Mobile-phone users are becoming more price sensitive, a trend that started primarily among savvy young consumers looking for the cheapest basic service package and spread rapidly to other segments, our research in several markets shows. Such customers don't want the large variety of products and services, such as access to news and weather bulletins, that are included by default in some standard contracts. Nor will they foot the bill for expensive retail outlets and advertising campaigns. So incumbent mobile-service providers around the world are now seeing a new breed of low-cost competitor courting these evolving segments with "no-frills" offerings.

Denmark was among the first places to experience the trend. In 2000 a new entrant, Telmore, bought unused mobile capacity from incumbent TDC Mobile. Unburdened by infrastructure costs, Telmore targeted college students with a fixed-price offer providing just voice and Short Message Service (SMS) at rates that were initially more than 20 percent below those of the competition. To crack the market, Telmore minimized costs by using the Internet as the sole distribution channel, supplemented by a small call center, which resolved questions for a fee. This stripped-down approach eschewed expensive product offerings, mass advertising, and subsidized handsets (Exhibit 1). Despite...