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Prepaid Lining up for growth


									                                       SPECIAL REPORT


Lining up for growth
An in-depth look at prepaid trends
in the United States and globally
By Dan Meyer and Matt Kapko

                                 Lining up fo
     he hottest word in the wireless    Analysts in general have been predict-   in service plans. Most of this shock has been

Lining up for growth
An in-depth look at prepaid trends
in the United States and globally
By Dan Meyer and Matt Kapko

                                                                                             in service plans. Most of this shock has been
T      he hottest word in the wireless
       industry nowadays is prepaid with
just about every operator turning their
                                                 Analysts in general have been predict-
                                              ing just such a thing for years now, noting
                                              that the wireless industry eventually would
                                                                                             attributed to early termination fees that
                                                                                             customers must pay if they want to cancel
attention to a market segment that was        reach a point where everyone who wanted a      their service while still in their contracts.
neglected for years.                          mobile device and could afford to purchase        According to a PriceWaterhouseCoo-
   This year has seen financial results       one under a contract would do so, leaving      pers consumer survey earlier this year,
from operators showing an increased de-       future growth dependant on reaching those      the downturn in the economy triggered
pendence on customers eschewing con-          customers who for one reason or another        an increase in consumers moving toward
tracts to bolster their customer growth       could not procure a traditional wireless of-   prepaid plans. On average, use of prepaid
numbers. During the first quarter alone,      fering. While the prepaid market has been      minutes increased more than 147% in the
virtually every domestic operator posted      served by various providers since the incep-   past four years, from 270 minutes in 2006
stronger growth from prepaid customers        tion of mobile services, it’s only recently    to 667 minutes in 2009.
than from more lucrative postpaid con-        that the industry has focused greater inter-
sumers who typically swap signing a two-      est on the segment.                            Laying the groundwork
year contract in exchange for an upfront         But, it’s not just customers who lack the      The move away from traditional post-
subsidy on their shiny new mobile devic-      credit score for postpaid service that are     paid customer growth first was seen sever-
es. Wireless carriers added nearly 2.8 mil-   bolstering the prepaid ranks. Postpaid cus-    al years ago when carriers aggressively be-
lion net prepaid subscribers during the       tomers looking for a bit more control over     gan to promote “family plans” that allowed
first quarter of this year, while postpaid    their monthly spending are also making         customers to add lines to their accounts
customer growth was basically flat.           the move to prepaid service plans.             and share in the traditional offerings of
   How did this happen? How did a cus-           According to a recent Federal Communi-      postpaid plans for a reduced cost. Most of
tomer segment that for years was not con-     cations Commission survey, 30 million Amer-    these offerings allowed customers to add a
sidered worth a concerted effort to court     icans have experienced bill shock, which       line for $20, which eventually dropped to
suddenly become the “it” segment for a        it defines as a sudden increase in people’s    as low as $5 per line. Carriers managed to
$100 billion industry?                        monthly bills that isn’t caused by a change    recoup some of the lost revenue of having

RCR Wireless | July 2010                                                                                                               53

a single new customer addition by charging       ings that – while giving up the handset              Speaking at a recent J.P. Morgan Tech-
more for the bucket of family-plan minutes       subsidy sought by postpaid users – pro-          nology, Media and Telecom Conference,
than what it charged for single lines. So in-    vided those forgoing a contract with lower       executives from both Verizon Wireless and
stead of a single customer paying an aver-       per-monthly charges.                             AT&T Mobility said they were not ready
age of $60 for a bucket of 900 anytime call-        The most dynamic reaction may have            to dive deeper into the prepaid space.
ing minutes, two lines would share a bucket      been undertaken by Tracfone Wireless Inc.,           “It’s something we monitor, something
of 700 calling minutes for $70. If that family   which managed to form a partnership with         we’re watching,” said Verizon Communi-
plan needed a larger bucket, the next high-      Verizon Wireless for nationwide network          cations Inc. EVP and CFO John Killian. “I
er tier typically would spike up to $90.         access and Wal-Mart Stores Inc. for broad        wouldn’t say it’s a big concern right now.
   These family plans also provided a            distribution of its Straight Talk service. The   It’s the lower end of the market. We do not
number of advantages for carriers, includ-       offering provided customers with unlimited       see – we see a little bit of move from our
ing tying members of a family to a plan for      calling, messaging and web access for $45        postpaid base, not much. And we still see
the term of the contract as well as allow        per month, undercutting the $50 price point      the ability for others to take postpaid cus-
parents to add children who did not have         established by Boost. In addition Tracfone       tomers away from other carriers.”
the credit or were not legally able to sign      received permission to use the Verizon               Killian noted that this did not mean
a contract on their own.                         Wireless name for branding the service.          that the carrier was completely ignoring
   These plans proved wildly successful             Tracfone, which is owned by Latin             the prepaid space and that it would make
and drove strong growth for carriers for         American-based operator America Movil,           adjustments as needed.
several years. Some estimates claims that        is a prepaid veteran, having offered a va-           “[Verizon Wireless CEO] Lowell [McAd-
nearly 70% of current domestic postpaid          riety of traditional prepaid services using      am] is looking at that right now in terms of
customers are on such plans.                     network agreements with various net-             – and there could be a little bit of modifica-
                                                 work operators. However, those services          tion in some of our prepaid offerings,” Kil-
Nationwide scope                                 have historically resulted in the company        lian added. “But it’s not a broad-based as-
   Domestically, the prepaid market re-          posting very low average revenue per user        sault on the prepaid market. It will be some
ceived a shot in the arm in early 2009           of around $10 per month.                         tweaks to some of the pricing, some of the
when Sprint Nextel Corp. subsidiary                 Since its launch last year, the Straight      offerings, probably making sure the mar-
Boost Mobile unveiled a $50 per month            Talk service has become a dynamo for             keting of it is more prominent in terms of
plan that included unlimited calling, mes-       both Tracfone and Verizon Wireless.              the Verizon network and the network qual-
saging and web access, all without a con-           For Verizon Wireless, the service has         ity behind that. But, I don’t think you will
tract. The carrier originally trialed the        allowed the carrier to continue focusing         see us from a retail prepaid perspective try-
offer in select markets using its CDMA           its core brand on the more lucrative post-       ing to be the leader in the prepaid market.”
network as a competitor to offerings from        paid customer base, while the margin-thin            Verizon Wireless earlier this year be-
Leap Wireless International Inc.’s Cricket       prepaid service can be shared with Trac-         gan offering customers no-contract plans
and MetroPCS Communications Inc. But             fone. Verizon Wireless noted that during         priced at a $5 premium on their contract
for its nationwide debut, the carrier relied     its first-quarter financials that nearly 1.3     offerings. That means prepaid unlimited
on its neglected iDEN network, which had         million of its 1.5 million total net addi-       voice plans run $75 per month compared
been hemorrhaging postpaid customers             tions were through its reseller partners, a      to the $70 per month the carrier charges
ever since Sprint Corp. acquired Nextel          number analysts noted was made up pre-           its contract subscribers. Customers who
Communications Inc. in 2005.                     dominately from Straight Talk sales.             add unlimited messaging are charged at
   While there were similar offerings that          The analysis was reinforced by Ameri-         $95 month. The carrier said the same $5
included unlimited calling, messaging and        ca Movil, which said its Tracfone subsid-        premium applies to voice-bucket plans of
web access from a number of providers be-        iary added just over 1 million customers         450 and 900 minutes per month.
fore the Boost offering, most were limited       during the quarter and ended the quarter             The prepaid move brought Verizon Wire-
in scope and network breadth. The move           with more than 15 million total custom-          less closer to the now-standard $50 per
was an instant hit for Boost and Sprint          ers across its prepaid offerings. America        month for unlimited voice calling without
Nextel, which spent the rest of the year         Movil also reported average revenue per          a contract, but is still $30 more per month
soaking up prepaid customers who eventu-         user of $11 for Tracfone, which further          than network partner Tracfone’s Straight
ally were able to outnumber the postpaid         highlights the razor-thin margins com-           Talk plan, which uses the same network.
customers the carrier was losing.                mon in the prepaid space.                            William Ho, VP of Consumer Services
   Seeing the writing on the wall, rivals                                                         at Current Analysis, noted the new pre-
began trolling the prepaid waters look-          Wait and see                                     paid plans could lure some customers
ing to ride the wave Boost Mobile man-              Few would question the phenomenal             looking at the less- expensive offerings
aged to catch.                                   growth in the prepaid market over the past       from regional carriers, but who are at-
   Within months a number of similar of-         several quarters with nearly every opera-        tracted to the Verizon Wireless brand.
ferings began to flood the market. Prepaid       tor posting stronger growth from its pre-            “Rather than compete directly with the
stalwarts MetroPCS and Leap bolstered            paid operations than postpaid. However,          possibility of cannibalizing its postpaid
their unlimited offerings with new fea-          the nation’s two largest operators, Verizon      base, the use of MVNO proxies to disrupt
tures and expanded coverage. T-Mobile            Wireless and AT&T Mobility, are content          growth leaders Boost Mobile, MetroPCS
USA Inc. revamped its entire rate plan           to sit on the sidelines of that increasingly     and Leap bring in the side benefit of ad-
structure to emphasize its prepaid offer-        competitive battle, at least for now.            ditional wholesale revenue,” Ho wrote in a
54                                                                                                                        RCR Wireless | July 2010
                                                                                                                            SPECIAL REPORT

recent report. “However, this approach is not
without risk as unfettered MVNO use of the
Verizon Wireless network could potentially
compromise ‘the most reliable wireless net-

                                                                                                                                                       Source: Wal-Mart Stores Inc.
work’ if wholesale customers and postpaid
customers contend for the same resources.”
   Speaking at the J.P. Morgan event,
AT&T Mobility President and CEO Ralph
de la Vega took a similar approach to the
subject, noting that the carrier was more
interested in revenue and margin growth
and that was coming from postpaid data
services, not prepaid voice.
                                                    Verizon Wireless has as of yet only dabbled in the prepaid space, using instead a partnership
   “There is an insatiable appetite for
                                                    with Tracfone Wireless and America Movil to target the growing market.
data,” de la Vega said. “We don’t see that
with voice.”
   AT&T Mobility late last year goosed its          All in                                           Common Cents offering targets consumers
Pay As You Go GoPhone prepaid offering                 While Verizon Wireless and AT&T Mo-           looking for a traditional prepaid service
with the launch of an unlimited talk and            bility have been cautious with their pre-        and not interested in the growing number
messaging option for $60 per month. The             paid moves, Sprint Nextel and T-Mobile           of unlimited offerings hitting the market.
offering undercuts its unlimited postpaid           USA have been aggressive. Both carriers              In addition, Sprint Nextel continues
offering by $10 per month.                          increasingly have relied on the segment          to offer its Assurance service, which it
   So, what’s the catch for those looking to        to boost their customer growth and thus          picked up when it acquired Virgin Mobile
join AT&T Mobility and seeing the significant       altered many of their plans to attract pre-      that provides a free phone and 200 calling
price difference between its contract and no-       paid customers.                                  minutes per month to qualified customers
contract offerings? The GoPhone plans are              Sprint Nextel is betting heavily on the       in a handful of states.
only available on a limited number of devices       prepaid market; the carrier said it expects         The offerings sit next to the carrier’s Vir-
from AT&T Mobility, though the GoPhone              70% of net additions this year to be custom-     gin Mobile service, which recently dropped
SIM should be compatible with nearly all of         ers who choose to go without contracts.          its pay-as-you-go option and voice-centric
the carrier’s devices. And phones acquired             “This is the year that prepaid moves          focus for a more data-centric model that
with a postpaid contract include a larger           to the forefront of the wireless industry,”      targets consumers looking at data and
subsidy and corresponding lower price. Also,        said Dan Schulman, president of Sprint           messaging services first, and voice second.
network coverage for the GoPhone service            Nextel’s prepaid group, during the recent        Sprint Nextel recently began to phase out
is limited to the carrier’s native network,         revamping of its prepaid lineup. “In the         the postpaid offerings from Virgin Mo-
while the postpaid offering includes coverage       first quarter of 2010, more than half of the     bile’s plate that it acquired when it bought
through roaming agreements.                         mobile gross additions in the U.S. selected      Helio L.L.C. in 2008. Stohrer said Virgin
   “It is a fine line for AT&T to stay rel-         prepaid, and we predict that approximate-        Mobile will continue to support customers
evant in prepaid calling but not ‘give away         ly 70% of the net adds in 2010 will choose       currently on its pay-as-you-go service, but
the store’ with a product that has good mar-        plans without a contract.”                       that over time it will look to migrate those
gins, is competitive, and does not cannibal-           In addition to Sprint Nextel’s Boost Mo-      customers to other plans.
ize postpaid users,” Current Analysis noted         bile offering, the carrier offers three addi-       “The other brands are more about month-
in a report. “The $60 Talk & Text plan is           tional brands targeting the prepaid market.      ly unlimited offerings,” Stohrer explained.
$10 (or more) more expensive than many                 The carrier recently unveiled its Common      “This allows Virgin and Boost to more effec-
competitors’ plans, but AT&T hopes that its         Cents pay-as-you-go service that provides a      tively target their specific audiences.”
premium brand will help pull in less price-         traditional prepaid plan for customers. Voice       Stohrer noted that Boost Mobile is a
sensitive customers who believe in the car-         calls are billed at 7 cents per minute with      “straight forward, no BS, unlimited talks
rier’s network message and image.”                  the hook that calling minutes are rounded        plus data and messaging” service target-
    Both carriers are on basically solid foot-      down to the nearest minute instead of up as      ing the 18-49 year old demographic. Vir-
ing in their stances. Verizon Wireless report-      is done with other calling plans. The service    gin Mobile is “all about beyond talk that
ed that direct customer additions for the first     also provides for text messaging priced at 7     leads with unlimited data and then lets
quarter totaled just 288,000 subscribers,           cents per message sent or received.              you pick your talk options” targeted at
compared with 1.3 million additions through            Distribution for the offering is through      a slightly younger 18-35 year old demo-
its third-party partners, which analysts            Wal-Mart Stores using both their retail          graphic. Common Cents’ demographic is
noted was composed mostly of Tracfone’s             locations – 700 stores at launch – and on-       the 25 and older crowd looking for a more
Straight Talk prepaid service. AT&T Mobili-         line storefronts and puts the offering in the    traditional prepaid offering, which still
ty was a little better off on the postpaid front,   same channel as Straight Talk. The Com-          represents roughly half of no-contract
noting it added just over 500,000 direct post-      mon Cents offering will also be available        customers, according to Sprint Nextel.
paid subscribers during the quarter, though         through a dedicated web site.                       “From a competitive standpoint, Boost
its indirect channels contributed nearly 1.4           According to Bob Stohrer, VP of market-       has great momentum and at its core
million customers.                                  ing for Sprint Nextel’s prepaid brands, the      is competitive against other prepaid

RCR Wireless | July 2010                                                                                                                          3

unlimited players like Metro and Leap,”        41,000 prepaid net additions could not          through a roaming agreement with fellow
Stohrer said. “Virgin sits in the prepaid      counter the postpaid loss.                      unlimited calling provider MetroPCS.
space, but is looking to capture customers        The new plans offer unlimited calling and       Leap said customers can add unlimited
migrating from postpaid that are looking       messaging for $50 per month, or unlimited       text messaging and other features at $10
for more value.”                               messaging for $15 per month and voice calls     increments culminating with its $60 Pre-
   Analysts have generally been positive on    charged at 10 cents per minute. The unlim-      mium Plan, which includes virtually all of
Sprint Nextel’s aggressive play in the pre-    ited voice and messaging offering lines up      Cricket’s offerings, including 100 roaming
paid space. “We are taking a very positive     with similar plans from rivals Boost Mobile,    minutes for calls made from outside the
stance on the Sprint Prepaid Group’s multi-    Straight Talk, MetroPCS and Leap’s Crick-       expanded coverage area. Leap said those
brand segmentation strategy, because it is     et service, though those carriers typically     calls would regularly be charged at 25
betting that wireless prepaid growth will      include unlimited data services and other       cents per minute.
fuel corporate revenue,” Current Analysis’     features with their offerings.                     The new plans undercut similar nation-
Maidy Whitesell noted in a research report.       The plans also slot in below T-Mobile        wide offerings from rivals, including Boost
“They added that the new Common Cents          USA’s Even More offerings, which allow          Mobile’s $50 per month plan that includes
offering along with the new focus of both      unlimited talk and text messaging for $60       unlimited voice, messaging and data ser-
Boost Mobile and Virgin Mobile will require    per month without a contract, but a wider       vices, as well as that from Tracfone’s
a reaction from its competitors.               selection of devices at unsubsidized prices     Straight Talk service that provides for un-
   “Boost Mobile and Virgin Mobile pro-        or $70 per month for the same devices at        limited voice, messaging and limited data
vide alternatives to Tracfone’s Straight       a subsidized price.                             services for $45 per month. Cricket throws
Talk and Net10 Unlimited,” Maidy added.           The selection of devices for the prepaid     in nationwide text messaging, unlimited
“It is certain that unlimited carriers such    service is limited to just four basic mod-      picture messaging from its home network
as MetroPCS and Leap will also be affect-      els ranging between $20 and $40, none of        and unlimited web use for $40 per month.
ed, in addition to smaller MVNOs with          which include a QWERTY keyboard. The               MetroPCS altered its rate plans earlier
smaller marketing muscle such as Page          carrier does offer a prepaid SIM card for       this year with new offerings that the car-
Plus. The Common Cents brand, with             $7 that can used in any T-Mobile USA or         rier said would provide customers with
its landmark, simple 7-cent proposition,       unlocked device.                                better control over their wireless bills. The
threatens all pay-as-you-go providers, es-        “T-Mobile needed to make their pre-          new plans begin at $40 per month and in-
pecially Net10, as it usurps that carrier      paid portfolio more competitive in light        clude unlimited domestic calling, messag-
as the low-cost provider – an important        of the multiple competitive prepaid un-         ing and data services as well as all regu-
distinction, especially to higher-churning     limited offerings out there,” explained         latory fees and taxes. Stepping up $5 in
and price-sensitive users.”                    Current Analysis’ Ho. “It is a tough road       price brings unlimited international text
   Sprint Nextel’s Stohrer acknowledged        they’re on to trying to capture a higher-       messaging, directory assistance and other
the potential for overlap between Boost        ARPU unlimited calling customer while           features; $50 per month adds MetroPCS’
Mobile and Virgin Mobile in some seg-          preserving margin and not cannibalizing         navigation service Loopt GPS service and
ments, but countered that the carrier          the postpaid base.”                             e-mail access; while $60 per month throws
would rather have some overlap instead            T-Mobile USA also continues to offer         in unlimited international calling.
of any gaps in its offering.                   its traditional, pay-as-you-go service that        For its smartphone users, MetroPCS
   Stohrer added that the carrier would        begins at $10 for 30 minutes ranging up         offers a $50 per month plan, which in-
also tout the nationwide reach of Sprint       to $100 for 1,000 minutes. Text messag-         cludes all of its features except for a $10
Nextel for all of its prepaid offerings,       ing on those plans is charged at 5 cents to     extra charge for international calling, and
noting that benefit is especially impor-       receive and 10 cents to send.                   a $60 per month plan for customers us-
tant when compared to competing offers                                                         ing Research In Motion Ltd.’s BlackBerry
from MetroPCS and Leap. The carrier            Regionals fight back                            device. The carrier still lacks the broader
is also looking at further integrating its        Looking to maintain their positions, es-     coverage provided by Leap and its larger
distribution efforts for the Boost Mobile      tablished regional players in the prepaid       rivals, but is moving quickly to launch
and Virgin Mobile offerings to take ad-        market like MetroPCS and Leap have made         its LTE network by the end of the year
vantage of Boost’s reach in some of the        recent moves to bolster their plans, increase   and has been very aggressive in offering
bigger retailers and independent wire-         device selection and boost coverage.            smartphones to prepaid consumers.
less locations and Virgin Mobile’s reach          During this year’s CTIA event in Las
in mid-sized retailers.                        Vegas, Leap unveiled new plans that pro-        Device pricing
   Having heavily modified its pricing         vide for nearly nationwide voice calling for       One challenge for continued prepaid
plans late last year in favor of its prepaid   $30 per month. The new plans updated the        growth is how carriers and handset mak-
offerings, T-Mobile USA recently updated       carrier’s previous offering by providing for    ers plan to handle device subsidies. On
the offering to now include unlimited call-    home calling in the top 125 markets across      traditional postpaid plans, carriers have
ing and texting options. The move looks to     the 50 states, Washington, D.C., and Puer-      been willing to fork over hundreds of dol-
be essential for the nation’s No. 4 carrier,   to Rico, thanks to new roaming agreements       lars in subsidies on devices in exchange
which recently said it lost 77,000 custom-     with unannounced partners.                      for customers signing a contract tying
ers during the first quarter, including a         Cricket’s previous offering was limited to   them to service for a specific time period
loss of 118,000 postpaid customers. T-         calls placed from markets that were either      or to pay a cancellation fee if they choose
Mobile’s unusually poor showing of only        covered by the carrier’s native network or      to leave before the contract expires.

56                                                                                                                     RCR Wireless | July 2010
                                                                                                                                               SPECIAL REPORT

                                                                                                                        and messaging and include a bucket of
                                                                                                                        300 anytime calling minutes.
                                                                                                                           “The way youth and young adults com-
                                                                                                                        municate has changed dramatically over
                                                                                                                        the past few years,” the carrier said, cit-
                                                                                                                        ing data from Nielsen on postpaid users
                                                                                                                        ages 18 to 34 from 2007 to 2009. “Minutes
                                                                                                                        of talk dropped over 10% while messag-
                                                                                                                        es sent and received grew by more than
                                                                                                                        150%. The amount of data usage within
                                                                                                                        this group grew by over 1,800% during
                                                                                                                        the same time period.”
                                                                                                                           As such, Virgin Mobile’s $25 Beyond
Source: Leap/Cricket

                                                                                                                        Talk plan includes unlimited data offer-
                                                                                                                        ings and 300 minutes of voice calling; the
                                                                                                                        $40 Beyond Talk plan offers the same
                                                                                                                        data offerings but includes 1,200 minutes
                                                                                                                        of voice calling and the $60 plan ups the
                                                                                                                        voice plan to an unlimited number of min-
                                                                                                                        utes. BlackBerry data service can be add-
                       Leap’s Cricket ser vice of fering has aggressively targeted the prepaid market in large
                                                                                                                        ed to any of the plans for $10 per month
                       and mid-sized markets, including Chicago.
                                                                                                                        more. Also, the carrier said the price plans
                                                                                                                        will include regulatory fees and taxes, al-
                          These contracts or fees have allowed car-     more chipsets, and the developer com-           though some sales tax may still apply.
                       riers to recoup that upfront subsidy, and if     munity adds a few more million poten-              Virgin Mobile introduced four new
                       a customer sticks to the life of the contract,   tial buyers to their audience. … Google         devices to accompany the Beyond Talk
                       profit handsomely over the term.                 Android on Virgin Mobile USA. Android           plans. Customers can buy a Blackberry
                          But with no contract or cancellation fee      on MetroPCS. Android on Cricket. An-            Curve 8530 for $300; an LG Electronics
                       tied to prepaid plans, carriers in many cas-     droid on Boost. Android on Straight Talk.       Co. Ltd. Rumor Touch for $150; an LG Ru-
                       es require customers to pay the full price for   Where will this leave AT&T and Apple?           mor 2 QWERTY for $90; and a Kyocera
                       a device or partner with second- and third-      Where will this leave traditional post-         Loft QWERTY handset for $70.
                       tier device makers in an attempt to bring        paid services? Can it happen in time for           “Virgin Mobile has broken from the
                       more affordable devices to market.               the 2010 holiday season?”                       pack, however, with its Beyond Talk pric-
                            Carriers also are beginning to stock           Larger carriers in general have kept         ing. This plan includes unlimited 3G data
                       smartphones, which typically have been           their prepaid device selections to entry-       and messaging plus 300 anytime minutes
                       left to the realm of high-end, postpaid rate     level models that they typically can sell at    for $25 per month. Straight Talk, its closest
                       plans. MetroPCS has been offering a Black-       low prices even without a subsidy. Verizon      competitor and Verizon Wireless post-paid
                       berry device for some time, while Leap has       Wireless and AT&T Mobility are prime            (which includes no voice) have their limita-
                       said it plans to launch both a Blackberry        examples of this as their branded prepaid       tions. And, with an affordable BlackBerry
                       and a Kyocera Wireless Corp. smartphone          services are limited to only a handful of       $10 adder, it’s a winner for their devoted
                       using Google Inc.’s Android operating sys-       basic devices.                                  fans ($35/mo. vs. $60/mo. prepaid and $80/
                       tem later this year.                                T-Mobile USA has taken a different ap-       mo. postpaid – the phone pays for itself vs.
                          Boost Mobile is also rolling out an An-       proach offering all of its devices to its no-   the post-paid world in six months), noted
                       droid-powered iDEN device, while Virgin          contract customers with the only stipula-       Mobile Symmetry’s Patterson.
                       Mobile’s device lineup is chock full of fea-     tion being they are not offered the subsidy        Leap was one of the first to move mo-
                       ture-packed smartphones.                         offered to postpaid customers.                  bile data services into the prepaid space,
                          Analysts seem particular bullish on the                                                       and looks to be set to further expand the
                       Android platform in the prepaid space,           Beyond voice                                    offering.
                       noting the OS’ open and free architecture           While voice services have seen the              Speaking at a recent investor confer-
                       seems ready-made for the razor-thin no-          broadest range of activity during the past      ence, Leap’s CEO Doug Hutcheson said
                       contract model.                                  12 to 18 months, carriers also are starting     the carrier is encouraged by recent data
                          “Android will be free (although Google        to merge mobile data services into their        pricing changes in the industry that have
                       will want some of your privacy for that free-    no-contract offerings.                          shown some upward mobility. Leap also
                       dom), and with Google Maps and Latitude,            Sprint Nextel’s Virgin Mobile brand is       has begun to test different pricing plans
                       you also get free navigation,” noted Jim         one that has moved aggressively into the        for the service, ranging in data transmis-
                       Patterson CEO and founder of Mobile Sym-         space recently reconfiguring its rate plans     sion from 1.5 gigabytes to 10 gigabytes
                       metry, in a recent column for RCR Wireless       to center on data services, with voice as a     and at prices points from $40 to $60 per
                       News. “Google builds on their operating          secondary feature. The brand’s plans be-        month. Leap currently offers a pair of
                       system expansion, Qualcomm sells a few           gin at $25 per month for unlimited data         pricing plans for its mobile broadband

                       RCR Wireless | July 2010                                                                                                                     5

service including 5 GB of service for $40 per   with Clearwire Corp. for unlimited access                    ply say the U.S. market is moving more
month or 10 GB for $50 per month. Unlike        to its WiMAX service.                                        in line with the prepaid-like practices of
some larger rivals, Leap does not charge            “You have to wonder what Wal-Mart is                     its counterparts in Europe and Asia. By
overage fees for customers going over their     cooking up on the data front,” Patterson                     taking an American-centric view of the
allotted bucket of megabytes and instead        wrote. “My guess is that they are saying,                    wireless space, it’s easy to label most of
throttles down the speed of the service to      ‘If Cricket can do 200,000 net adds with                     the globe as dominantly prepaid.
those users.                                    $40 per month broadband, I wonder what                          It’s worth pointing out that there are
   While Virgin Mobile and Leap have tar-       we can do with $30.’”                                        many factors and complexities that play
geted the prepaid mobile data space, other          “Prepaid mobile broadband is quickly                     into the prepaid and postpaid ways of
carriers are taking a more cautious approach,   transforming into the primary option                         wireless operators in every country. This
limiting the amount of data transmission        among carriers looking to boost their data                   helps explain why the U.S. market is see-
available to customers. Verizon Wireless, for   usage levels and expand the applicability                    ing such a shift toward prepaid today.
example, offers prepaid customers up to 1       of their services,” noted Deepa Karthikey-                      A vast majority of net subscriber ad-
megabyte of data transmission for $50 per       an, senior analyst at Current Analysis in                    ditions in the United States are being
month, which is only $10 less than the 5 GB     a recent report. “One only needs to look at                  drawn into the mobile pool thanks to pre-
postpaid customers can select.                  the activity levels in this space over the                   paid offerings, but there are key differ-
   Beyond the traditional operators, some       past few months to get a feel for the fren-                  ences between what prepaid means in the
see potential in this space from some of        zied movement across national as well as                     United States and what it means almost
the larger retailers that have seen a strong    regional carriers trying to grasp this op-                   everywhere else. America has two flavors
uptake of more traditional wireless voice       portunity to increase their revenues and                     of prepaid: pay-as-you-go plans and flat
services. Mobile Symmetry’s Patterson said      spike up their subs.”                                        rate all-you-can-eat plans.
that a retailer like Wal-Mart could spread                                                                      “In the United States, prepaid seems
out into the mobile data space by offering      World view                                                   to be predominantly with flat rate all-you-
a branded service through a mobile virtual        While comparisons can and should                           can-eat voice, as offered by Leap Wireless
network operator agreement with either a        be drawn across the Pacific and Atlantic                     International Inc., MetroPCS Communica-
traditional carrier on a capped service or      Oceans, it would be short-sighted to sim-                    tions Inc. and Boost Mobile (a subsidiary of
                                                                                                             Sprint Nextel Corp.). Outside the United
                                                                                                             States, prepaid is invariably pay-as-you-
RIM’s Blackberr y                                                                                            go, as offered by Tracfone Wireless Inc. and
Cur ve has become                                                                                            GoPhone (from AT&T Mobility). There are
a popular option for
                                                                                                             some similarities and some marked differ-
carriers looking to
                                                                                                             ence between these two approaches,” Keith
add smar t phones
                                                                                                             Mallinson, analyst and founder of Wise-
to their lineup.
                                                                                                             Harbor, told RCR Wireless News.
                                                                                                                Most of the prepaid business outside
                                                                                                             the United States is tied to SIM cards,
                                                                                                             which can be purchased with a pre-de-
                                                                                                             termined amount of credit on board. Cus-
                                                                                                             tomers simply replenish their accounts
                                                                                                             (which are tied directly to a refillable SIM
                                                                                                             card) as needed. As Mallinson points out
                                                                                                             though, “the price per minute on that type
                                                                                                             of prepaid tends to be quite high and it
                                                                                                             promotes disuse.”
                                                                                                                The flat-rate flavor of prepaid does almost
                                                                                                             the exact opposite. With an unlimited offer-
                                                                                                             ing, customers are encouraged to use min-
                                                                                                             utes and call or text away to their hearts’
                                                                                                             content. As such, the per-minute rates for
                                                                                                             these types of plans tend to be very low.
                                                                                                                “The bucket postpaid that we have
                                                                                 Source: Virgin Mobile USA

                                                                                                             largely here (in the United States) is slow-
                                                                                                             er in the penetration rate and uptake, but
                                                                                                             it really drives usage,” said Roger Ent-
                                                                                                             ner, SVP of research and insights in The
                                                                                                             Nielsen Co.’s telecom practice.
                                                                                                                While the United States continues to
                                                                                                             move down two parallel tracks, the pay-as-
                                                                                                             you-go model is the only variant of prepaid
                                                                                                             being used abroad. Of course, there are

58                                                                                                                                   RCR Wireless | July 2010
                                                                                                                        SPECIAL REPORT

unique reasons for the difference in prepaid         “Prepaid is obviously the minor part of      to swap SIM cards because international
positioning and strategy, but much of it comes    the market in the United States, Canada         travel is that much more likely.
down to regional economics and a cash- ver-       and Finland. It’s (even more) minuscule            While there are reasons behind the in-
sus credit-based approach to finances.            in Japan and Korea. Prepaid is very small       flated number of active SIM cards in many
   “The prepaid that we see in the U.S. is        in those countries and then when you get        countries, customers in the United States
appealing to people that have contract pho-       everywhere else it’s mostly prepaid. In         are much less incentivized to follow suit.
bia, who want predictability in their expen-      developing countries and Latin American            “You either just take it on the chin and
diture, who don’t want a contract, and who        countries you’re talking about postpaid         pay the high charges, or if there’s one place
can’t get a contract because they can’t do a      being a matter of a percent or so,” Mal-        that you go to a lot, you get a SIM for that
credit check,” Mallinson said.                    linson added.                                   country,” Mallinson said. “Most people
   On the flip side, many countries are al-                                                       who are traveling abroad ... probably are
most exclusively subject to cash on-hand          Dubious subscriber penetration rates            dealing with one or two countries.”
reserves that shift every day. Typically, the         While the U.S. market is nearing a 90%
more reliant a country is on cash the greater     penetration rate for wireless subscribers,      Why prepaid reigns supreme elsewhere
chance the regional wireless industry has         it’s often considered “behind the rest of the      As is often the case with the structural
been built around a prepaid model.                world” at that rate, Mallinson points out.      make-up of most industries, access to cash
   Although a majority of wireless customers          While American carriers’ counterparts       and credit plays the strongest determining
in many countries in Europe, Latin America        are enjoying penetration rates of 120% to       factor in terms of pricing, business models
and some parts of Asia are on prepaid, at least   130% in some developed countries, it’s not      and general consumer access to products
one analyst tells RCR Wireless News that it       because that many people are carrying           and services. The wireless industry is no
would be a mistake to put everything outside      two devices with them at all times.             different.
the United States in the prepaid column.              “You see a lot of multi-SIM usage.             Where cash economies reign supreme,
   “The assumption that the rest of the           There are some countries where they have        wireless prepaid also reigns supreme.
world is prepaid is highly misleading,” said      120% penetration, but only 40% of the              But there are other factors at play just
Nielsen’s Entner.                                 country has a phone. This inconvenience         the same.
                                                  that drives penetration is so unnecessary          Carriers can and will exacerbate the
Prepaid statistics outside the U.S.               here,” Entner said.                             issue by imposing higher fees and doing
    The most recent data from Nielsen puts            “The reason it’s higher is because of the   everything in their power to minimize
the scope and reach of prepaid in the inter-      prepaid phenomenon,” Mallinson said             the commoditization of voice minutes and
national space into greater perspective. The          “Even though the per-minute price is        data. Carriers have also blazed a trail for
share of prepaid in each European country         quite high (on pay-as-you-go plans), if         prepaid by establishing a wide network of
is not purely broken down by latitude, but it     you’re a low-rate user ... you can sustain      physical and virtual locations where pre-
does seem to play a factor.                       that phone on a fairly low expenditure,”        paid customers can refill their accounts
    “Basically the further south you go, the      he added. “What they’ve managed to do is        with ease. Many ATM networks, for ex-
higher the prepaid percentages,” Entner           pick up the low-level users.”                   ample, can now be leveraged as a poten-
said.                                                 The question of whether that’s a busi-      tial refill station.
    According to Nielsen’s latest figures, Ger-   ness that you want to pick up anyway is            Moreover, the cost of implementing pay-
many counts 56% of all wireless customers         worth asking. Maintaining a large swath         as-you-go prepaid for a carrier is much low-
on prepaid, the United Kingdom stands at          of low-usage customers for a few dollars a      er. There must be systems in place to track
58% and Italy is at 83%. The majority flips       month of revenue per user, on average, is       usage, especially to cut off service when
on its side in France, where only 31% of the      a tough sell, but they’ve made it work in       available credit runs, but there’s no require-
country is on prepaid. Austria is at 38% and      Europe and elsewhere.                           ment to maintain a database with details
then there’s Finland, which only counts 8%            Cost structure is key, Mallinson said.      of every call. Therefore, credit control, bad
of its customers on prepaid billing plans.        Without a tight grip on operation expens-       debt issues, billing and customer support
    At last count, China has 71% of its rapidly   es, it’s not possible to survive on extreme-    are much more of a non-issue with prepaid.
growing number of customers on prepaid and        ly low average revenues per user.
India’s market is dominated by prepaid at             There haven’t been any drastic moves        The calling-party-pays effect
a rate of 89%. Singapore is split right down      in the U.S. market for low-level users, but        Another phenomenon that has impact-
the middle with half of its customers on pre-     as subscriber levels saturate on the post-      ed the role of prepaid outside the United
paid, and Taiwan’s market counts a prepaid        paid front, more and more carriers may          States is the system of calling party pays.
penetration rate of 20%. South Korea, on the      find that their pricing plans are cutting       The system of pinning all of the cost of a
other hand, barely has 1% of its customers on     out potential customers. Mallinson said         call on the party placing the call has been
prepaid, Entner said.                             carriers might be forced to make a play for     driven purely by carriers. It’s a system
    For all intents and purposes, most other      that money they are leaving on the table        that has come under scrutiny by regula-
countries in Asia, Europe and Latin Ameri-        by targeting low-level users and pushing        tors and other watchdog groups.
ca are at a prepaid penetration rate of 90%       that penetration rate above 100%.                  The United States has its own variant
or greater, he added.                                 Still, it won’t come in the form of SIM-    called receiving party plays, but few car-
    “Fundamentally, prepaid is the mobile         swapping that we see so much of outside         riers have employed free incoming calls
market in most countries. Overwhelmingly,         the United States. Customers in smaller         and generally speaking, that doesn’t exist
it is about prepaid,” Mallinson said.             countries find it particularly appropriate      elsewhere.
RCR Wireless | July 2010                                                                                                                      7

    Calling party pays, however, is much      tomers are also the most price sensitive,       substantially over time.
more the norm everywhere else. Carriers       Mallinson added.                                   “I think Europe has a different focus.
have conditioned customers to pay for            On the whole, ARPU for postpaid cus-         They don’t have regional focus. U.S. is do-
both ends of every phone call that they       tomers is generally double to triple that of    ing its own thing,” Ho said.
initiate.                                     ARPU for prepaid customers, Entner said.           If there is an Achilles Heel for prepaid
    Calling party pays is yet again another      This helps explain why the top U.S.          – and it’s likely not the same potential cul-
example of carriers promoting disuse and      carriers – AT&T Mobility and Verizon            prit of a couple years ago – it would likely
it’s a hallmark of wireless operations in     Wireless – are re-doubling their efforts        play off a carrier’s ability to manage churn
Europe. The model has driven multi-SIM        on postpaid and mostly getting into             and cost to acquire users, he added.
usage as well because carriers charge so      prepaid at arm’s length through resale             “The prepaid base is a fickle bunch and
much less for calls made entirely on their    agreements.                                     they would go and jump through the roof
network.                                         “They are still looking at the high-val-     for offers,” Ho continued.
    Customers have also been dissuaded        ue customers that stay a long time, spend          Prepaid models are likely being
from using minutes in Europe because          a good amount of money and the growth           strengthened thanks to the greater se-
carriers have presented them with a           for them here is still plentiful,” Entner       lection of smartphones available at full
cheap alternative in the form of text mes-    said. “It isn’t necessary for them yet.”        retail price. In essence, prepaid carriers
saging. In Europe, text messages cost no         Meanwhile, AT&T and Verizon have             have started to flip the issue of a contract
more than a penny on average and it ex-       been able to benefit from prepaid with-         on its head by charging customers exor-
plains why SMS took off so much earlier       out having to invest much in the model          bitant amounts for a top-of-the-line de-
there and with heavy adoption rates.          or dilute their postpaid plans.                 vice that only works with their network.
    “The reason Europe was so strong on          “It’s not a separate market. It’s not        Expensive smartphones eventually could
text messaging was because it was a           as if Verizon and AT&T can’t do it. They        become just as much of a churn deterrent
voice replacement,” Entner said.              have everything they need to do it. All         as contracts.
    Calling party pays has long been con-     they’re doing is introducing a new pric-           “Similar to postpaid, if you’re happy
sidered a cross-subsidy between the lan-      ing plan,” Mallinson said.                      with the service, why monkey around
dline operators and wireless carriers. As        Even Sprint Nextel, arguably the most        with anything else?” Ho posited.
regulators became increasingly inquisi-       aggressive tier-one carrier on prepaid,
tive about connection fees and termina-       has carefully placed its prepaid offerings      Will U.S. go the way of Europe and
tion fees, the prices handed down to cus-     under entirely different brands.                Asia?
tomers have ebbed and flowed over time.          “It’s all about focus and if you look even      While the U.S. market can be seen by
    A couple years ago there was debate       at Sprint where they own the brands,            some to be following Europe’s lead on the
about whether European carriers would         they are separately set up,” Entner add-        prepaid front, there is an emerging trend
actually lose money if not for the fees       ed. “There’s no shifting on focus.”             in Europe to follow the unlimited, all-in
they collect under the calling party pays                                                     plans that we’re seeing more in the Unit-
model.                                        Lessons to be learned at home and abroad        ed States.
    “The entire system of calling party          While there are structural, economic            “The flat-rate model only came about
pays “has been a bit of a cash cow for the    and cultural reasons for different pricing      after it was here in the U.S,” Entner said.
mobile operators,” Mallinson added.           models in different countries, there are at     “If there is a trend in Europe then I would
                                              least a few lessons that carriers can learn     say it’s going toward the buckets that we
Surviving on lower ARPU by design             from their international counterparts.          see here in the U.S.”
   ARPU is another factor that presents          “I think what Europe can teach us is to         The U.S. market won’t ever go the way
prepaid in a unique light outside the         provide the right plan to the right people,”    of Europe and Asia because of all about
United States and a handful of other          Entner said. “What the Europeans learn          the credit cards that are linked to our ac-
countries where it’s less dominant. AR-       from us is how to drive usage at a really       counts, Mallinson said. The growing reach
PUs tend to be lower on prepaid in inter-     cost-effective way.”                            of Apple Inc.’s iTunes is reinforcing the
national markets and because of the cut-         Ho from Current Analysis, told RCR           postpaid model in other markets as well.
throat competition, many carriers have        Wireless News it’s all about the custom-           “In some countries there’s so little post-
been so aggressive with pricing that it’s     ers each carrier is trying to win.              paid, it’s likely to go the other direction,”
made postpaid any even less attractive           “It goes back to carriers looking to ac-     he said.
proposition.                                  quire high-value users,” Ho said. “With            The prepaid segment has obviously
   “It’s the postpaid countries that have     an all-you-can-eat product, you don’t call      blossomed into a market that nearly all
the higher ARPU,” Mallinson said. “The        customer service. That’s what they’re           carriers are now targeting with an aggres-
U.S. carriers enjoy relatively good profit-   hoping for.”                                    siveness not seen in the mobile industry
ability” and they tend to not be as bru-         Meanwhile it’s worth noting that “pre-       for years. As long as customers continue
tally competitive as their counterparts in    paid’s complexion has changed,” Ho add-         to look at such options, that aggressive-
other markets.                                ed. In the United States there is a trend to    ness is not expected to slow.
   As the penetration rate of prepaid in-     get more postpaid-like handsets for pre-
creases, ARPUs tend to go down because        paid customers and that could shift the         RCR Wireless News Editor Tracy Ford contrib-
most of those “higher-hanging fruit” cus-     percentage of U.S. customers on prepaid         uted to this report.

60                                                                                                                    RCR Wireless | July 2010

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