Time will tell if new prepaid plans offered by U.S. nationwide operators this year spur more growth in the wireless industry.
Verizon Wireless plans to introduce a new nationwide prepaid pricing strategy in the third quarter. Though it won’t release the details, Verizon said the new pricing plan will be one that complements its nationwide SingleRate plan introduced earlier this year.
“Customers will be able to take their prepaid service and use it virtually anywhere in the country,” said Nancy Stark, spokeswoman for Verizon. “It will be national, digital and there will be a number of tiers and denominations customers will be offered.”
Speculation the new pricing plan could spur other operators to become more aggressive in the prepaid arena comes from one of the company’s owners, Vodafone AirTouch plc. Chris Gent, chief executive of the U.K.-based company, said earlier this year that he was unsatisfied with wireless growth in the company’s U.S. business. One of the ways to promote growth is through flooding the market with prepaid offerings, he said at this year’s Wireless 2000 show.
Prepaid is responsible for the massive growth in the United Kingdom and other European countries. For many European operators, prepaid accounts for more than 50 percent of their subscriber base today. The GSM Association boasts about 94 million prepaid subscribers out of the more than 300 million subscribers today.
To date, U.S. carriers aggressively pushing prepaid services are few. Since 1996, most carriers have targeted the credit-challenged customer with high per-minute pricing, limited roaming capabilities and a small number of prepaid handset models. Carriers, while understanding prepaid lowers billing and acquisition costs along with bad debt, are afraid of this unknown customer, who is more susceptible to churn than postpay customers.
“Right now, whether it’s Sprint or AT&T, every carrier has a punitive tariff by looking at the credit-challenged,” said David Kerr, director with Strategy Analytics. “Network operators remain unenlightened. There’s a problem fundamentally until they decide that prepaid is a strategic investment and another platform they offer.”
Regional operator Powertel Inc. is one of the most aggressive carriers, charging an industry-low 35 cents per minute and offering a broad service area. Seventy percent of the carrier’s activations in the first quarter were prepaid activations. It won’t lower its pricing until it sees a competitor in its markets that can offer the same coverage area and replenishment services it can offer.
VoiceStream Wireless Corp., which recently acquired one of the most aggressive prepaid carriers, Omnipoint Corp., has pulled back many prepaid offerings in Omnipoint’s former markets to reposition the service nationwide. In some cases, Omnipoint was pricing prepaid service lower than postpay service, causing service quality problems, said Bob Stapleton, president of VoiceStream.
“We’re repositioning it so that it complements a postpay service offering,” said Stapleton. “The (prepaid) pricing doesn’t complement the service, and the service hasn’t been reliable and stable enough for a broad market of consumers to use. We’ve invested to improve reliability of replenishment, make it easy to use and activate and to make sure we have enough capacity to support growth.”
Stapleton said VoiceStream will continue to heavily market its postpay service offerings, but make prepaid look like just another payment option. Stapleton envisions families and businesses having both prepaid and postpay accounts. A family may have a postpay account, but want their children to have service that’s restricted. Analysts have long heralded prepaid service as a way to allow businesses to limit their employee’s spending on wireless service.
“You’ve got to lower initial costs of acquisition and improve revenue streams by activity encouraging replenishment by using SMS, postcards and whatever other direct marketing means to that customer,” said Stapleton. “We have a whole program to encourage replenishment … The big picture is to ramp up the rate of growth dramatically for the company with a mix of postpay and a strong, healthy prepay business. In the longer term, I see 75 percent of our sales being postpay sales.”
Strategy Analytics’ Kerr plans to release a new study next month, profiling the unknown prepaid customer.
“Prepaid users have the same needs, wants and desires as postpaid customers,” said Kerr. “In terms of what they want to buy, they are right on par with the average customer. They are customers that want a different economic model.”
“Prepaid in the U.S. will finally take off when, like the rest of world, it is targeted to the on-the-go young affluent people who don’t have the time and inclination to pay their monthly bill,” said Kenin Spivak, chairman and chief operating officer of Telemac Corp., a company that supplies handset-based prepaid software. “Those people who are convenience oriented are the real high-margin consumers for wireless services and completely different from the traditional target market in the United States.”
The younger market is also one that is expected to adopt wireless data services more quickly, say analysts. Developing a prepaid option for wireless data will be critical.
“Prepaid plans are looking to go from ticking off minutes to ticking off purchases. Everyone wants in that game,” said Adam Zawell, analyst with the Yankee Group.
But the prospect of prepaid wireless data is giving many wireless executives headaches. How can carriers charge for prepaid wireless content and e-commerce? European operators are offering prepaid wireless data service today, but only based on airtime usage.
“Perhaps the most frightening thing is prepaid IP,” said Kerr. “If you can’t bill a customer or get a return on your investment for voice, can you imagine prepaid for the wireless Internet?”
“The real financial potential is to be able to bill different rates based upon what is occurring in the data,” said Bob Pye, senior vice president with Telemac.
Telemac said it has a handset-based software solution that is able to charge for network time and assign a certain rate to that use. Operators in Europe are using Telemac’s technology to bill for short messaging service based on connection and duration of use.
