Channel Partners

May 1, 2000

12 Min Read
What's in a Name?

Posted: 05/2000

Growing Wireless Appetite
Following the Land of Pasta, Pizza, Pesto and Prepaid?

The land of pasta, pizza and pesto is full of prepaid wireless subscribers. Some 15.2 million Italians–74 percent of all Italian wireless subscribers–prepay their wireless service. Analysts and observers say such a concept is ready to make its passage to the United States.

Consultant firms ATLANTIC-ACM Inc.
( and The Yankee Group
(, along with the Cellular Telephone Industry Association (CTIA), predict that prepaid wireless will be a $2.2 billion market in the United States within two years. That is up from $1.2 billion last year.

While prepaid wireless is dwarfed by the projected $58 billion U.S. postpaid wireless market, the experts say prepaid will grow more than twice as fast, with compound annual growth rates of more than 40 percent by 2002.

The Insight Research Corp.
( says more than 60 percent of new subscribers to PCS PrimeCo Personal Communications LP
( are prepaid customers, while wireless carrier Omnipoint Communications Inc.
( says more than half of its new subscribers are prepaid.

In December 1998, AirTouch Communications Inc.
( reported prepaid card sales accounted for 50 percent of its new international subscriber base, 28 percent of its overall international base, and up to 4 percent of its domestic cellular base.

The number of U.S. prepaid wireless subscribers nearly tripled, from 533,000 in 1997 to 1.8 million in 1998, Insight reports.

That growth is expected to jump to at least 27 million by 2003, according to Insight’s data.

Exploding at a Rapid Rate

“The prepaid wireless market is about to explode,” says Eddie Pena, president of Blackstone Calling Card, master distributor for BellSouth Mobility’s
( prepaid wireless products and services. “With statistics showing that up to 25 percent of all cellular applications are being declined, the potential for growth in the prepaid wireless market is tremendous.”

ATLANTIC-ACM analyst Imke Mensah adds, “This is a market that is definitely growing at a rapid rate.”

Mensah says several factors contribute to the phenomenal growth rate. One key is that overall wireless penetration rates are growing.

ATLANTIC-ACM predicts nearly doubled total wireless revenues during the next three years. And while prepaid makes up only a small percentage of the market, its popularity will result in increased revenues and a bigger portion of the overall wireless play for carriers.

Another factor is that wireless carriers are expanding their marketing efforts, reaching beyond the traditional prepaid market of the “credit stressed” and bringing in cost-minded consumers and businesses, Mensah says.

“When prepaid wireless first came out in the United States, it was not really an option unless you wanted to get taken advantage of,” she explains. “You were better off using your brother’s credit card to make calls than pay prepaid wireless rates.”

That is changing as carriers market prepaid wireless to traditional wireless markets including teenagers, travelers, cost-minded corporations, students, seniors, truckers and third-party payers.

The Markets

Steve Flaherty, president of prepaid wireless provider Q Comm International Inc.
( puts students, seniors and salespeople at the top of his prepaid wireless customer list.

He explains it works well for students who often have established no credit history or are too young to sign postpaid wireless contracts.

Students–or the parents who provide the prepaid phones–also often are budget conscious, so paying for minutes ahead of time obviates exorbitant monthly cellular bills, Flaherty says.

Seniors also are budget conscious and often have low phone usage patterns, so prepaid makes more sense for them, Flaherty adds.

In sales, Flaherty says he sees companies outfitting more of their regional sales representatives with prepaid wireless phones as a way to keep phone costs under control.

Mensah adds that an interesting market is prepaid for sales representatives and other business people who travel internationally as a way to lock in rates before a trip. This helps to avoid costly international calling surcharges from hotels and other locations abroad, she explains.

Beyond Borders

Carriers point to international markets as an extremely hot growth area for prepaid wireless.

ATLANTIC-ACM says Europeans represented 76 percent of the world’s 40 million prepaid wireless subscribers in 1998. Latin America and Africa represent booming markets as well.

For example, Mexico boasted 2 million prepaid wireless subscribers in 1998. Half of South Africa’s 1.3 million wireless subscribers were on prepaid plans during that same year.

Chart: Profile of European Wireless Prepaid Subscribers, 1998

“The whole wireless world is moving much faster abroad than it is in the U.S.,” says Elhum Vahdat, vice president of prepaid platforms and billing services provider APEX Voice Communications
( “Much of the less-developed world has very old phone systems, and it makes more sense for them to go wireless than it does to install entire new wireline systems.”

Carriers and analysts say the international wireless phenomenon will wash across U.S. shores, bringing increased prepaid wireless usage in its wake.

“We expect 2000 to be a watershed year for wireless, with U.S. wireless penetration rates finally reaching par with European and Asian countries,” says Robert Rosenberg, president of Insight.

He says Insight has found that as many as six of 10 U.S. households would consider using wireless phones as their primary phone, if costs were equal to wireline service.

With wireless rates falling an average of 15 percent annually, that time will come sooner rather than later according to Rosenberg.

He adds that a similar dynamic could take place if prepaid rates were to fall to match postpaid wireless or wireline rates.

Costs and Consumer Benefits

Prepaid wireless rates could fall, will fall and are falling, according to Q Comm’s Flaherty.

“The first six to nine months of last year, everything was 69 cents per minute. Now it is dropping to 49 cents and some to 39 cents or 35 [cents],” Flaherty says. “By the end of this year, 35 to 39 cents will be the average, with some breaking into the 20 cents per minute range. At that point, people who could qualify for postpaid will choose prepaid instead, because it eliminates the hassle of contracts and monthly minimums.”

Voiceware System’s
( vice president of sales Jeff Porter says prepaid wireless already is beating the rates many business travelers can find using hotel room phones or pay phones while on the road.

He considers prepaid wireless an intriguing niche market for convention and trade show groups, which could provide attendees phones to call company headquarters, while setting time and dollar amount limits for wireless usage.

Porter says prepaid wireless remains a “largely untapped” national market in the United States because carriers protect their postpaid wireless or wireline markets. Smaller countries in Europe and Latin America with one centralized carrier provide a more lucrative market, he adds.

“Here in the U.S., you have too many carriers nationwide, and to make it work is very difficult,” Porter explains. “On a regional level, it has been very strong in the U.S., but nationally it has been a harder sell.”

Overprotective or Overwhelmed?

Q Comm International’s CEO Paul Hickey suggests carriers may be more overwhelmed by the current demand for postpaid wireless than protective of their markets.

“The fact is that the wireless carriers still have more contracts to write than they can possibly write,” he says. “For most carriers, it is not a matter of cannibalization, but rather where will I focus my energies–on a one- or two-year contract with guaranteed revenue or on a smaller sale that may not be repeated? I am not going to invest a lot in prepaid if the postpaid is still so hot.”

Another problem postpaid wireless carriers face is rolling prepaid, because many don’t have a ready network of retail outlets, Hickey says, explaining it will change as demand for prepaid grows.

Flaherty adds carriers will need to change marketing strategies if they want to capture more of the prepaid wireless market.

“Prepaid is still a more spontaneous buy,” Flaherty says. “People are buying it at retail outlets, not directly through the phone company. It may even be likely that the person has already been to the phone company for service and been rejected.”

According to Steve Menear, account development director for the Intelligent Network division of Comverse Network Systems Inc.
(, a provider that sells to carriers on five continents, “contract mentality” on the part of U.S. carriers and consumers may be holding back demand for prepaid wireless.

“You still have a lot of deals where you get special offers if you sign the contract,” Menear explains.

He cites handset subsidies as an example. Many contracts throw in the handset or sell it for a nominal rate of a penny or two, he points out.

“You still end up paying for it over the life of a contract, but it appears you get it for free, and that seems to work to convince consumers they are getting a good deal,” Menear says.

Menear also says he doesn’t expect carriers suddenly to give up postpaid contracts, since they provide a consistent revenue stream, and consumers seem less enthused to sign new contracts. It is more likely that carriers will concentrate prepaid offerings on groups of customers who are not already part of their customer mix.

Among the key targets are children, teenagers, seniors, travelers and a small niche market that insists on anonymity and freedom in their phone usage, Menear says.

“They are willing to pay up front. They recharge the phone in cash, and the phone company has no knowledge of who they are whatsoever,” he adds.

In some countries, all phone users are required to register their prepaid phones, something that has resulted in a somewhat comical end run by true anonymity seekers.

“In these countries, you have a surprising number of phone users registered as M. Mouse or D. Duck,” Menear says.

Hickey adds that increased consumer education and marketing could spur domestic prepaid wireless demand.

“The amazing thing is I still talk to people on a weekly basis who don’t know what prepaid cellular or prepaid wireless is,” Hickey says. “The prepaid wireless market is going to react similar to the way the prepaid calling market did in the ’90s, when people were saying, ‘What is that?’ It took a few years for the public to understand what prepaid calling cards were all about, and we are seeing the same thing now in prepaid wireless. Joe Public still does not understand what it is.”

Carrier Benefits

Even if Joe Public doesn’t get it, experts say Joe Carrier has no such excuse.

ATLANTIC-ACM says approximately 31 percent of U.S. citizens do not have a checking account, and some 90 million U.S. citizens pay for services in cash. These people are potential wireless customers, but 30 percent to 40 percent of them can obtain service only with a substantial deposit.

Prepaid customers help carriers cut new customer acquisition costs, reduce fraud and eliminate bad debt, Mensah says. She adds that prepaid is “a way for carriers to get rid of their worst clients,” by turning slow or no-payers into prepayers.

Hickey adds prepaid services help carriers reach new consumers in outlets such as convenience stores, department stores, grocery stores, truck stops and service stations.

For retail outlets, he says, prepaid wireless represents a high-margin, low-or-no-cost inventory item that generates additional traffic and boosts the bottom line.

Various distribution methods exist, but point-of-sale activation systems using magnetic stripe readers or computer-generated personal identification numbers (PINs) mean sales clerks need no additional training, and new customer acquisition costs can plummet to pennies for prepaid carriers.

Prepaid also can simplify an onerous task for all phone companies–billing.

With prepaid, the money already is in the bank, so the carrier’s primary task is to attribute used minutes to their correct cost category.

A prepaid bill gives companies spending control, and for the carrier prepayment reduces administrative costs, eliminates the expense of printing and mailing bills, and helps reduce customer service calls and call times.

Insight Research estimates carriers spend an average of $2.50 per month printing, mailing, processing and collecting bills.

Insight also says the concern that prepaid wireless might promote churn has not been the case in Europe. Research has shown that European carriers experience almost no churn from prepaid customers, as opposed to the 15 percent or higher rate some experience among postpaid subscribers.

Another Insight study shows that 94 percent of prepaid subscribers were extremely loyal and had no plans to leave their current carrier.

Some carriers even use prepaid to lead customers into postpaid wireless, Flaherty says. He cites Sprint Corp.
( as being successful at this. It creates account-based prepaid services for those who might not have qualified for postpaid, and then converts them to postpaid after several months.

Mensah says Omnipoint follows a similar tactic, with over 50 percent of its new subscribers started on prepaid.

“Some of these customers might not have good enough credit to start the postpaid account, so it lets them test the customers out and move them over,” Mensah says.

It can work both ways, however, according to Menear, who says that in some cases carriers might get nervous about a customer’s ability to pay their wireless bills. In other cases, subscribers who start as prepaid are weaned and put onto postpaid once they have proven their creditworthiness.

One other factor to consider in comparing prepaid and postpaid wireless in the United States is the advanced services development, Vahdat says.

In postpaid wireless, features such as voice mail and call waiting are becoming standard, while the prepaid market only recently has begun to add those features to the mix.

The lack of advanced services presents two hurdles for carriers who offer prepaid service, Vahdat explains. One is that advanced services are becoming an important revenue generator. The other is that advanced services tend to create customer loyalty.

As more prepaid advanced services are introduced, the customer demand will increase, he says.

Insight Research says the number of subscribers and revenue figures show that prepaid wireless presents enticing opportunities for all carriers in the near future.

“Prepaid service is not just a small add-on service marketed to the credit challenged, but a major source of potential subscribers and revenue,” Insight says in its latest consumer report on wireless telephony. “Carriers could gain a 25 to 50 percent increase in their number of subscribers if they target the prepaid market.”

James R. Dukart is a freelance writer based in Minneapolis. He can be reached at
[email protected].


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