Subject: [NEXTEL-1] Carriers push prepaid handsets, but are they worth it? (NO)

From: Marcel <[email-masked]>
Date: Wed, 26 Mar 2003 12:57:28 -0500

Carriers push prepaid handsets, but are they worth it? (NO)

By Shauna Smith

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.

Pricing

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, ARS found 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 a hassle to refill once airtime runs out: It is not uncommon for consumers to run
out of minutes and not refill them for days or weeks because of the inconvenience of
having to find a computer with Internet access or run out to a retail outlet that sells
refill cards for their service. 7-Eleven and Circle K offer the widest distribution of
refill cards for almost every major carrier with the exception of Alltel. Wal-Mart carries
a decent selection of refill cards as well, although it lacks offerings for T-Mobile,
Boost Mobile, and Virgin Mobile. Beyond these, customers can generally refill their
minutes at the respective carrier stores or via their Web sites as well as some national
consumer electronic, computer, and office supply superstores. TracFone, which certainly
has the widest reach, also enables customers to refill their minutes at outlets such as
Vons, JC Penney’s, Kmart, Lowe’s, Target, Western Union, and many others.

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 four months. 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 20 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.

http://www.serverworldmagazine.com/ars/2003/1q/0325_prepaid.shtml
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