Prepaid wireless service could spur price war
The prepaid cell phone market has finally hit the U.S. in a big way as economically strapped consumers flock to inexpensive pay-as-you-go services. The result will likely mean that big cell phone providers may be forced to slash prices on contract service plans to keep consumers from defecting.
This is good news for consumers, who could see lower prices on both prepaid and post-paid service plans. But it is very bad news for cell phone operators, which make more money from their post-paid customers than they do from prepaid customers.
Prepaid cell phone plans, which have been very popular in Europe and other parts of the world for several years, allow consumers to buy a phone at full retail price, without committing to a contract, and pay for service in advance. By contrast, post-paid services require consumers to sign a one- to two-year service contract, and their usage is billed on a monthly basis. In exchange for signing a contract, wireless operators often subsidize the cost of the phone.
For years, the post-paid business model has dominated the U.S. cell phone market, providing strong growth for U.S. wireless operators. Meanwhile, the prepaid market in the U.S. has been largely left to consumers who are young, price-sensitive, or considered credit risks. While all of the major cell phone operators offer prepaid services, smaller operators, such as Leap Wireless, MetroPCS, and Virgin Mobile USA, have largely dominated this market.
Now, it looks like the tide is turning. First-quarter earnings from all of the major cell phone operators indicate that consumers are flocking to new all-you-can-eat prepaid plans instead of the contract-bound post-paid plans.
"Post-paid (wireless service) growth is arguably over," Craig Moffett, a Sanford Bernstein equities analyst, said in a research note published this week.
Post-paid subscriber growth came to a "virtual halt" in the first quarter of 2009, Moffett noted. He estimates that net additions of post-paid customers across all major carriers fell 58 percent from the first quarter of 2008 to the first quarter of 2009.
Meanwhile, prepaid customers are on the rise. A year ago about 50 percent of new cell phone users signed up for prepaid cell phone service, Moffett said in his note. But in the first quarter of 2009, about 80 percent of cell phone subscriber growth came from prepaid plans.
Sprint Nextel, which reported results on Monday, is the most obvious example of how things appear to be shaking out in the wireless industry. Sprint added about 674,000 new prepaid subscriptions in the first quarter, according to Moffett's estimates. But the company lost nearly 1.25 million post-paid subscribers.
Driven by bad economy
The boom in prepaid cell phone service is likely being driven by the sour economy, and by the fact that providers, such as Sprint and Virgin Mobile USA, have recently introduced $50 unlimited voice services. Sprint's Boost Unlimited service also includes unlimited text messaging and unlimited wireless Web access. Leap Wireless and MetroPCS also offer similar all-you-can-eat plans.
Sprint's service, offered through its subsidiary Boost Mobile, uses excess capacity on the former Nextel iDEN network. So the low-cost service didn't require an expensive network upgrade. The service launched in January, and it was deemed a huge success. Sprint executives said Monday the initial uptake of the service was more than the company had expected.
It seems the $50 price tag could be too good for some consumers to pass up. Comparable post-paid service plans offered by AT&T and Verizon Wireless cost $99.99 a month. And Sprint's own "Simply Everything" plan, which includes unlimited Web surfing and e-mail in addition to unlimited voice and messaging service, costs $99.99 a month.
Sprint's CEO Dan Hesse said during the conference call with analysts and investors that there "is no question that there is a movement toward prepaid." But he was careful to point out that he doesn't see the prepaid market cannibalizing the more lucrative post-paid business model. In fact, he said that the prepaid market is actually expanding the entire wireless market.
"Some of these prepaid customers are people using cell phones for the first time," he said. "So I think overall, as an industry, we will see more revenue growth than we would have seen without prepaid services."
But with more than 80 percent of the U.S. population already using a cell phone service, it's getting harder to sell wireless service to people who don't already own a cell phone. That means that wireless operators are already trying to steal each other's existing customers.
The problem for wireless carriers is that not all cell phone customers are equal. Moffett's analysis indicates that prepaid customers typically generate less than half the value of post-paid subscribers over time. And the reason is simple. On average, prepaid customers generate less revenue per month than post-paid customers. They are more likely to switch back and forth between service providers. And they typically use more network resources, averaging around 2,000 voice minutes per month compared to about 1,000 minutes per month, than post-paid customers.
As a result, carriers, such as Sprint, that are growing their prepaid subscriber base at the expense of their post-paid customers, will, over time, make less money, Moffett reasons.
But regardless of whether carriers want to offer more prepaid services, the troubled economy is likely accelerating the trend. As more Americans lose their jobs and household budgets get tighter, some cell phone subscribers are starting to opt for cheaper prepaid cell phone plans when their current post-paid contracts run out.
A recent study conducted by Opinion Research Corporation (ORC) for the New Millennium Research Council (NMRC) suggests that many people are already canceling their cell phone plans and getting prepaid cell phones as a reaction to the financial crisis.
It is clear that the current trend is probably bad for wireless operators. But if more wireless operators match Boost with their own $50 all-you-can-eat prepaid service plans, a pricing war could emerge, which will likely benefit consumers. And it's very likely the price drops won't stop at the prepaid plans. If carriers start losing even more post-paid customers, they may also be forced to reduce the price of their contract-based all-you-can-eat plans.
But because most prepaid services only offer basic phones, the price war may not immediately affect more advanced smartphone sales and service plans. Still, as the cell phone market reaches saturation, wireless operators can't afford to lose any subscribers.
Marguerite Reardon has been a CNET News reporter since 2004, covering cell phone services, broadband, citywide Wi-Fi, the Net neutrality debate, as well as the ongoing consolidation of the phone companies. E-mail Maggie. 
The cell-phone carriers (and communications service-providers in general) charge far too much for what they provide! I absolutely love the new communications services such as cell-phones, but the services-costs are excessively high.
I refuse to go beyond about $25/person (on a family plan), and I'm by no means "cheap". I'll forgo fancy clothes and home furnishings for technology, but the current cell-phone pricing is a bad value.
I'd love to have data-services so I could get a "smart phone", but again, I refuse to go beyond $25/mo. Cell-phone companies can keep their bogus subsidies, which we pay many times over in service-charges!
ATT charges their "post paid" customers who don't subscribe to a text messaging package 20 cents to send or receive 160 bytes. ***?
Totally outrageous, and the Public Utilities Commission, whose job it is to watch out for this stuff, is nowhere to be found. These carriers deserve to have defections. We need more competition like this.
"I'd like this phone."
"You need to upgrade to the data plan."
"How about this one?"
"Data plan. All of the phones along this wall require the data plan."
"But I don't need it."
"Sorry, but that's the rules..."
So, if I only receive calls I don't even need to put money into my account.
When consumers are REALLY strapped, they'll start to assess whether they really need to call their spouse on the other side of the store, whether they really need to monitor e-mail 24/7/365, whether they really need Internet access from their car, whether they really need to send text versus a make quicker phone call. Then, they'll come to the same conclusion I did a couple years ago: A simple voice phone, which allows the rare emergency and occasional time-critical calls, is really all anyone "must have." --mark d.
I am hoping for a big change in how mobile providers charge. I don't understand the problem with being able to choose any phone (provided it works on the network - GSM vs. CDMA), paying a monthly standard fee (like $9.99) to maintain access and service, then being charged for what you use, be it voice or data. Because of my choice of phone, I have to have a contract, and the lowest voice minute package is 450 minutes. I might use 50-60 of it a month, usually less. I have well over 5000 roll-over minutes now that I'll never use, but I use the h3LL out of my unlimited text and data. I would prefer prepay, but cannot due to the hardware I prefer. I am considering stepping down to prepay now and will have to again carry more than one device with me, which blows.
Perhaps the mobile companies could offer customized plans: Basic plan ($9.99), per minute voice ($0.10) or packages (500, 1000, etc.), per kilobyte or packages or unlimited, etc. You tailor your plan based upon your needs. If offered I'd switch so fast.
To fumelo: the reason carriers don't offer what you're looking for is because their goal is to increase ARPU (average revenue per unit). If they gave you the light-use plan you seek, they wouldn't be charging you as much. They also lock down devices here in the U.S. so they can nickel and dime you with their overpriced services. You should be able to go on prepay with a GSM handset though; I don't see why that wouldn't work. Also, small prepay services (airvoice, pageplus) are usually a better value than the major companies (t-mobile being the exception -- their prepay is a good value).
1gig for £10, 3 for £15 and 7 for £25. Very useful when i am away, but a contract would be too much.
In fact, this is the exact same reason i wouldn't pay for an MMO either, unless they start allowing pay-as-you-play methods, i just won't play games that often, even my own. (which is why i would never make anyone pay)
Unless of course you run your business through the internet and must be connected as much as possible.
1 big company buys them out and then raises the prices after they merge or some new law to protect consumers and they inflate prices.
Same ole same ole.... same old game..... drop price to get tons of consumers hooked then once saturation takes hold then mergers happen.
History sucks for consumers.
I am sick to death tired of being indentured by expensive contracts, early cancellation fees and grotesquely expensive phones. By the way, the per minute fees for US cell services are immensely more expensive than in most of Europe.
Yes we are getting ripped off in a big way. I bought a phone for my 17 yr old's birthday yesterday. According to a popular "what it cost to manufacture" web site, the phone I bought costs less than $60 to manufacture, but the cell phone provider charged me almost $400. No wonder people are enraged and fleeing to prepaid services.
I for one would LOVE to see a revolution in cell phone services in the US. The general public has been getting needlessly ripped off because they don't know any better. Time for change, time for the big cell providers to wise up. Nothing worse that corporate america gouging the little guys while using advertising to convince them that they are saving money. Lacks integrity, doesn't it?
Consumers are smart and realize contracts are a ripoff. They want cheap phones that do what they want. So a comment to the mobile carriers. The gravy train has left the building you need to be competitive of fail. Consumers are now empowered.
Oh I have one more immature thing to say to Sprint. Ha Ha Ha look who is crying now you Contract Peddling Dealer!
The comment, however, regarding postpaid subscribers being more profitable is not necessary true. Though historically prepaid has been geared towards the cost conscious, and hence, they spend less, with the shift in the general population, those figures will change. Moreover, as prepaid phones are less heavily subsidized, assuming the service is good and customers are happy and stay long enough, their profitability will actually be higher than with postpaid. i.e. Lower CPGA (cost per gross add).
Carriers in other countries like Europe are able to make money with a high penetration of prepaid; US carriers need to adapt. Also, given that handsets are generally getting cheaper, and prepaid providers are starting to offer smartphones and the like, postpaid is truly on its way it. It simply no longer makes sense.
Would you please investigate the billionaire Carlos Slim of Mexico of the TELMEX/TELCEL fame providing cell services worldwide. I live in Mexico and use Telcel and Movistar prepaid cell services and despite his policies he has an incredible business model. if you investigate his rates ,cost of unlocked phones with sim cards, his recharge card and instant minutes model you will see that he makes a ton of $$$$$$ and provides the world's worst service. BUT his business model works and brings money $$ in from everyone in the country at the pace of $20/$30/$50/$100/$200/$500 pesos per purchase which is reasonable for the skimpiest budget ,you buy what you need or want when you want or need it.
He also has monthly plans etc. but the majority of customers are on buy what you need. We are also vendors of the recharge minutes and phone cards for TELCEL and Movistar.. You would be surprised at his business model. Study it and report on it.. It wouldn't hurt some of the US cell boys to adopt this model if they need revenue and fast and tons of customers.....thanxxxxx.(ps. rate of exchange is about 12.5 pesos per dollar now.) you might compare his mexico model to his US model and the differences of the effect of Us law on his model....Interesting!
- by May 17, 2009 7:04 PM PDT
- Get a Tracfone!
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(22 Comments)My wife and I have been using it for years!
We spend $20 apiece for 3 months service.