Continued growth in the wireless industry is likely to come from untapped market segments that may not prove as financially rewarding as the saturated early-adopter segments, according to a new report from Compete Inc. and Bear, Stearns & Co. Inc.
The report, “Characteristics of Wireless Subscribers and Non-Users,” estimated that the industry will sign up 54 million people during the next six years, driving total penetration from 61 percent at the end of 2004 to 75 percent by the end of 2010.
“This showed that customer growth still has legs,” said Adam Guy, director of Compete’s wireless practice.
Of that potential growth, the report found that while 13 percent of non-wireless consumers said they would never adopt wireless service no matter how cheap or how good service gets, the remaining 87 percent said they plan on signing up for wireless service at some point.
Bear, Stearns & Co. wireless telecom service analyst Philip Cusick noted that he expected most of the increased penetration to come from people below the age of 20 or those older than 65 as well as from lower-income population segments. The younger segments are expected to be drawn into the market through more direct marketing efforts and advanced messaging applications, while older segments will be drawn by safety issues and interest in staying in touch with family members.
While growth potential for the wireless industry remains, the value of those potential subscribers will require carriers to find more creative ways to attract them at profitable levels. The report found that non-wireless consumers reported an average maximum willingness to spend $29 per month for service, which is well below the $50 to $55 in average revenue per user posted by the industry.
“There is interest, but the revenue picture is not pretty,” Guy said.
Guy noted that the challenge for wireless carriers is to find a way to lower their acquisition costs-which typically run between $300 and $400 per subscriber-as well as their ongoing cost-per-user expenses. This challenge is likely to be met most directly through the use of prepaid or hybrid offerings, family plans and lower-cost acquisition and maintenance channels.
“To profitably address new entrants, carriers need to focus on accelerating realized utility among new subs,” Guy added.
Prepaid is seen as an obvious route to target lower-valued customers as the model traditionally has used lower subsidies to attract customers and higher per-minute costs compared with postpaid models. These models have proven successful for a number of companies, including Tracfone Wireless Inc. and mobile virtual network operator Virgin Mobile USA L.L.C., which have combined to sign up more than 7 million wireless subscribers.
“Prepaid is emerging as a strong point of entry for carriers,” Guy said, adding that prepaid lifecycles are shortening, which is good news for the industry.
Virgin Mobile USA’s success in the prepaid space also lends credibility to the MVNO model as a compelling way for carriers to attract untapped market segments.
“Carriers need to look at prepaid and MVNOs not in a vacuum, but as an entry point to postpaid,” Guy added.
The report also found that so-called hybrid plans that combine the no-contract of prepaid plans with recurring monthly charges of postpaid offerings is also becoming an increasingly compelling alternative. Cingular Wireless L.L.C.’s GoPhone service, which initially was launched by AT&T Wireless Services Inc., and Verizon Wireless’ recently introduced INpulse service have allowed carriers to create more value from lower-spending subscribers.
“GoPhone is a good example of a carrier tweaking the original prepaid model to derive more revenue from customers,” Guy said.
Cusick added that such offerings are also a good stepping stone for migrating subscribers to higher profit postpaid plans once a customer outgrows the prepaid model.
“New subscribers can start at the lower end of the ARPU spectrum, but as wireless grows as a utility, they will look to `graduate’ to more encompassing services,” the report noted.
Cusick also said that the increased marketing efforts placed by carriers on family plans could pay off. Despite recent comments from Cingular that the growing number of customers signing up for such plans has impacted its ARPU results, Cusick noted such plans can offset lower recurring ARPU with lower acquisition costs, lower operating costs and reduced churn.
The report included models that showed carriers can achieve similar or better net present value results for a pair of subscribers sharing a $90 per month service plan as it could serving those subscribers separately with $50 plans.
“Customers are often times worth more together than they are separately,” Cusick explained.
The report also noted that to counter potentially lower-spending subscribers, carriers will need to leverage lower-cost acquisition channels, including third-party retailers and Web sites. The report found that a typical call-center transaction costs wireless carriers between $8 and $10, while the same transaction done online can be done for between 15 cents and 80 cents.
Guy added that customers expressing a satisfactory online self-care session also expressed a lower future churn propensity.
“It’s a potential win-win for carriers and customers,” Guy said.
