Prepaid Mobile Gains Ground

Mobile broadband arguably represents the single biggest revenue opportunity for U.S. mobile providers, at least in terms of organic growth. The second-biggest opportunity for some providers is buying growth through acquisitions.

Market share shifts probably are about the third biggest potential source of revenue growth.

But the prepaid segment now has assumed higher importance as the post-paid segments saturate. Recent gains by prepaid providers over the last six months suggest that many mobile users have decided they can save money by shifting from post-paid to prepaid.

Prepaid mobile traditionally has been seen as a relatively low-value segment by the largest providers, in part because of lower average gross revenue, in part because of more-challenging credit worthiness issues and in part because there simply were other segments to sell to.

Some years ago, however, as penetration of working age adults began to saturate, mobile operators realized the major untapped demographic was teenagers, and “family plans” have been one of the major marketing innovations designed to capture those potential users.

Researchers at Ovum note that prepaid recently increased its share of gross and net subscriber additions and that the prepaid carriers recorded the highest quarter-on-quarter subscriber growth since the third quarter of 2007.

Up to this point, MetroPCS and Leap Wireless, or “niche” providers such as Tracfone and Virgin Mobile, have dominated the prepaid market segment, which deliberately was positioned by the major providers as an inferior offering compared to postpaid service, in part to sustain demand for postpaid accounts.

But that left MetroPCS and Leap to establish themselves are significant providers of prepaid mobility.

But Ovum researchers say prepaid now is viewed as a growing and increasingly valuable segment because of the strengthening demand, particularly in the hybrid segment of the market, where customers pay upfront for either a bucket of usage or unlimited service.

Traditional pay-as-you-go has the greater share of prepaid connections, but hybrid plans seem to be getting most of the renewed attention.

T-Mobile and Boost (Sprint’s prepaid division), for example, are targeting prepaid growth using new hybrid tariffs.

Virgin Mobile has realigned its pricing to compete head on with Boost while the established players in the hybrid market, MetroPCS and Cricket Communications also are waging a new price war, Ovum says.

The big issue is how sustainable the change is. It is not surprising that “more affordable” plans are attractive in the midst of a recession. What remains unknown is whether there is a shift in demand related to prepaid services that will continue even after the recession has run its course.

The hybrid plan attraction for service providers is clear enough: it provides steadier cash flow. Traditional prepaid customers pay by the minute or by the day and then “top up” their accounts as their balances approach zero. That means less revenue predictability.

Hybrid subscriptions give unlimited monthly access to basic mobile services. On a hybrid plan, subscribers can make an unlimited number of calls at any time and on any network and are designed to encourage high usage levels and regular spending. The payment plan resembles postpaid, in that respect.

Still, recent moves by some of the major carriers suggest they still are reluctant to offer too much value for their prepaid plans, and will be careful about cannibalizing their existing postpaid subscriber bases.

That said, more aggressive moves should be expected if the prepaid trend continues unabated, and especially if the end of the recession does not dampen prepaid growth.

One clear sign of prepaid’s new importance would come if one of the four biggest providers, especially AT&T or Verizon Wireless, were to acquire Leap Wireless or MetroPCS, providing a way to participate in prepaid growth while maintaining the positioning of post-paid brands. Sprint already has such positioning with Boost Mobile.

The other sign would be significant marketing resources put into new hybrid plans by any of the largest four U.S. wireless providers, without creation of a separate brand.

Either way, some new developments are likely if prepaid subscriber growth continues at anywhere near its current trajectory,
over time. IP