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Prepaid Mobile Phone Service
Is the Stigma Really Gone?

In the mobile phone world, pre-paid service plans have been associated with less-than-desirable subscribers: especially those with bad credit or no credit at all. Some might even say that the communications divide, or chasm, has been exemplified by the mobile phone plans consumers choose.

Is the stigma of being a pre-paid cell phone user a thing of the past?

Let’s consider the facts: Pre-paid calling plans are used by the majority of mobile phone subscribers globally. This is not so in the United States, where only a small number of subscribers use pre-paid plans. Subscribers with the highest monthly bill, or ARPU (Average Revenue per User), tend to have post-paid service plans (i.e., the bill arrives from the carrier after monthly usage has been tallied). This group of consumers represents well over 90 percent of all subscribers in the U.S. today. In fact, U.S. ARPU levels are the second only to those found in Japan.

The landscape for pre-paid mobile phone services from carriers used to be very generic. Historically, prepaid wireless plans have been considered very expensive, when viewed on a cost-per-minute basis. In addition, pre-paid handsets had always been low-cost devices -- they looked cheap and they were packaged cheaply, as well. The plans themselves were not designed to be consumer friendly. Many carried any combination of consumer-unfriendly baggage -- from minutes that expire, to daily/monthly fees, to limited network coverage and roaming capabilities, and difficult or confusing methods to ‘top-up’ (i.e., pay) for additional minutes.

The landscape is changing

The simple fact is that penetration of mobile phones in the United States trails that of most developed nations. There are several reasons for this situation, but the one that many carriers are focusing on now is the low adoption of pre-paid mobile services.

Changing consumer attitudes, however, is not a simple process. Before they accept pre-paid plans, American consumers must look past their “have-nots” stigma. When Virgin entered the U.S. market in a joint venture with Sprint, they launched the first high-profile pre-paid MVNO (Mobile Virtual Network Operator), Virgin Mobile. Primarily targeting the youth segment, Virgin Mobile began to transition pre-paid plans from ”embarrassing” to “cool”. Boost Mobile, a pre-paid quasi-MVNO owned by Nextel (now Sprint-Nextel) launched with the same youth target segment. Their differentiator was push-to-talk. Pre-paid sales increased from 8 percent of new sales in 2002 to 12 percent of all sales in the first half of 2005, partly driven by the growth of these two key players.

Devices have also changed with the times. Greater general acceptance of pre-paid plans is reflected in the migration of features and functionality from post-paid plans into the pre-paid space. Among the attributes found on pre-paid phones sold in the first half of 2005 were the following:

More than 45 percent had color display screens
More than four percent had Push-to-Talk functionality (from Boost)
More than four percent had integrated cameras

Both pre-paid MVNOs, Virgin and Boost Mobile, are now members of the ‘Million Subscriber’ club. Their subscribers have been very active in generating additional revenue by adopting application and ring-tone downloads. Many additional content-based pre-paid MVNOs have been announced -- with Disney and ESPN being the two highest profile entrants.

The success of these MVNOs has not gone unnoticed by the major carriers. The mobile phone industry is now looking toward pre-paid service plans to provide subscriber growth just as new post-paid subscribers are decreasing. The major carriers have launched their own marketing promotions to target pre-paid users: Prices have fallen, phones are better and more minutes can be obtained almost anywhere.

All told, the pre-paid subscriber has suddenly become a hot property for both carriers and MVNOs. It’s therefore safe to say that the pre-paid ‘stigma’ is finally gone.

— Glen R. LeBlanc, Research Director, Wireless Services