other interesting pricing schemes. The simple excuse that business use during the weekdays creates a supply constraint thus prices must rise simply doesn't cut it.

Eric Schmidt of Google has suggested that the alternate content that phone carriers can charge for, like ringtones, sms, photomail, video content, gps, themes and games are so profitable that they can more than pay for voice carriage. Voice could be free just to get people on the platform of subscription services. Already Sprint has such a rebate system in place that most of the handsets are free. Clearly any digital system capable of delivering video games, has umpteen times the bandwidth required for monaural duplex voice.

Me myself, I've got the Treo 650 on Sprint PCS. I get unlimited SMS, internet, email pop client and all the Palm goodies, and 1000 minutes for about 65 bucks a month. So I'm not complaining at all considering that finally all of that works. Lots of folks have griped that Sprint has disabled some of the bluetooth and wi-fi capabilities of the Treo, but I don't mind. It's just a leash.

In the meantime, pay as little as possible for voice. Hope the spreadsheet helps. Now, what's the formula?

Posted by mbowen at June 16, 2005 08:35 AM

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Posted by: Elizabeth Ditz at June 19, 2005 08:23 PM