Initially used as a tool to tap into the credit-challenged market, many carriers are finding that prepaid service is attracting more than those with bad credit.
Many personal communications services carriers are reporting that as much as 50 percent of their subscriber bases are made up of prepaid customers. While the credit-challenged market has proven lucrative-about 30 percent of consumers trying to sign up for service are rejected in the United States-carriers are finding a significant number of credit-worthy customers are choosing prepaid service because it allows for better cost control. In addition, many ethnic communities operate on a cash-only basis and are attracted to the service.
Omnipoint Communications Inc., a PCS operator in New York, is one carrier that is capitalizing on this by marketing the service heavily on television, newspapers and radio. Roughly half of its subscribers are prepaid.
“I think it could be a driver for the industry. It’s definitely an untapped market,” said John Robertiello, general manager of Omnipoint’s New York market. “In New York, we’re clearly the leader in prepaid … It’s one of the niches that Omnipoint has. As a very new brand in the market, we don’t have the deep pockets that other carriers do. We have to pick our battles.”
PrimeCo Personal Communications L.P. also reports that 50 percent of its customers are prepaid. “It’s a very healthy segment of our business,” said PrimeCo spokeswoman Catarina Wylie. “More people are entering the segment that are credit-worthy … We were pleasantly surprised by the pent-up demand.”
Western Wireless Corp., which reports a strong success with prepaid service, recently repositioned its prepaid service to target every consumer after finding “the real appeal is not just for credit-challenged individuals,” said John Tedeschi, manager of consumer product development with Western Wireless.
The financial proposition for carriers from prepaid service also is attractive. Analysts say the service can reduce costs of acquisition and billing, eliminate bad debt and improve cash flow. A recent report from Toronto Dominion Securities in New York indicates that Omnipoint’s prepaid customers are generating monthly average-revenue-per-unit numbers comparable to or greater than postpay subscribers. Western Wireless and others are finding that they can lower promotional costs in this segment as well, by simply promoting the service inside their stores.
“We wanted to see if we could drive penetration without spending money on promotion,” said Tedeschi. “Sales have been very good to date.”
Prepaid service, however, is in its infancy. Carriers are in the process of studying the behavior of prepaid customers and refining that side of the business.
One variable unknown in this market segment is churn. Prepaid customers are seen as less loyal because they have less contact with the carrier than postpay customers do. Customers typically purchase a prepaid card from a carrier and replenish it by buying more airtime from the store or through customer care over the phone. When they want to end service, they simply have to stop replenishing the airtime. These subscribers also don’t receive a bill so the carrier does not have contact with them every month.
“With an access-based customer, the customer has to call to disconnect service,” said Western Wireless’ Tedeschi. “When [prepaid customers] are coming in and buying at will, you don’t get that opportunity … The less interaction means the less opportunity to keep that customer.”
Richard Siber, director of Andersen Consulting’s worldwide wireless consulting practice in Boston said the penetration of prepaid service should continue to rise in the United States, mimicking countries like Italy, where carriers have reported huge successes with prepaid.
“The caveat here is: do you really want 50 percent of your customer base to be prepaid? You improve cash flow on one hand and lower fraud and billing costs. However, you don’t have a method or process today that allows you to develop an effective customer relationship program where you reach out and touch the customer every month,” said Siber. There’s no identity with prepaid, no brand awareness or loyalty in the future. Fifty percent of your installed base could walk away.”
Many digital operators also are having a hard time selling handsets to prepaid customers at full price since digital handset prices still are significantly higher than analog handsets. Analysts believe carriers need to sell handsets to prepaid subscribers without subsidies in order to keep the acquisition costs low and remain profitable with this segment since not every prepaid customer replenishes their account every month. Omnipoint, PrimeCo and Western Wireless sell subsidized handsets to their prepaid customers. Western Wireless said it initially charged full price for handsets to prepaid customers but now subsidizes the phones.
Pricing is another issue carriers are studying. Many are charging a premium rate for prepaid service, which may deter the high-end user.
“If you look at most of the rates, they’re a lot higher than the 10 cents per minute that some of the carriers are charging in the 400 to 700-minute blocks,” said Herschel Shosteck, president and chief executive officer of Herschel Shosteck Associates Ltd. in Wheaton, Md. “The challenge of prepay is to structure the cards to enable high-volume users to a gain benefit from this.”
