NEW YORK-Carriers, resellers and handset makers involved in domestic prepaid wireless services have much in common with ancient mariners navigating the narrow Straits of Messina where the mythical monsters of Scylla and Charybdis threatened them on either shore.
“Carriers recognize there is something to this because more and more of them are offering prepaid services, and more and more [requests for proposals] are being issued for prepaid platforms,” said David Berndt, associate director, the Yankee Group, Boston.
However, “carriers have had a postpaid business structure for so long that it blinds them to operating in a prepaid environment. And some will flat out say ‘we’re really not making money on this.'”
Prepaid wireless calling is viewed generally as a driver of net customer additions, but quantifying its specific value can create major headaches.
“Prepaid is an important part of why I believe incremental penetration will rise again this year,” said David A. Freedman, managing director of Bear, Stearns & Co. Inc., New York.
Largely but not exclusively, it is domestic personal communications services providers that embraced prepaid calling first as a means “to tap into new market segments,” said Kent Olson, a telecommunications consultant with The Strategis Group, Washington, D.C.
Some have begun to identify publicly some of the performance criteria that would help define the value of this service to the carrier.
Freedman said Omnipoint Communications Services L.L.C. breaks out what percentage of its customer base is prepaid. Western Wireless Corp. reports the total revenue it gains from prepaid services without identifying the number of prepaid customers. Aerial Communications Inc. identifies the percentage of its customers that are prepaid and a separate churn rate for them. Powertel Inc. releases the number of prepaid customers and the average revenue per prepaid unit, as do Canadian carriers Microcell Telecommunications Inc., Rogers Cantel Inc. and BCE Inc.
“For cellular (carriers), prepaid is so small that they tend to report it as a percentage of growth,” Freedman said.
“They say churn is higher (in prepaid) but not how much higher.”
As a securities analyst, Freedman said he isn’t troubled by the inconsistencies among carriers’ in their ways of counting prepaid customers and associated costs and revenues, but he is concerned about the lack of complete data publicly available about prepaid customers within each carrier.
“They are certainly not sharing it with the Street,” he said.
Except for prepaid customers roaming into its network or combined postpaid and prepaid minutes sold through a reseller, any carrier easily can identify a good bit of detail about its prepaid customers, said Kenin M. Spivak, chairman, president and chief executive officer of Telemac Corp.
An investment banker with Merrill Lynch earlier in his career, Spivak heads a company that provides a patented, handset-based prepaid technology to wireless carriers, resellers and phone manufacturers.
Two of its licensees later were acquired by SmarTalk TeleServices Inc., a Columbus, Ohio, prepaid calling card distributor. SmarTalk ran afoul of its outside auditors and shareholders last year for reasons similar to the experiences of Internet service providers and cable television programming companies before it, Spivak said. The past is prologue for prepaid wireless services.
“Part of what’s happening is that it’s not really that difficult to compute the incremental value of prepaid, but there is a variance from company to company in the way they account for customer acquisition costs and losses on the sale of handsets,” Spivak said.
The conservative approach is to account for these charges as ongoing expenses. However, in the early, high-growth stages of an industry sector’s development, taking this approach “can mask incremental revenues.”
“At the other extreme, a carrier or distributor could try to estimate the average time a prepaid customer remains before dropping off, the average loss on a handset-usually about $20 to $25-and the average acquisition costs, which vary widely, then amortize those over 12 months.”
This liberal approach is a risky one, particularly in a new sector like domestic prepaid wireless where there is little operating history and the real possibility of changing future market characteristics, he said.
“I believe customer acquisition costs should be expensed for tax and public accounting purposes,” Spivak said.
“On the other hand, handset losses should be amortized over a short period of time, (perhaps) several months, because the only reason companies are in the business of selling handsets is that they want to sell airtime.”
Today, because there isn’t a decade worth of operating history as exists in postpaid wireless, carriers “still are trying to figure out what are true ARPU, [minutes of use] and renewal rates,” said Berndt of the Yankee Group.
“We are talking with different prepaid platform providers that are incorporating into [their systems] mechanisms to account for this. It is incumbent on prepaid vendors to extract value from the data because, in many cases, the prepaid system doesn’t integrate with a carrier’s billing system.”
Spokesmen for several vendors interviewed, including Corsair Communications Inc., Palo Alto, Calif., and Comverse Network Systems, Wakefield, Mass, said their companies’ systems can provide carriers with this detailed information.
Statistical modeling takes the creation of benchmarks over a period of time. The prepaid offering is so new to some carriers that the information is just starting to obtain enough of a time line to be meaningful, according to Olson of Strategis.
However, Larry Swasey, senior wireless analyst for Allied Business Intelligence, Oyster Bay, N.Y., said he believes that prepaid’s domestic debut as a “poor cousin” offering for customers in lower-income brackets is the main reason carriers have so far been slow to mine customer data. This limited approach ignores larger potential markets, including parents and corporations, he said.
“With automatic identification, they should be tracking each minute by prepaid customer, by reseller and by carrier,” Swasey said.
“In any business, the toughest thing to do is develop properly targeted marketing programs. [Tracking] would let carriers cut better deals with resellers and would allow cross promotions.”
Zoran Mladen, a telecommunications trends analyst for American Management Systems, Fairfax, Va., holds a contrary view, but nevertheless is a supporter of prepaid services as adding value to carriers’ business.
“You can track your distribution channels because you can track the unique card number. The downside is, because you don’t know who the customer is, it is impossible to determine churn rates and you lose a chance to cross-sell or up-sell,” Mladen said.
“From my perspective, prepaid is beautiful because you get all the revenues up front, and there is no customer service and no bill collections. But it’s hard to say how prepaid affects the (wireless) market because there is a lot of money out there, [although] it isn’t necessarily new money.”
It is definitely new money, not old money, from which Topp Telecom, a Florida-based prepaid services provider, makes its value-added case to carriers, said Robert Dandrea, senior vice president of marketing.
“We have a call center, and we give a report to carriers by retailer as to how many activations at each outlet and how many are value-adds,” he said.
“It’s single subscriber economics. A (prepaid customer) may come and go and come back again, but the important thing is what’s his overall revenue as a user. You can be a better customer than someone with a contract who hardly uses the phone. The issue is quality over time.”
