NEW YORK-Domestic wireless operators have begun to take prepaid services seriously, although it will be awhile before they approach the successful benchmark set by their European counterparts.
Comfort with credit is a key distinction between American consumers and those abroad, where cash is king. Prepaid telecommunications services lend themselves better to that consumer mind-set.
Notwithstanding this important cultural preference, the overriding distinction between Europe and the United States relates to overall market penetration of wireless services.
As 2000 drew to a close, a little more than 30 percent of U.S. residents were wireless customers, and about 10 percent of that customer base was prepaid, said Michael Doherty, senior consultant for Ovum Inc., Wakefield, Mass.
In Europe, by contrast, as much as 97 percent of all new wireless customer additions are prepaid, and many postpaid subscribers are converting to prepaid, said Andrew Cole, global head of wireless for Renaissance Worldwide, New York. Overall penetration rates for wireless services generally are in the 40-percent to 70-percent range.
As carriers market deeper into the total available consumer base, they must reach out to groups of people, like teenagers and safety users, for whom prepaid makes more sense than postpaid, Doherty and Cole said.
“Especially in the United States, there is a relatively unpenetrated youth market, an interesting piece carriers are only just getting to now,” Cole said.
“The cross ownership by European carriers is giving prepaid a boost. I would be surprised to see a major shift in the next 12 months, but carriers are getting ready for the opportunity.”
There are significant indications the transformation already is under way. Wireless providers that had been reluctant to market prepaid as “other than a second-class alternative,” very recently have begun promoting it with attractive plans, Doherty said.
“We love how it’s been unfolding. It became prime time mainstream this holiday season with product positioning like AT&T Wireless’ Free to Go and Verizon’s national prepaid wireless,” said E.Y. Snowden, president and chief executive officer of Boston Communications Group Inc., Boston.
“AT&T Wireless’ one-rate pricing with roaming is about 15 cents per minute, and Verizon’s is about 20 cents. The carriers have unlocked the (prepaid) roaming issue, and their average yield is 15 cents to 18 cents (per minute).”
The 40-percent decline in prepaid airtime costs over the past two years has been matched by a 30-percent to 40-percent increase in the growth rate of prepaid customers, said George Lebus, president and chief executive officer of National Telemanagement Corp., Dallas.
“Within three years, the cost of prepaid will be less than postpaid,” he said.
Lebus said he believes domestic carriers will develop prepaid wireless services that have a distinctly American flavor and follow Internet service provider billing models.
“It’s all billed in advance, although not advertised as such, and replenished automatically,” he said, citing as examples Leap Wireless’ Cricket service, U.S. Cellular Corp.’s MetroZone service and Alltel’s Boomerang service.
“Prepaid has changed quite a bit, especially over the last two years. We see it going beyond the credit-challenged, bifurcating into two realms: the one we all know of, prepaid on a card, and the other of real-time billing programs paid in advance.”
Cincinnati Bell Wireless has begun a trial allowing its customers to top off their prepaid accounts via the Internet, Doherty said. Web-enabled handsets will allow automatic recharge of prepaid accounts.
Gone, too, are the days when a prepaid customer could only replenish his account inside his home carrier’s network coverage area, Lebus said.
The increasing variety of recharge options, from automated teller machines to convenience stores, not only helps consumers but also carriers. Increasing competition among physical and virtual points of presence for account recharge gives carriers leverage to decrease hefty commissions they now pay to third-party vendors, Snowden said. That is necessary if the ultimate goal of using the wireless handset for prepaid, non-telecommunications mobile commerce services is to become a practical reality, he said.
Within the past year, prepaid services underwent another significant change as American wireless operators stopped relegating them to analog calling, Snowden added. Today, prepaid is all digital.
“In the United States, carriers have been reluctant to load up prepaid with value-added services, but AT&T has started to roll out some additional features, like prepaid voice mail and SMS (short message service),” Doherty said.
SMS phones only recently became available in this country. They and the service they provide are critical to tapping the teen market, an ideal segment for prepaid, Snowden said.
“The billing side is the major Achilles Heel of the whole value-added services thing because it’s so difficult to do. So many folks can’t even bill for Internet services,” Cole said. “Carriers are working on the ability to recognize what each packet does, and they are worried about the reconciliation of charges.”
The biggest bad omen for prepaid wireless in the United States was a decision by Sprint PCS in the fall to “actually abandon their effort, although they may be refocusing it,” Doherty said.
Sprint wrote off two kinds of subscribers, bad debt postpaid accounts and inactive prepaid accounts, Snowden said.
“That gave (Wall) Street a bad taste and put a bit of a damper on the analysts,” he said.
“The biggest carriers in the country have to see successes, and we won’t see that until the first or second quarter when those carrying the sword start to show results.”
Wall Street needs a more accurate way to gauge the value of prepaid customers, Lebus said. On average, a prepaid customer provides only 90 percent of a postpaid subscriber’s average revenue per unit. However, in a discounted cash flow analysis, that same prepaid customer also produces between 50 percent and 100 percent more cash flow than his postpaid counterpart.
“Postpaid has been well served. Prepaid will allow (American) carriers to buy back their growth rates,” Snowden said.
“All of Europe is growing at four times the rate of the United States. The market cap (capitalization) of a company is directly affected by its growth rate.”
