NEW YORK-A noteworthy dynamic has developed in which major players like AT&T Wireless Services Inc., Cingular Wireless and Sprint PCS are actively promoting prepaid services, while smaller providers like Dobson Communications Corp. and TeleCorp PCS want to minimize its role.
“The irony is not lost on me that AT&T is attacking prepaid when TeleCorp is running away from it,” said Bill Benton, wireless services analyst for William Blair & Co, Chicago.
TeleCorp, which is AT&T Wireless’ largest affiliate, intends to raise its postpaid subscriber base to 90 percent by year-end, a 20-percentage point increase from 2000.
“We have a lot of spectrum capacity, so we are not concerned about overloading our network, and we have a lot of retail outlets,” Gerald T. Vento, chief executive officer and board member, said in late May.
“But we looked at the financial return on prepaid and have come to believe we should focus our financial and human resources on postpaid.”
Churn is expensive and prepaid customers are more likely than postpaid subscribers to change carriers, said G. Edward Evans, president of Dobson. Consequently, this AT&T affiliate has established the goal of reducing its prepaid customers to less than 8 percent of gross additions and less than 1 percent of its overall base.
“Apparently, the regional carriers are getting away from prepaid, while the national carriers are going after it,” said Jeffrey L. Hines, group head of North American telecommunications research for Deutsche Bank, New York.
“The jury is still out as to carriers’ ability to generate returns on prepaid. The real key, more so than in postpaid, is the lowest possible subscriber acquisition costs if you’re going to have a shot at making money in prepaid.”
Large wireless operators may be better positioned to minimize the overhead associated with low-margin prepaid customers because they can bulk-buy handsets and amortize marketing and customer support over larger bases, Hines said.
“TeleCorp may get handset discounts from AT&T, but Dobson doesn’t. Neither benefits from a large subscriber base over which to spread other costs,” he said.
Blair’s Benton said the primary reason TeleCorp is “running away from prepaid” is that this segment of customers tends to call its customer relationship management centers a dozen times yearly, primarily to inquire about the balance left in their accounts. Prepaid customers also tend to avoid using interactive voice response systems that would allow them to bypass operators to recharge their accounts.
Postpaid subscribers, who tend to spend more than the $20 monthly prepaid average, call CRM centers an average of eight times per year. The difference of four calls yearly doesn’t seem large, but the $5 to $8 it costs a network operator for each call handled by a customer service representative adds up.
Benton said he doesn’t agree with Dobson’s contention that prepaid customers churn more than postpaid. Turnover is hard to measure in this segment because each person whose prepaid card expires is counted as lost, then added on as a new customer when he or she advance-purchases more airtime minutes.
Taking the opposite tack, Verizon Wireless has lately become quite aggressive about courting prepaid customers in an effort to “outrun its churn” in all segments, Benton said.
Prepaid customers tend to be those who must watch their personal budgets carefully, so “it doesn’t make intuitive sense to me that they would get a new phone every time they use up their prepaid minutes on the handset they already possess,” he added.
Handset subsidies for prepaid customers are particularly onerous to most American wireless operators, regardless of their size, because the widespread use here of TDMA and CDMA standards is not mirrored globally, Benton said. A carrier using GSM technology, which is far more ubiquitous, might only have to subsidize a $125 phone, while one using CDMA or TDMA might have to subsidize a $200 phone.
“Prepaid is a very tough business here because the economic structure is very different. There is no calling party pays, so all the revenue must be generated by the customer making the calls,” Benton said.
“In Europe, wireless operators don’t care if their customers never make a call because of the high termination charges they receive when a landline customer calls their customer.”
Third-party distributors of prepaid phone cards also extract their pound of flesh in the form of 15-percent commissions, a phenomenon that further diminishes the value of prepaid to American carriers, Benton said.
“Carriers will get away from the prepaid card altogether and do all (recharge) over the phone, over the network or through MVNOs (mobile virtual network operators),” said Kim Jones, market strategist for the Geneva product unit of Convergys Corp.
The technology already exists to provide “one-touch recharge” for customers who have an electronic profile on file with carriers, said Carla Schneiderman, vice president of worldwide marketing for Lightbridge Inc.
Sprint PCS, whose overall churn rate is declining, has taken a slightly different tack to avoid paying commissions to third-party retailers of prepaid minutes. Under its “account spending limit” approach, its prepaid customers must place a deposit of $125 to $200 with Sprint at a company-owned store.
“The system whispers to you as you approach the end of your minutes, and this drives people back into Sprint stores. But the last I’ve heard from Sprint, they won’t say good things about prepaid,” Benton said.
Earning the float on advanced deposits in prepaid accounts is a good way to make prepaid pay, as electronic toll taking authorities already have discovered, Schneiderman said.
Lately, however, Sprint has been under pressure from Verizon and Cingular Wireless, which are selling prepaid without required deposits in the same markets, Benton said. Sprint has responded by eliminating its deposit requirements for some of its prepaid customers.
Jones, Schneiderman and Kenin Spivak, chief executive officer of Telemac Corp., said prepaid can and will become more sophisticated in the near future, handling minutes, bits and transactions.
This autumn, for example, Geneva plans commercial introduction of “Convergent Pre-Pay,” which will allow recharge of prepaid handsets, such as those owned by teenagers, by billing the postpaid accounts of their parents. The elders will receive advance notice through short message service alerts and must authorize funds transfer.
“The young see the phone as a debit card for micro commerce, and they are comfortable using it that way,” Spivak said.
In Schneiderman’s view, the cellular phone and prepaid services are a perfect vehicle for moving the concept of the electronic wallet into widespread adoption in this country.
