Cellphones Are Eating the Family Budget –

 By Anton Troianovski | The Wall Street Journal

Reuters - An Apple employee counts cash after selling a customer three Apple iPhone 5 phones at the Apple Store on 5th Avenue in New York, September 21, 2012. REUTERS/Lucas Jackson

Heidi Steffen and her husband used to treat themselves most weeks to steak at Sodak Shores, a restaurant overlooking a lake near their hometown of Milbank, S.D. Then they each got an iPhone, and the rib-eyes started making fewer appearances.

"Every weekend, we'd do something," said Ms. Steffen, a registered nurse whose husband works at a tire shop. "Now maybe once every month or two, we get out."

More than half of all U.S. cellphone owners carry a device like the iPhone, a shift that has unsettled household budgets across the country. Government data show people have spent more on phone bills over the past four years, even as they have dialed back on dining out, clothes and entertainment—cutbacks that have been keenly felt in the restaurant, apparel and film industries.

The tug of war is only going to get more intense. Wireless carriers are betting they can pull bills even higher by offering faster speeds on expensive new networks and new usage-based data plans. The effort will test the limits of consumer spending as the draw of new technology competes with cellphone owners' more rudimentary needs and desires.

So far, telecom is winning. Labor Department data released Tuesday show spending on phone services rose more than 4% last year, the fastest rate since 2005. During and after the recession, consumers cut back broadly on their spending.

The combined cost of the components for the iPhone 5 is estimated at $197, or only $9 more than for the iPhone 4S, Arik Hesseldahl reports on digits. Photo: Getty Images.

But as more people paid up for $200 smartphones and bills that run around $100 a month, the average household's annual spending on telephone services rose to $1,226 in 2011 from $1,110 in 2007, when Apple Inc.'s iPhone first appeared.

Families with more than one smartphone are already paying much more than the average—sometimes more than $4,000 a year—easily eclipsing what they pay for cable TV and home Internet.

The trend has been a boon for companies like Verizon Wireless and AT&T Inc. (T). U.S. wireless carriers brought in $22 billion in revenue selling services such as mobile email and Web browsing in 2007, according to analysts at UBS AG. By 2011, data revenue had jumped to $59 billion. By 2017, UBS expects carriers to be pulling in an additional $50 billion a year.

But the question for the industry is how much bigger bills can get before the cuts in other parts of the family budget grow too painful.

Melinda Tuers, an accounting clerk at a high school in Redlands, Calif., said she already pays close to $300 a month for her family's four smartphones. She and her husband have cut back on dining out, special events and concerts to make room for the bigger phone bill.

Her household may soon have an even bigger hole to fill. Two of the Tuers's smartphones are on unlimited data plans, meaning she pays the same price no matter how much she surfs the Web. She has taken advantage of that freedom to watch TV shows such as "Covert Affairs" and "Grey's Anatomy" on her phone almost every day.

Ms. Tuers now wants to replace those three-year-old smartphones. But her carrier, Verizon, announced this summer that customers would have to give up unlimited data plans if they want to upgrade their phones at the subsidized price.

Ms. Tuers figures that she and her husband would need to scrape together more than $1,000 to pay full price for two new high-end phones or settle for one of Verizon's tiered-data plans, which she fears would cost a lot more given her video habit.

Streaming 30 minutes of video per day over a 4G connection and doing nothing else on her phone would cost Ms. Tuers roughly $120 a month on one of Verizon's new data plans, according to the carrier's website.

Carriers fully expect people to use more data and pay more for it. "Speed entices more usage," Verizon Chief Financial Officer Fran Shammo said at an investor conference last week, according to a transcript. "The more data they consume, the more they will have to buy."

But some question where the money for that data will come from. Americans spent $116 more a year on telephone services in 2011 than they did in 2007, according to the Labor Department, even as total household expenditures increased by just $67.

Meanwhile, spending on food away from home fell by $48, apparel spending declined by $141, and entertainment spending dropped by $126. The figures aren't adjusted for inflation.

The increase in telephone-services spending masks an even higher rise in cellphone bills, because people have been paying less for landline service.

Much of the revenue growth that industry executives and investors are hoping for is likely to come from higher-income households that do have the money to spend more on wireless data. But the wireless industry also generates a lot of revenue from lower-income users.

Almost nine in 10 of all U.S. adults have a cellphone, according to a Pew Research Center survey. Middle-income consumers increased their telephone spending in 2011 by $59, almost as much as the $64 in additional telephone spending by the 20% of consumers with the highest incomes, according to the Labor Department data.

As wireless service gets more expensive, the trade-offs become more painful. That could threaten to further crimp consumer spending elsewhere—or slow the upward swing in consumer spending on wireless.

That trend is evident in the home of 40-year-old Scott Boedie, a neighborhood service representative for a cable company.

Mr. Boedie said he and his wife now pay $200 a month for cellphone service, up by about $50 from early last year, even as they have managed to cut spending on groceries by shopping at discount chain Aldi and on "fun stuff" by going out to dinner and movies less often.

Looking over the family budget on Sunday night, Mr. Boedie said, his wife marveled at how much of it was going to the phone company.

"It stinks," Mr. Boedie said. "I guess it's the cost of modern-day America now