Price Discrimination -- An Example from the Cell Phone Industry

The major cell phone carriers charge iphone users approx $90 per month for cellular and data services on an iphone. At least one pre-paid carrier offers cellular and data services for iphone owners at $45 per month ($50 with taxes, or about $42 with taxes if prepaying one year).

That pre-paid carrier is Straight Talk, which appears to be a partnership between Walmart (retail), Net10 (an experienced pre-paid carrier), and AT&T (cellular network), offering pre-paid services on a number of smartphones and other cell phones. (I am no expert on the partnerships, but my son has his iphone4 on straightalk and I see obvious fingerprints of all three partners).

Despite the 100% price difference, both marketing and setup costs are preventing most iphone users from switching away from the major carriers. On the marketing side, Walmart and Straight Talk are pretty quiet about the fact that iphone users can use their $45/mo service (did their AT&T partner pay them to be quiet?). Even cnn.com had a story claiming (incorrectly) that, as of today, none of the pre-paid carriers are available for iphone users.

One the setup cost side, iphone owners need to take four separate steps to join the service:

1. Obtain an AT&T compatible iphone (new or used).  I don't think you can buy one at Walmart without signing up with AT&T or Verizon, but many other places cell them contract free.
2. Purchase a $15 AT&T compatible micro-sim card from Straight Talk and insert it into iphone.
3. Activate the micro-sim with Straight Talk (if you had a phone number from another carrier that you previously were using with iphone or any other cell phone, at this stage you can assign it to the micro-sim).  It may take up to two days from the time that you activate and the time that your iphone can begin to place and receive calls and/or text messages.  At this stage you pay your $45.
4. Set the APN numbers on the iphone to work with Straight Talk (this step is necessary to use data services).  One way to do this is to connect iphone to wifi and then go to go to http://www.unlockit.co.nz, and the iphone will automatically adopt the proper APN numbers.  Update Oct-2013: follow these instructions to get your iphone to automatically adopt the proper APN numbers.

I suspect that knowledge of these steps will diffuse pretty quickly, and in less than a year major carriers will have to reduce their monthly cellular charges to be much closer to Straight Talk.

Update Oct-2013: I did not correctly predict AT&T's pricing.  It appears that AT&T is actually charging a bit more (eg., no more 200-MMS packages) than they used to.

Update Jan-2014: AT&T has finally moved prices a lot closer to Walmart.