Resale Report

Posted: 09/1997

Resale Report

Prepaid Wireless:
Add Another Arrow to Your Quiver

By Debera Bell-Beam

Despite huge revenue growth_$4.6 billion from 1995 to year-end
1996_only 17 percent of the U.S. population subscribes to a
wireless service, according to the Cellular Telecommunications
Industry Association (CTIA).

Wireless already serves 50 million customers, but with about
30 percent of potential customers refused post-paid wireless
service for bad credit, no credit or hefty deposit demands,
prepaid could be a profitable niche market for long distance
providers looking for a low risk-low capital outlay addition to
their service menu.

There are reasons credit checks, deposits, onerous service
contracts and per-minute cost that end users have stayed away
from wireless. There are also reasons people are now turning to
it safety, emergency, convenience and accessibility, to name a
few.

Prepaid is an emerging opportunity for resale. Providers can
avoid credit checks, monthly bills and collections notices as
well as time-consuming follow up.

And, the service is not just for the credit challenged.
Corporations that want to provide personnel with wireless service
and, at the same time, prevent runaway wireless bills may find
prepaid an economical and convenient solution by setting limits
beforehand. Moreover, international applications for personal and
business travel abound, especially for providers seeking to
establish a global presence.

On a cautionary note, while the market offers a wealth of
opportunity, right now it is very fragmented. As one industry
insider notes, resellers need to watch who they hook their wagons
to.

Hot, Hot, Hot

Prepaid wireless offers low risk with its pay-as-you-go
feature that includes fat profit margins and little up-front
cost. Resellers gross 15 percent to 20 percent on all air time,
says Travis McGregor, executive vice president for San
Francisco-based Telemac.

In addition to offering a sweet margin, prepaid service is an
attractive service menu option that will become even bigger once
wireless becomes more mainstream as industry insiders predict.

"Everybody wants bundled services these days. It (prepaid
services) is another arrow in your quiver," says Juan
Moragas, vice president of sales and marketing for Miami-based
National CommLink. "We’re taking all the risks. We’re
putting in the hardware and providing a turnkey product."
Indeed, the market has "literally exploded in the last year,
due to the realization by a lot of entrepreneurs that the profit
margin is extremely high and it was an untapped market,"
says Stephen Thomas, Orlando, Fla.- based CellComm’s director of
sales and general manager. "It was a marketplace that
everybody had ignored for a long time."

But, that segment, comprised in part by people who either have
bad credit or no credit "need the service. They want the
service, and they will pay a premium for it," Thomas says.
"The best way to get into this market is to partner with
someone who has the technology you’re looking for. We actively
pursue long distance carriers and resellers. We’ll sell it to
them, partner with them, do whatever they want to do.
Unfortunately, they haven’t realized the true potential that’s
out there."

So prepaid is still waiting in the wings as far as resale
goes, but it’s predicted to soon take center stage. Among its
other attractions, emerging technology has combated fraud and
untangled a complex billing system to entice resale and its
lucrative opportunities. And air-time cost has begun to fall as
competition has increased, making the service more attractive to
end users (in 10 years, the average customer’s monthly bill has
dropped to $47.70 from nearly $100, according to the CTIA).

Also, billing for wireless service has been very complicated,
and most carriers and companies have stayed away, McGregor says.
But technology has created solutions that include converted
handsets that actually display the dollar amount of air time
remaining on a prepaid phone account (Telemac’s Debit Technology
embedded into a Phillips Consumer Communications’ cellular phone,
for example).

Finally, opportunities are not limited to the
credit-challenged niche. Some prepaid wireless companies offer
student rates and corporate discounts to keep runaway costs in
check. "We’re finding that although the prepaid arena is
viewed as a credit-deficient arena, we view it as an opportunity
for both credit-deficient and credit-worthy customers," says
Tom Thomason, vice president of sales and marketing for Mill
Valley, Calif.- based Momentum Telecom Inc.

Facts About Wireless

Software vs. Switch

Prepaid wireless comes in two distinct flavors: switch
independent (also called handset or phone based) and switch
based. Phone-based providers use software technology that
converts a regular handset into a prepaid phone. This system also
requires an interactive voice response system or operator-based
update system to provide a way to increase the balance of the
phone. These phone-to-go systems are a very easy way for
resellers to enter the wireless market, says F.J. Pollak,
president of Miami-based Topp Telecom Inc. Topp’s program allows
distribution via private brand or through Topp’s own Tracfone.
"It has no up-front costs, it’s easy to use and it’s secure
and proven in the market. We provide resellers with the same
technology and platform that we use for our own branded
product."

Momentum, offering both prepaid and postpaid and dealer and
agent packages, says its switch-independent phones do not require
a cellular phone number until the phone is activated, allowing
for nationwide retail distribution and sales without limitations.
Offering prepaid wireless for about six months, Thomason says
Momentum has received a lot of wholesale interest from the
traditional prepaid calling card niche.

Momentum points out that the advantage to a switch-based
system is increased distribution channels offered by the local
carrier. However, switch-based systems do not allow users to take
advantage of the automatic roam feature included with most
regular wireless services outside the calling area. And, in some
applications, all calls have to go through an 800 number and
require long distance calling cards in addition to maintaining a
debit account. The platform is expensive, may require
modifications to the switch and is controlled by the carrier.
Some may also require deposits, a prepaid packaged amount and
high air time rates combined with an access fee. Moreover, unlike
switch-based systems, customers on switch-independent systems
cannot churn without first cutting off their service. Thomason
says this feature dramatically reduces churn. "In
switch-based systems, about 50 percent of customer bases are
churning within the first two months of service. What we’re
seeing with our phone-based system and electronic fund
transferring payment structure is only 8 percent churn within the
first two months of activation."

Others, however, opt for the switch-based approach and its
feature advantages. "We find there’s not a lot of
flexibility when you change rates if it’s phone based. It also
limits you to the phone," Moragas says. National CommLink is
in the process of building a 30-switch national network. Its
first two switches are going up in Miami and Philadelphia, and
commercial launch is set for the beginning of this month. Moragas
says the company opted for switch-based because real-time rating
for cellular and wireless is difficult to get otherwise.

Still others, like CellComm, operate in both arenas. One
advantage phone- based systems have over switched systems is
phone-based providers avoid acquiring the underlying carrier’s
T-1 cost, which translates into lower operating costs and
increased profits, Thomas says. Moreover, the software rates each
call, and, because calls are debited against a prepaid account,
the need for a billing and collections system is eliminated.
(Prepaid resellers still require a way to manage air time used by
customers on their lines against air time that has been sold at
retail, but some companies such as Topp provide a reconciliation
package that accomplishes this task.)

CellComm provides a phone-based solution to 84 companies it
wholesales to nationally, Thomas says, but, the company also owns
two switches one each in Puerto Rico and Korea_for international
sales, "because of the unwillingness of the carrier to give
us carrier cooperation with access into its switch."

Access Requirements

To offer prepaid wireless, providers must either have direct
connection, 800/888 access setup or smart card phones.

Fighting Fraud

Fraud has been nightmarish in the national wireless industry,
costing $1.7 million every day through cloned phones alone for an
annual loss of $650 million, according to the CTIA. While
encryption and other security measures are working to reduce
fraud, prepaid service eliminates or at least further reduces the
risk of loss. In cloning, the hacker programs a valid electronic
serial number (ESN) and continues to use the cloned number until
detection. Because prepaid limits time, it also limits access and
loss. "Prepaid cellular allows companies to enter the
wireless market without having the risk of bad debt associated
with post-pay cellular programs," Pollak says.

International Opportunity

Prepaid wireless is a profitable business opportunity in the
international realm as well. As the World Trade Organization’s
(WTO) telecommunications agreement goes into effect next year,
markets will open in 69 countries, representing about 93 percent
of the world’s telecom revenues.

"In the majority of countries access to land-based
systems is limited and expensive," CellComm’s Thomas says.
"Prepaid, especially switch-based, is an extremely good
opportunity for carriers internationally." In addition to
the switches CellComm owns in Puerto Rico and Korea, negotiations
are underway for switch-based systems in seven foreign countries
in the Pacific Rim, the Caribbean Islands, Central and South
America, Africa and the states of the former Soviet Union.

Momentum’s Thomason says his company is looking at
opportunities south of the border. Telemac, likewise, is looking
to the global market but taking a different tack by going
phone-based, rather than switch-based. Telemac expects to begin
its international presence in South America followed by global
implementation, enabled through a recent agreement with Philips
Consumer Communications to develop and market applications for
switch-independent prepaid services worldwide. Philips Consumer
Communications is the result of a union between Philips
Electronics N.V. and Lucent Technologies, a joint venture to
develop, manufacture and market a wide range of products that
include analog and digital cellular phones. Definitive agreements
between Philips and Lucent are slated for completion by next
month.

Customer Service

It doesn’t take a math genius to figure how much money could
be made in the 30 percent who are refused service due to bad or
no credit. "We’re talking about many millions of people who
would probably be interested in prepaid," says David Gusky,
executive director of the National Wireless Resellers Association
(NWRA). But resellers who opt for this niche should be aware of
special customer needs, warns CellComm’s Thomas. "Selling to
a customer who is credit challenged is extremely different from
selling to a customer who can go through the traditional means of
acquiring service."

Sensitivity training and different marketing tactics are two
aspects resellers should consider. "Customers who are credit
challenged do not want to be reminded of it. They know it. We
know it. In the short of it, they want to be treated with
dignity, which is what they weren’t being treated with when they
went to the carrier."

Another important consideration is the loyalty that is
returned for giving someone a break when he’s down and out,
Thomas observes. "The biggest killer of cellular is churn.
We can’t afford to lose any of our customers. We need everyone
we’ve got."

Susanna El-Armale, a marketing associate for CPDI, a
PC-based call processing platform provider in Vancouver, Wash.,
contributed to this article.
For more information , call (360) 694-2977.