Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
Born during the mid-1990s in Western Europe, prepaid mobile services’ impact on subscriber growth has been unprecedented. This unexpected growth has had several consequences: a) it allowed for mobile telephony to surpass fixed-line telephony in penetration levels; b) it forced a decrease of telephony tariffs and by making service available to all segments of the economy, contributed to the evolution of the portrayal of mobile telephony as a luxury item to presenting it as commodity service. As a result, prepaid service is now a key component of mobile service providers’ portfolios.
But just as many experts were declaring that prepaid’s “golden age” was approaching an end, the market has evolved to resuscitate this payment method. Analysis by Signals Telecom Consulting shows that mobile prepaid revenue growth in the coming years will come from non-telecom services and not always those enabled by high transmission speeds. Future mobile consumers will be able to segment the services/applications that they want to access on a contract basis from those that they prefer to use under a prepaid scheme. Mobile operators may opt to offer only certain types of services under a prepaid scheme.
Mobile operators initially introduced prepaid service as a buffer against fraud and bad debt. But the late 1990′s economic crisis in South East Asia and Latin America caused prepaid service uptake to skyrocket. The worsening economic conditions forced many mobile users to switch their service plan to prepaid, so they could better monitor their spending and control their usage. For example, Latin America’s mobile service industry growth skyrocketed with the introduction of prepaid services during the late 1990s. Countries like Venezuela and Mexico saw a drastic increase in their prepaid subscriber base posting a CAGR of 251.14% and 116.55%, respectively, during the 1996–2001 period. Similar growth rates were experienced throughout the region as prepaid opened mobile services to the lower economic segments of society and lack of credit became one of the main drivers of the prepaid explosion.
Introducing prepaid services allowed mobile operators to leverage the mass market since making telephony accessible to the lower income strata vastly increased the potential addressable market size. This fact becomes crucial in the emerging markets of Asia, Africa, Latin America and the Middle East where fixed line installation rates are prohibitive for a large segment of the population. Prepaid’s arrival—mostly through the “phone in a box” (i.e., the Amigo Kit) concept—provided a cheaper alternative, which combined with low telephony penetration, resulted in incredible growth rates for these services.
Market liberalization and the subsequent increase in the number of mobile service providers have forced new entrants to focus initially on their prepaid offerings as a means to acquire the most needed critical mass that would make their business viable. But gaining market share should not be the sole purpose of a mobile operator as divergent experiences have shown. For example, Mexican mobile operator Unefon (now part of lusacell Group) started operations with a strategy based on only offering prepaid services to its customers. It targeted lower income users and provided rates that were a third of what was being charged by the incumbent operators. Eventually, the company launched contract services, but its low rates and heavily subsidized handsets have made it extremely difficult for the operator to recoup its investment with its slim profit margins. On the other hand, a Virgin Mobile UK mobile virtual network operator (MVNO) has managed to build a large subscriber base by only offering prepaid services combined with other alternatives. And with its success, it has proved that prepaid customers can be as valuable as postpaid customers.
In recent years, the favorable industry perception of prepaid services has gradually shifted toward a generally accepted dogma that “prepaid subscribers are not very attractive for mobile operators as they drag down the average blended (i.e., contract + prepaid) ARPU because of the lower levels of usage by subscribers.” This statement should be considered to be an ARPU-centered half-truth, which disregards other factors that in many instances make the prepaid subscriber equally, and on occasion, more profitable for a mobile operator than their contract users.
Claiming that prepaid users are less profitable than contract subscribers is not an accurate statement. As shown in recent years, prepaid services open a door to greater revenues as prepaid allows a large mass of subscribers to access services that historically were limited to high income individuals. For example, mobile operators such as Más Móvil (Cable & Wireless) in Panama and Digicel in the Caribbean completely changed the mobile landscape when they started providing Blackberry services to their prepaid subscribers. The future holds even greater opportunities for the prepaid market as operators use prepaid services to increase the reach of their mobile wallet services, social network access and OTT platforms for entertainment (e.g., video, books, music, games, etc.).
Prepaid services offer incredible advantages for mobile operators that learn how to leverage this segment of their subscriber base while decreasing subscriber acquisition costs (SAC). This latter issue is the key factor in determining a subscriber’s profitability factor or how quickly the operator recovers the incurred customer acquisition costs. Subscriber acquisition costs are defined as the average cost incurred by the mobile operator for each new-signed subscriber. Mobile operators able to decrease their average SAC have a healthier financial outlook, as they are able to recover their investment more rapidly and subsequently increase per-user profit margins. Most SAC fall into four major categories: a) packaging and distribution logistics; b) promotion and advertisement; c) commissions for distributors; and d) handset subsidies.
Finally, Latin America’s mobile market is becoming less dependent on advantages provided by technology issues rather than service differentiation. Revenue growth will spring from operators successfully segmenting the prepaid subscriber base, offering differentiated (and where permitted) proprietary products, and bundling various telecom services.