US Carriers Look to Prepaid For Growth
By Carlo Longino, Wed May 04 23:00:00 GMT 2005

While European carriers often decry their high number of prepaid users, several American carriers are looking to grow that segment of their business.

About 7 percent of top US carrier Cingular's customers are prepaid, reflecting the general mix in the US as well as a the contrast between it and Europe, where some countries like Italy have over 90% prepay customers. Vodafone, for instance, has 60% prepaid subscribers worldwide. But Cingular is joining other American carriers in beefing up its prepaid offering as a way of continuing subscriber growth.

European carriers often decry their large prepaid user bases, because they can be a drag on results. When T-Mobile gave a strategy presentation at 3GSM earlier in the year, it highlighted eliminating prepaid subsidies as a key for future growth, CEO Rene Obermann saying that all they really do is subsidize low-cost rivals. He's got a point -- low-cost, no-frills MVNOs like EasyMobile don't even sell handsets, allowing them to set prices way below full-service operators. And of course the whole point of prepaid service is that there's no contract, making the revenue stream unpredictable and the chances of recovering a handset subsidy not always certain.

In the US, T-Mobile and Verizon have been pushing prepaid pretty hard of late, and Nextel has been successful with its youth-focused Boost carrier-within-a-carrier. Most of the efforts, Boost in particular, are being aimed at young people. But they are still falling into many of the traps that gave an opening to virtual operators like Virgin Mobile UK by offering off-target services and confusing tariffs at prices that aren't particularly attractive.

Cingular will emphasize the former AT&T Wireless "Go" service, which bills users an established amount at the beginning of each month. It also plans to let users get any of its phones for prepaid services, a big departure from the norm, as most carriers limit the prepaid phones they sell to the lowest entry-level models or last year's leftover cool devices. Presumably, the devices will be pretty expensive, since, like other carriers, Cingular will have no guarantee of making back its subsidy. It's a questionable strategy, since prepaid often attracts budget-conscious users.

The real question, though, is if full-service carriers can win the prepaid battle against MVNOs. There's a lot of overhead that eats into the profitability of prepaid customers on traditional operators, and the price pressure exerted on them by their virtual rivals doesn't help matters either. Traditional operators do business like, well, traditional operators. Look at Verizon's pay-as-you-go tariff as an example: the 10-cent per-minute charge isn't bad at all, but it's negated by a 99-cent charge for each day a call is made. Orange UK provides another example, with what has to be one of the most complicated prepaid offers out there. Compare these to 7-11's easy 20 cents per minute (PDF), or Fresh's tariff in the UK: simple, straightforward and relatively cheap.

That hits on one of the sticking points of prepaid -- it really isn't cheap at all. Comparable airtime on contract comes much, much cheaper. But for someone who can't or doesn't want to spend much money, prepaid service offers about the only opportunity to not have to spend $30 or 30 pounds or 30 euros a month, but rather whatever they can afford. So perhaps operators could find some different or more creative solutions to attract these users that will otherwise get taken by cheaper, better and more nimble MVNOs.

Or, they can just leave them to the virtual operators and make their money through them. Sprint PCS follows such a model, eschewing its own prepaid service in favor of just selling Virgin Mobile service at its retail locations.