NEW YORK-The rapidly growing prepaid wireless sector offers carriers a means to reduce customer acquisition costs and capture market segments otherwise out of reach.
Nevertheless, prepaid has its problems and its critics. Proponents of prepaid, however, argue solutions are readily available to smooth the bumps.
“The overall response to prepaid has been very positive. It has a role in the market, but it’s not the Holy Grail and there’s always an element of trial and error,” said Kent Olson, a consultant with The Strategis Group, Washington, D.C.
“A carrier using prepaid has to be careful about how to position it in terms of product mix, to what extent to subsidize the handsets and about how to retain control of the customer and customer information,” he said.
In the United States, prepaid customers comprise about 4 percent of total wireless subscribers and will constitute about 25 percent of the 12 million new additions this year, according to projections culled by Andersen Consulting, Wellesley, Mass., from several investment banks.
“We have been somewhat the lone wolf with regard to prepaid,” said William Esry, chairman and chief executive officer of Sprint Corp.
“We are seeing by some of the announcements from our competitors that prepaid isn’t as good as people thought it would be.”
Omnipoint Communications Services Inc., for example, opted to remove 20,000 prepaid customers from its subscriber base during the third quarter, dropping those who had not used their phones for 90 days.
“It is becoming increasingly clear that [Omnipoint’s] strategy, which hinges on the prepaid segment, is difficult to execute,” said Kevin C. Condon, director of equity research for Warburg Dillon Read L.L.C., New York, in a recent report.
So far this year, some 54 percent of Omnipoint’s new subscribers have been prepaid customers, as were half of those added by PrimeCo PCS and 40 percent of those gained by BellSouth DCS, according to Richard S. Siber, a managing director of Andersen Consulting.
“Anything negative about prepaid is associated with churn … typically due to 60-day expiration dates vs. one year in Europe,” he said.
Calling domestic carriers’ measurement of churn in their prepaid segment “terrible,” Siber said today’s estimated average prepaid churn rate of 12 percent to 13.5 percent monthly may well be “exaggerated by a factor of 50 percent.”
That lower rate still would be significantly higher than churn in the postpaid subscriber segment. However, carrier costs associated with prepaid customers are roughly 20 percent of those related to postpaid subscribers. Prepaid customers, for example, typically pay the full cost of their handsets, often refurbished rather than new.
As wireless services move toward a commodity business, lower-cost prepaid customers still promise to yield comparatively greater margins despite their higher churn rates, Siber said.
However, he also noted some domestic carriers offering prepaid services have planned from the outset to limit this segment to a small proportion of their subscriber base.
“They see it as 10 (percent) to 15 percent and want to keep it that way.”
Another criticism of prepaid wireless service is that its anonymity prevents carriers from continued contact with these customers to try convert them to postpaid subscribers.
“Prepaid has been more successful than it should be,” said Charles E. Hoffman, chairman and chief executive officer of Rogers Cantel Inc.
“The trick now is to match some of these customers with more appropriate services.”
The key to postpaid conversion opportunities is to get and keep as much subscriber information as possible from prepaid customers when they first purchase wireless services, said Olson of Strategis.
Alltel Corp., whose 360
