NEW YORK-With an estimated 5 million American customers today, prepaid wireless services have yet to fulfill their promise, but that potential is getting closer to realization.
Within the next several years, analysts from The Yankee Group, the Strategis Group and Donaldson, Lufkin & Jenrette Securities Corp. predict prepaid wireless users will account for at least half of domestic net additions. Getting from here to there is not without its challenges, however.
American consumers are becoming savvy about their expanding array of wireless telecommunications choices and cognizant of a host of negatives associated with prepaid service. Those disadvantages will not necessarily be permanent, but they are relevant in the present environment.
Comparative price is one big factor. A wireless customer using 30 prepaid minutes a month can actually save up to 30 percent relative to postpaid wireless, according to a study by Econ One Research Inc., Los Angeles. On the other hand, a big talker spending 150 minutes on the phone can pay up to 75 percent more on a prepaid plan.
“For anything more than 60 minutes a month, bucket-of-minutes plans undercut prepaid,” said Charles Mahla, the Sacramento, Calif.-based chief economist of Econ One.
Tom Erskine, vice president of product development for Boston Communications Group, a provider of network-based prepaid systems, said that retail prices for prepaid minutes have been dropping during the past year. He would not offer specific prices, saying that “a number of carriers might feel that is proprietary information.”
In some instances, prepaid rates can be as much as four to five times that of postpaid, said Ron Mitra, vice president of sales and marketing for Comverse Network Systems’ Intelligent Network Division, Mount Laurel, N.J.
Prepaid rates can go as high as $1 per minute, according to Bill Coker, president and chief operating officer of Simple Communications L.L.C., a Houston-based start-up reselling Sprint PCS as a handset-based prepaid service through local retailers. For $20 worth of prepaid, end users will pay about 36 cents per minute, and for $100, about 25 cents each.
Coker formerly was in charge of indirect distribution of prepaid services for PrimeCo PCS, which boasts a prepaid segment as high as 95 percent of its New Orleans market customer base and more than 60 percent of its Houston market. He also spearheaded the prepaid deployment for US Unwired, a Gulf Coast carrier that is Sprint PCS’ largest affiliate.
“Places like Beaumont, Texas, and Baton Rouge, La., are blue collar markets perfect for prepaid because, if people have credit, they don’t have much of it,” Coker said.
That description poses in a nutshell the conundrum for prepaid wireless.
“When this all started to kick off big about three years ago, the target was people not clearing credit checks. About 30 percent of applicants were being sliced off, and the idea was to take 10 [percentage points] of that and drop it to the bottom line,” said Tom Williams, the Dallas-based vice president of Americas region sales for Logica.
“The industry overestimated the technical reality of delivering the product and that prepaid might have a bigger stigma than the market was willing to accept. Then, as we tried to make it more palatable to corporations to better monitor employee usage, we ran into technical issues, like no roaming, and the fact that prepaid is more expensive than postpaid.”
Mitra of Comverse offered several other reasons why prepaid has not yet taken off in the United States: lack of calling party pays; the preponderance of numbering schemes using the same area codes for wireline and wireless phones; the variety of incompatible radio-frequency technologies deployed; and a widespread consumer preference for credit rather than debit transactions.
Expiration of unused prepaid minutes is another serious bugaboo, said Mahla of Econ One.
Orange plc in the United Kingdom boasts of “no expiry date” on prepaid minutes in its full-page advertisements in The London Times. But so far, domestic carriers have not followed suit.
“As a consumer, I think expiration dates are bogus, and our system supports expiration dates,” said Williams of Logica, which is headquartered in Dublin, Ireland.
“As a supplier to service providers, I understand why they want them. For security and fraud reasons, we have to hold back unused prepaid identification numbers, and the sheer size of that data base could become unmanageable. There is also breakage, (in which) carriers carry unused minutes as an asset that goes to the bottom line of their balance sheets.”
Despite these thorny issues, technological and marketing innovations under way offer promise that 2000 will be a significant milestone for prepaid wireless in the United States.
“The [Wireless Information Network] Phase II standard is being finalized now, despite all the foot-dragging by many carriers and switch vendors,” Mitra said.
“Its aim in life is to allow roaming, and we expect to see WIN Phase II switches by mid-year, although there won’t be complete roaming for several years. Switches must have Phase II features before platforms, including prepaid, can be added.”
Besides making roaming possible for prepaid customers, WIN Phase II also will decrease the costs to carriers of providing prepaid services, Erskine of Boston Communications Group said.
Handset-based prepaid services also are getting a technology boost, said Coker of Simple Communications. Automation and outsourcing of financial, accounting and auditing permits Simple to reduce overhead associated with prepaid customers. This will help offset its average revenue per unit, which is about $3-$4 less monthly than postpaid subscribers.
Lucky Goldstar, followed closely by Nokia Corp., will soon provide prepaid phones that not only “tick down the minutes” but also include software allowing customers a Web-based locator by ZIP codes of the nearest recharge places, Coker said. Many of these will have vending machines that accept cash.
Removing the stigma of prepaid also will require expanding the kinds of wireless services to include many, if not all, those available to postpaid subscribers.
“We elected to go with voice first to get the kinks out, but prepaid users will get all the same feature sets, like caller ID, voice mail and three-way calling. We probably will get into data applications eventually and mechanically tick down the minutes,” Coker said.
Boston Communications Group is working on prepaid short message service and data billed at different rates, Erskine said. It also has one carrier deployment, which he declined to identify, that allows customers to use their prepaid minutes for landline and mobile wireless calls.
Logica, a pioneer in the commercial deployment of prepaid SMS, can include voice mail notification and voice messaging and bill by either event or by the minute.
“If I can do this, why not extend it to [Wireless Application Protocol] or even to purchases in e-commerce?” Williams said.
Extending the expiration dates of prepaid minutes purchased also would go a long way to expand the market. Coker said Simple Communications gives end users 60 days from the date of activation rather than purchase. Williams said expiration dates of six to nine months are feasible.
Then there is the issue of marketing itself.
“(American) carriers have been worried about cannibalization. Their overall experience is that ARPU for prepaid is lower. If they make prepaid the same as postpaid, will customers migrate to prepaid?” Mitra of Comverse said.
“The experience in Europe suggests little cannibalization. The important thing is target marketing to broaden the overall market in the end.”
Both Mitra and Williams said some carriers, notably Vodafone AirTouch pl
c, have begun enlightened marketing campaigns for prepaid, offering it as a hip way to get wireless with no commitments.
Leap Wirel
ess International Inc., with its Cricket brand of exclusively prepaid service, also has been successful with a similar strategy. However, its unique positioning as a local calling area only service may signify that Leap’s experience cannot be extrapolated to other carriers, said Williams of Logica and Mahla of Econ One Research.
