The $10 Phone Bill

With his gray hair and grandfatherly demeanor, Roger Linquist hardly seems like the kind of guy to kneecap a $116 billion industry. Yet the 71- year-old chief executive of MetroPCS cheerfully and brazenly promises to do just that. He aims to bring down the lucrative business of selling cellular phone calls, a business that for four decades has grown bigger and richer with every passing year.

MetroPCS, which Linquist founded 15 years ago, is now the fifth-largest cell phone network in the U.S.--a distant fifth behind the giants that dominate the business: Verizon, AT&T, Sprint Nextel and T-Mobile. Linquist argues that his upstart company's $3 billion in revenue and 3% market share give it the freedom to remake the industry. He means to help turn cell phone calls into just another cheap digital commodity, the same fate that has already befallen the rest of the phone business and doesn't much care what happens to his giant rivals in the process.

The Big Four are scrambling to offset any drop in calling revenue by shifting their focus to new wireless opportunities. They are just beginning to spend tens of billions of dollars deploying new "fourth generation" cellular technology to greatly expand their data-moving capacity and make all sorts of new wireless devices possible, from e-books to dog collars that let you track Fido's whereabouts. Linquist just signed contracts to buy the same 4G technology for a very different reason: He plans to use it to radically improve his ability to carry phone calls--and do it much more cheaply.

"Commodity--as distasteful as that word might be, there's opportunity there," Linquist says, contemplating the coming apocalypse with a smile. "Our anchor is that as long as we have a substantial cost leadership position we know we're not just a survivor ... we will thrive."

The new gear is so powerful that he will be able to simultaneously increase the quality of cell phone calls while cutting the cost of providing each minute, from just under a penny today to closer to a tenth of a cent. Linquist charges 2.1 cents a minute, just under half of the industry's average revenue. He'll continue cutting, confident his singular focus on running the cheapest voice network will keep his costs well below those of the rest of the industry.

A decade ago there were three phone businesses: local, long distance and cellular. The first two have already collapsed, done in by advancing Internet and cellular technology and the cutthroat competition they unleashed. Americans paid $110 billion annually for long-distance phone calls nine years ago. It's now down to $55 billion and still shrinking. Local phone companies took in $126 billion at its peak eight years ago; that sum has fallen to $86 billion and is dropping fast.

To date the cellular calling industry has been immune from the commoditization infecting the rest of the phone business. Today's Big Four carry more phone calls than ever (almost 2 trillion minutes last year) and took in more money doing it than ever before ($105 billion). Collectively they control 90% of the U.S. market, and this cozy oligopoly hasn't succumbed to ruinous price wars--yet. Over the past three years, for instance, the four giants hiked the price of single text messages from 10 cents to 15 cents, and then to 20 cents, despite the lack of any plausible link to their underlying costs. (That encouraged customers to opt for all-youcan- text flat rates, boosting industry profits.) The lockstep price increases sparked a Senate investigation of the Big Four's market power, but they remain in effect.

When Linquist looks at that sort of pricing he sees not strength but weakness. Modern cell phones can do thousands of things, from downloading TV shows to finding the nearest Korean restaurant. Nevertheless, the cellular industry still makes almost all its money charging for just two applications: making phone calls ($116 billion) and sending text messages (roughly $12 billion, the carriers won't give exact figures). Everything else is considered generic "data." All of those thousands of other uses, many of which put much greater strain on the network than calling or texting, bring in the remaining $20 billion in revenue.

Linquist, a former analyst with McKinsey&Co., argues that the barriers to competition that have long insulated the market are eroding. In the past the cellular giants have been able to rely on the scale of their nationwide networks to limit competition. They also kept an iron grip on what their customers' phones could do--but now consumers are wresting that control away.