Will Wal-Mart's Straight Talk squeeze wireless carriers?

October 15, 2009: 7:00 AM ET
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Back to the future: Straight Talk phones like the LG 200C might be dowdy, but growth in the prepaid market could eventually squeeze carrier profits. Photo: LG.

Look out, U.S. wireless carriers: Wal-Mart is teaming up with billionaire Carlos Slim's América Móvil to train its price-crushing might on cell phones.

In time for the holiday season, the mega-retailer on Wednesday announced a nationwide roll-out of the new prepaid Straight Talk service, offered through América Móvil subsidiary Tracfone Wireless. Unlike mainstream wireless plans that pair cutting-edge phones with higher monthly fees and multi-year contracts, pre-paid services like Straight Talk offer cheaper phones, lower fees and no contracts.

Wal-Mart will offer two Straight Talk options: a $30 monthly plan that comes with 1,000 minutes, 1,000 texts and 30 megabytes of data, and a $45 monthly plan with unlimited voice, texts and data. Straight Talk uses Verizon's (VZ) wireless network.

The bargain-basement prepaid approach makes sense in a down economy, where consumers are looking for cheaper options and fewer can pass the credit checks that come with traditional phone plans. Prepaid plans have been a hot ticket in this market, which explains why Wal-Mart (WMT) is taking Straight Talk from a year-long pilot in 234 stores to a nationwide, 3,200-store launch.

Why does this matter? It's not just about price. The all-you-can-eat Straight Talk plan is only $5 per month cheaper than offerings from rival Boost Mobile – plus, the Straight Talk phones aren't going to impress anyone. The cheapest, the LG 200C, costs $40. The somewhat better looking Motorola's (MOT) RAZR V3A is $100. Both might have been cool four years ago, but not today.

No, the interesting thing here is the evolution – and proliferation – of prepaid.

With Wal-Mart in the game, the other pre-paid players will feel pressure to offer both lower prices and cooler phones; and with low-cost smartphone software like Android gaining steam, it's only a matter of time before decent smartphones arrive hit the prepaid market. (Sprint (S) CEO Dan Hesse said as much at Fortune's Brainstorm Tech conference in July.)

Over time, those cooler phones and no-contract plans could start to lure customers away from mainstream wireless services. That's good for penny-pinching consumers, but bad for carrier profits.

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