Much of the wireless industry’s strong subscriber growth over the past several quarters has been attributed to carriers’ ability to target customer segments that had previously been unable to qualify for service using either prepaid or family plans.
Some analysts have attributed up to half of the nearly 11 million net customer additions through the first half of the year to these offerings, which have allowed carriers to target previously underserved customer segments, including teens and the credit-challenged. The Yankee Group released results from a consumer survey earlier this year that estimated teens on either family plans or prepaid plans increased from 6.5 million in 2004 to 9.4 million this year.
While family plans and prepaid offerings have been beneficial for overall customer growth, they both carry baggage that carriers have been forced to juggle.
Family plans, which have been favored by larger wireless operators like Cingular Wireless L.L.C. and Verizon Wireless, typically allow carriers to add new subscribers at lower acquisition costs. Customers on these plans are typically more loyal as they are tied to a contract with other plan members. These plans also have allowed carriers to tap into credit-challenged segments because additional lines typically are not subject to the same credit requirements as the primary customer.
Verizon Wireless is a prime example of an operator that has taken advantage of those benefits. The carrier posted industry-leading 1.2 percent customer churn during the second quarter and less than $300 in cost per gross addition, a figure that is well below the industry average.
However, analysts have noted that family plans have watered down the recurring revenue carriers receive since customers can add other lines to their primary accounts for $10 per month. What was originally a single user paying $50 per month for wireless service can become five users paying $100.
While family plans typically drag down monthly recurring revenues, the accompanying reduction in customer churn allows carriers to monetize the value of the subscribers with lower monthly ARPU (average revenue per user) generated over an extended time frame.
“Family plans could be just a short-term fix,” said Yankee Group senior analyst Linda Barrabee. “Although family plans can have a positive impact on a few key carrier financial performance metrics-mainly by acting as a potential churn reducer and boosting net additions-they can also prove to be a drag on ARPU.”
Cingular and Verizon Wireless have both cited the success of family plans as reasons for their relatively flat ARPU during the past several quarters. Carriers can reverse those results if they effectively market data services to family-plan members, which often are not available to prepaid customers.
Prepaid plans have many of the same qualities as family plans in that they typically target the credit-challenged or the youth segments, but do not require customers to sign long-term contracts. The lack of a commitment generally has generated higher churn for many prepaid carriers, but prepaid subscribers usually are charged a higher per-minute rate for placing calls and are given lower subsidies on handsets.
Tracfone Wireless Inc. and Boost Mobile L.L.C. are prime examples of how carriers can effectively target the prepaid market, which traditionally has been shunned by larger operators.
Tracfone, whose customer base has increased 39 percent year-over-year to 4.9 million customers at the end of the second quarter, said its customers used an average of 63 minutes per month during the second quarter and posted $14 in ARPU, which translates into a per-minute rate of more than 22 cents per minute.
Boost has seen even greater success as it has reported more than $40 in ARPU based on the strength of its push-to-talk feature, which provides customers with unlimited PTT calls for $1.50 per day. Those PTT calls also are beneficial as they are on-network traffic and require another customer to pay the $1.50 per day fee to access the service.
Traditional postpaid customers typically generate between 10 cents and 15 cents per minute in calling charges, with some operators offering bucket-rate plans that charge less than 5 cents per minute.
While Tracfone’s per-minute charges were more than double that of traditional postpaid plans, the carrier also was stymied with a 4.9-percent customer churn rate during the second quarter. At that inflated level, Tracfone had to replace more than 60 percent of its customer base if it wanted to show growth.
Boost reported similar inflated churn in the first quarter of 5 percent, which was more than triple parent company Nextel Communications Inc.
The Yankee Group survey also found that family plans may be running out of steam as an increasing number of teens and ethnic customer segments are turning more toward prepaid services. This could force operators that have traditionally steered clear of prepaid to re-examine their plans.
“Family plans have definitely been very good to carriers like Verizon and Cingular,” said Yankee Group analyst Marina Amoroso. “But, there appears to be a limit to family-plan growth that has so far not been seen with prepaid or hybrid plans.”
