Storm Watch

Posted: 07/2000

Storm Watch
Prepayment Puts Unlikely Users into the Path of Internet
Fury
By Tara Seals

There are 150 million Internet users worldwide–a number that is expected to double by the end of the year. While the Internet’s cyclonic momentum appears to be sweeping up everyone in its path, it is missing patches of potential users–the ones who can’t obtain or don’t want subscription-based accounts. Emerging prepayment options are making sure even these groups won’t be left behind.

Prepaid Internet is going to be the most successful prepaid product to date, says Yair
Shalev, president of prepaidCYBER.com (www.prepaidcyber.com). “I still think there are a few more months to go before it explodes. But it’s going to, like wireless did. The Internet is the future.”

He may be right. In the last six months, prepaid Internet provider Pine Creek Systems Ltd.
(www.netaccesscard.com) claims its web traffic has grown by 20 percent to 30 percent per month. Pine Creek manager Roger Schultz says he knows of at least 20 new prepaid ISPs that launched during that same time–some of whom have begun advertising without a working product. And according to sources familiar with the companies, big prepaid players such as GRIC Communications Inc.
(www.gric.com) and Blackstone Calling Card Inc.
(www.blackstonecallingcard.com) may be poised to enter the prepaid Internet access market.

“This is going to be huge,” Schultz says.

Service: ‘ISP With a Twist’

Prepaid Internet access functions the same way as any other prepaid service. A user purchases a card, dials an access number, enters a PIN and is online. Access is often priced by the minute or hour like other prepaid services, and a customer is automatically logged off when the card burns out. According to the average prepaid ISP website, typical per-hour prices are anywhere from 57 cents to 95 cents, and can be as low as 1 cent per minute with a bulk purchase.

However, says Doyal Bryant, chairman of the National ALEC Association/Prepaid Communications Association (www.nala-pca.org), this is an inefficient model. He says that in order for prepaid Internet to have real appeal, the only difference between prepaid and conventional access should be transactional. “The cards should be priced for unlimited monthly access, with the only difference to the consumer being in paying for the month ahead instead of the month before.”

Founded in 1997, Pine Creek is one of the largest prepaid ISPs. According to Schultz, prepaid access also must be competitive with the “$19.95 a month” unlimited access most consumers expect from ISPs. “I see an awful lot of companies in the U.S. trying to sell access by the [hour],” says Schultz. “But really, customers want the same product everyone else is getting, just on a prepaid basis.”

PrepaidCYBER.com is one company that has adopted the unlimited access model. The customer’s 30 days of access, priced at $16.99, begins with the first logon. The company also offers full portal services, web-based e-mail, stocks, news and other “channels,” further decreasing the gap between prepaid and traditional Internet accounts.

Shalev also explains that most prepaid Internet firms purchase PoPs and bandwidth from large dealers such as UUNet (www.uunet.com) or PSINet Inc. (www.

psinet.com), and says there is no difference between prepaid and traditional ISPs in terms of access quality.

“We’re a normal ISP with a twist,” he says. “We have the same system and service as everyone else, and virtually no busy signals. It’s just that we don’t require a credit card.”

Some prepaid ISPs are getting away from the 800 access numbers so common to prepaid platforms and are moving increasingly toward local PoPs.

According to Shalev, when consumers are used to unlimited minutes at a low cost, offering an expensive 800 access number is prohibitive for the provider. Prepaid CYBER.com in particular has close to 1,700 local access numbers covering 49 states.

Markets: Expanding the Scope

The prepaid market has traditionally been populated with credit-challenged consumers, and prepaid Internet has its share. According to Shalev, there are about 15 million people who have computers with modems but can’t get online because of credit problems.

Although the credit challenged represent a large portion of the prepaid Internet access market, computer ownership is a gating factor. Providers say prepayment appeals to other market segments such as travelers, students, the budget conscious and the privacy seekers. “You’re hitting important expanding markets with this,” says Shalev. It’s really for everyone, not just the credit challenged.”

While prepaid calling card providers often rely on mom-and-pop corner stores as retail outlets for their cards, prepaid Internet providers prefer higher end stores more likely to cater to computer owners. Outlets such as Walgreens and other drugstores would be a more successful distribution channel, says Shalev.

Month-to-month access allows the consumer to try before they buy, but it also appeals to people who prefer to do business without commitments, he adds. Avoiding a year contract with monthly credit card charges attached is attractive to many consumers.

This “no-strings” option also offers consumers anonymity. Because prepaid access can be sold for cash in a retail environment, it’s virtually untraceable, says Shalev. “Prepaid ISP generally requires no information about the user.”

Travelers and students make up another important market. Wired travelers have few choices: America Online Inc.
(www.aol.com) is one of the very few ISPs that allows access outside of a home area, says Schultz. Also, travelers often contend with high hotel surcharges, making dialing a long-distance access number unpleasant.

Chart: A Prepaid Provider Snapshot

College students, the majority of whom could be said to travel at least nine months out of the year, also are target consumers. Students attending schools that do not
provide free access can benefit from the Internet’s research capabilities without
getting roped into a yearlong commitment or having to use a credit card.

“This is more of a ‘control pay’ option,” says Bryant. “Let’s say my daughter or son is off to college. Instead of giving them control over a credit card, we’ll just prepay it. Or if I’m traveling and I just need remote access for a short period of time, this is perfect.”

International Growth

Prepaid Internet is making inroads outside the United States, too.

That success is somewhat a function of the traveler market, says Shultz. “For instance, Bahrain is the home of the American fleet. There are a lot of British and American tourists as well as people from Saudi and other places in the Middle East. So we’re able to offer prepaid Internet in retail outlets with great success.”

Bahrain Telecommunications Co. (Batelco), the national telecom of Bahrain, has been using Pine Creek’s platform since 1999 to provide prepaid Internet access in the Middle East. Others, such as Jabatan Telekom Brunei, the national telecom of Brunei, are just now starting to usethe platform.

International governments also are a driving force in proliferation of prepaid Internet in their countries. According to Reuters, Venezuela may introduce prepaid cards to allow Internet access for low-income families.

Three-quarters of the country’s population lives in poverty, and there are roughly 750,000 Internet users among its 24 million people. Shalev sees a similar opportunity in Argentina, where PrepaidCYBER.com hopes to launch its product in August. “We had about 1,000 agents there, with their hands open asking ‘when,'” he says. “There’s a real opportunity there with people who would
otherwise never be given access.”

Distribution: Resale, Licensing Take Off

To reach these customers, most prepaid ISPs distribute their products through agents and retail outlets such as rent-to-own and drugstores, and market the products via their websites. With no required hardware or software elements on the client side, co-branding, resale and licensing are also emerging distribution strategies.

Pine Creek, for example, has an extensive resale program and claims that a majority of prepaid Internet access companies are either reselling Pine Creek’s accounts or licensing its services. Resellers can purchase accounts for anywhere from $10 to $13.75 a month. This allows resellers to make a 40 percent margin and still be able to offer prepaid Internet access for less than the $19.95 most consumers are now paying for a subscription.

To further aid resale efforts, Pine Creek’s PrepaidInter.net website
(www.prepaidinter.net) provides e-mail and technical support in a generic format so that resellers can
create a branded version.

According to Bryant, ISP Level 3 Communications Inc. (www.level3.com) also offers a product for wholesale. The unlimited access turnkey product is positioned for CLECs to resell and includes local access, customer support with an 800 number hotline and e-mail. The wholesale price is competitive, he says, and the end user pays a lower price ($16-$18 per month) than for AOL.

Co-branding also is emerging as a distribution method.
PrepaidCYBER.com, for example, is in negotiations with an airline company to provide branded access for its traveling employees, and Shultz says branding prepaid access with a particular store’s name or logo is routine. According to a source at Rent-Way Inc.
(www.rentway.com), the world’s second-largest rent-to-own company, its subsidiary, dPi Teleconnect LLC
(www.dpiteleconnect.com) has signed a contract with Dell Computer Corp.
(www.dell.com) to offer computers with prepaid access in more than 1,000 Rent-Way locations under the Dell name.

ISPs co-branding promotional cards can offer the value-added benefit of guaranteed web traffic to their partners. The co-brander’s website can function as the home page every time the customer uses the card. Because site hits are
trackable, this marketing tactic provides a measurable advertising return for the promotional partner, unlike billboard or print advertising.

Tara Seals is agent channel editor for PHONE+ magazine.