Wednesday, December 13, 2006

Prepaid Cellular Carriers Push Prepaid Handsets & Services!

Carriers push prepaid handsets & Services!

Amidst a tapped out base of contract-based subscribers, the prepaid cellular phone market has been receiving much attention from wireless operators who are now starting to more heavily promote their prepaid phones and service offerings. Some, including Cingular Wireless and Alltel, have recently launched whole new branding campaigns around them. In addition, two major Mobile Virtual Network Operators (MVNOs), Virgin Mobile and Boost Mobile, have joined TracFone in providing prepaid-only services within the last year.

The end result is many more prepaid phone options available to consumers, strengthening the prepaid appeal to individuals who may be weary of signing up for lengthy contracts. Carriers will likely do much more to promote prepaid in the near term. However, from a U.S. consumer perspective, they are not always the right options, and thus there many factors to consider for carriers looking to capture market share.

Target Market

Traditionally, the prepaid market has been defined as youths, such as adolescents under the age of 18, and credit challenged individuals who often do not qualify for an annual subscription. Of course, those who plan to use their phone very infrequently or simply do not want the obligation of reoccurring monthly charges for one or two years often opt for a prepaid phone as well. So what other factors will customers need to consider in deciding whether a prepaid phone service, like the ones above, is the right for them? First, how often and when does the customer plan to use the phone? Will the phone be used when traveling, and if so where and how often? What features are important? Is a one-year contract even an option? When looking at a specific carrier for a prepaid phone, customers should also consider what how much it costs and how easy it is to refill minutes.


In general, the cost of a prepaid phone is almost always higher than or equal to the same phone with a one- or two-year service plan. Based on a survey of carrier and national dealer stores in 43 major U.S. markets in February, that nearly 40 percent of the prepaid phone options available through carrier stores and national dealers were more expensive than their contract-based counterparts, while another 48 percent were exactly equal.

Some specific examples include the Nokia 5185i, selling for $89 with Alltel's Prepaid Wireless service at Alltel stores versus $29 with a one-year service agreement. The Nokia 3395 also sold for $99 with prepaid service at Cingular Wireless stores versus $49 with a one-year service contract. Additionally, T-Mobile offered the Nokia 3390 for $99 prepaid versus $49 with a one-year contract, and Verizon Wireless offered the Motorola T720 for $299 prepaid compared to $259 for contract customers. In fact, in February Verizon Wireless and its national dealer stores promoted the carrier's prepaid service, offering up to 7 different handset options, depending on the local store visited, four of which were priced between $10 and $40 more than with a one-year service agreement. Verizon generally offers customers the option to purchase any wireless phone with prepaid service but requires them to pay an activation fee, whereas phones such as the Motorola V120c, that are featured as part of a prepaid bundle (including initial airtime) usually do not require an activation fee.

Handset Options
Overall, handset options are far fewer for prepaid customers. For example, there are currently only two choices of handsets with Virgin Mobile in the U.S., both very basic Kyocera models, or five options with Boost Mobile, all Motorola iDEN-based, as the operator uses Nextel's network in California and Nevada. TracFone customers may have a choice of up to three similar Nokia phones. Additionally, most national carriers, including AT&T Wireless, Cingular Wireless, T-Mobile, and Verizon Wireless, generally only feature three of four models with prepaid service, depending on location.

Refill Minutes
In contrast to signing up for a one- or two-year service agreement, prepaid phones can also be refill once airtime runs out: It is common for consumers to run out of minutes refill them at local corner store, Now retailers can offer the widest distribution of refill cards for almost every major carrier, customers can generally refill their minutes at the respective merchant retail store.

Cost Per Minute
From a cost per minute standpoint, prepaid services will almost always be more expensive than if the customer has a postpaid service agreement. Even if customers choose a prepaid phone for emergency use only, they should remember that all carriers have airtime expiration dates that vary between two and one year. T-Mobile even has a national refill card option for 30 minutes for $10 (33 cents per minute) that expires in 15 days. Not only is the cost per minute very high, but if those minutes aren't used in two weeks they're lost. One thing that keeps the overall airtime cost high for prepaid services in the U.S. is that customers pay for both incoming and outgoing calls. In almost all European countries, customers with prepaid or post-paid service plans do not pay for calls received. This calling party pays (CPP) system makes prepaid service much more attractive. For one thing, the phone still works even if the customer's airtime has been used up, as he or she can still receive calls.

While the cost per anytime minutes for regular calling plans often turns out to be in the just single digit cents per minute and rarely exceeds 15 cents per minute on plans priced $30 per month and up, the cost per minute for weekday minutes on a prepaid plan is almost always greater than 10 cents per minute. In fact, in many cases, it is much higher than 20 cents, as service providers such as AT&T Wireless and TracFone often charge consumers over 50 cents per minute depending on which refill card dollar increment they purchase.

Virgin Mobile is clearly the low price leader from a cost per minute standpoint, charging customers 25 cents per minute for the first 10 minutes and only 10 cents per minute thereafter. At 10 cents per minute and no additional long distance or roaming fees, this service is the most competitive with regular contract-based services. However, even at just 10 cents per minute, this is much higher than many regular calling plans.

Among the most expensive prepaid service providers are TracFone and AT&T Wireless. However, AT&T Wireless users receive better rates as they purchase more expensive airtime cards. For the most expensive card, priced at $100, customers pay only 22 cents per minute. However, with the $25 and $50 cards, customers still pay 65 cents and 50 cents per minute, respectively. TracFone, following suit with AT&T's high rates, also charges roaming fees of double its airtime rates when customers are outside of their local calling area.

Value Added Features
Finally, if value-added features like color screens, text messaging, and MMS matter to customers, there are very few prepaid phones that will be satisfactory in the U.S. For color screens, customers can opt for the Motorola i95cl ($299) and Boost Mobile service or the Motorola T720 ($299) with Verizon Wireless. Of course, the options are more limited if the customer does not live in California and Nevada, the only two states where Boost Mobile is currently available.

Assuming the customer has a two-way text messaging phone, most carriers provide for SMS messaging, the exceptions being Alltel's original Prepaid Wireless service and TracFone. AT&T Wireless charges 10 cents for each message sent, while text messages received are free; this is fair, as it is the same rate structure as applies to its regular calling plans. Cingular Wireless and T-Mobile are slightly more expensive at 10 cents for each message, sent or received. Alltel's Simple Freedom is the most expensive at 80 cents per message, sent or received, and Verizon Wireless customers pay the least at only 5 cents per message, quite a dramatic decrease compared to Alltel, for each message sent or received. Boost Mobile has a unique pricing structure whereby at 20 cents per day, customers may send an unlimited number of text messages. Making the most out of the SMS messaging, Virgin Mobile, equally owned by entertainment giant Virgin Music and Sprint PCS, offers customers a wide array of SMS services in conjunction with MTV and VH1. These creative services include MTV and VH1 alerts, special vote programs for music videos, all for the same rate as Cingular Wireless and T-Mobile, at only 10 cents per message sent or received.

Downloadable ring tones are about 99 cents each for most carriers; although they are not available for customers of Alltel's original Prepaid Service or TracFone. Downloadable games with prepaid service, however, are only available through Cingular Wireless and only in its TDMA markets as well as through Verizon Wireless and only with the Motorola T720. Similarly, the only prepaid service provider to offer wireless Web access is Boost Mobile at 20 cents per day.

Capturing Market Share
The potential for prepaid phones in the U.S. seems to be great, and carriers are taking action. Within the last few weeks, we have seen carriers like AT&T Wireless and Sprint PCS increase the cost of regular postpaid wireless services. This is also likely to happen across the board, as calling prices have hit rock bottom and carriers realize the need to slowly increase prices.

We will also likely see carriers reduce airtime costs for prepaid calling in efforts to boost this market. However, customers will still likely have to pay higher prices for phones and generally settle for relatively basic phone models with few value-added features. The risk that carriers run with the prepaid market is that prepaid customers have much less loyalty and are likely to have greater churn than those that have committed to one- or two-year service agreements. As such, carriers do not want to subsidize handsets as much for prepaid customers in order to minimize their loss if the customer leaves within the first few months.

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Friday, December 08, 2006

MVNO'S Preapaid Cellular Providers are Gaining Customers

There are now more than 250 MVNO's worldwide. By 2005, more than 50 MVNO's were operating in the European Union with about 42 providers were operating in the United States. Total MVNO revenue in the United States is expected to rise from $9.6 billion this year to $29.6 billion by 2010.

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