Prepaide Wireless Trend

Prepaid vs. Postpaid.

Prepaid and postpaid are simply references to two different payment options for mobile service.

Postpaid mobile service is also known as contract or billable service since consumers must sign a contract in order to obtain the right to be billed after usage.

Prepaid mobile, also known as pay-as-you-go mobile and pay-in-advance mobile, is just service that is paid for prior to usage. Many consumers prefer prepaid because it offers improved budget controls, access and flexibility while not requiring deposits or constraining contracts. Prepaid mobile can be purchased off the shelf as easily as a camera and instantly used. After purchasing the handset and using initial airtime, prepaid mobile customers typically buy additional airtime at participating retail stores – often high-traffic shops such as convenience stores and gas stations. As the prepaid customer uses the phone, airtime drains at the specified rate per minute. The handset shows minutes remaining at the beginning and end of each call.

While nearly 85 percent of the United State’s 140 million mobile subscribers are currently on postpaid plans, the majority of the world’s other subscribers are on prepaid plans.

Prepaid Around the World. Although prepaid mobile service only emerged in 1996, and didn’t reach many countries until 1998, the number of people using prepaid now exceeds the number of people on postpaid plans. Today, about 60 percent of the world’s mobile subscribers, prepay their wireless service. According to Baskerville research firm, worldwide prepaid users are forecast to reach one billion in 2005 and 1.5 billion in 2010. iGillott Research says that prepaid will represent about three-fourths of the world’s total wireless subscribers as early as 2006.

Since its inception, prepaid has been credited for fueling the rapid growth of wireless services in both underdeveloped and developed countries alike. Because prepaid offers virtually anyone instant access to telecommunications service, certain Latin American, African, Asian and other countries with underdeveloped landline infrastructures, promote prepaid to rapidly boost telecommunications access for the bulk of their citizens. Already prepaid users account for more than 80 percent of the subscriber base in Russia and the African continent. Latin America stands at about 76 percent prepaid with between 75 percent to 90 percent of new users currently choosing prepaid plans.

In developed countries, as wireless penetration advances, the impetus to promote prepaid increases since it spurs continued growth by reaching untapped market segments that postpaid plans traditionally alienate or miss altogether. Examples of these developed countries with high penetration rates include most of those in Western Europe where more than 80 percent of mobile phones now sold are prepaid. And, prepaid is becoming so popular that already more than 90 percent of all Italian mobile subscribers prepay their service.

Prepaid in the U.S. With about 145 million wireless subscribers, mobile phone penetration is about 50 percent in the United States. At this level, U.S. carriers are beginning to encounter penetration rates that Western European carriers faced several years ago when the European carriers began promoting prepaid mobile. Now U.S. carriers are approaching saturation among professional user groups and others typically on postpaid (contract) plans. Today about two-thirds of U.S. adults own mobile phones. In order to continue growing, U.S. carriers are just now aggressively promoting prepaid wireless in order to penetrate untapped market segments, such as the youth. For example, working as a mobile virtual network operator (MVNO) with Sprint, Virgin Mobile USA launched its youth-oriented wireless services in July 2002 and quickly added more than 500,000 prepaid subscribers within its first 9 months of operations. Largely because of U.S. carrier’s recent interest in promoting prepaid service plans to reach untapped consumer segments, U.S. wireless penetration is forecast to grow to 70 percent in 2006.

U.S. prepaid airtime rates are higher than postpaid rates. However, with prepaid competition heating up, prepaid airtime rates are decreasing faster than postpaid rates. As prepaid prices continue to fall and more parity is achieved with postpaid plans, mainstream consumers will increasingly adopt the prepaid mobile option.

Various analysts agree that prepaid mobile is on an aggressive growth trend in the United States. Atlantic-ACM calls prepaid wireless the fastest growing segment of the entire U.S. wireless industry. The Yankee Group predicts subscriber growth from 9.4 million in 2000 to more than 50 million in 2006. iGillott Research forecasts that prepaid users will grow from 14 percent of the overall U.S. wireless subscriber base today to nearly 30 percent in 2006. While U.S. prepaid mobile revenues were about $4 billion in 2002, the Pelorus Group research firm forecasts U.S. prepaid mobile revenues to hit $20 billion in 2006. According to the Yankee Group, “In the next few years the United States will begin to resemble Europe in terms of widespread acceptance of wireless prepaid services.”

Who’s Buying Prepaid Wireless in the U.S.? Those buying prepaid mobile include...

Mainstream Consumers. Following the lead of international markets, more and more mainstream American consumers are selecting prepaid over postpaid mobile for its unique benefits that include greater flexibility, access, and budget controls. Contrary to what most expect, a study by the Yankee Group has showed that prepaid mobile most appeals to those with annual incomes in excess of $75,000.

Youth. Carriers such as Virgin Mobile, Verizon, Cingular, AT&T, T-Mobile (VoiceStream), and Boost Mobile are starting to target the U.S. youth with prepaid wireless offerings. Market research now suggests that prepaid offerings best meet the youth’s needs and that the youth represents the U.S. wireless industry’s greatest growth potential as well as the opportunity to develop a lifetime of brand loyalty. There are currently 78 million pre-teens, teens and young adults in the United States, a group larger than the total population of most countries. The Yankee Group estimates that the youth market will spend more than $170 billion this year of their own money (most in cash) and will, via their parents, influence an even greater amount of total household spending. U.S. teens now rank wireless phones as the number one coolest item to own and spend an average of $100 per week. Largely overlooked until recently, wireless penetration among U.S. teens stands at about only 20 percent. Cahners In-Stat forecasts penetration of the U.S. 10 to 24-year-old segment to reach 71 percent in 2004. The Strategis Group says that 29 percent of teens without mobile phones plan to get one this year. Pent-up youth demand will bolster prepaid growth in the United States as it has internationally.

Contract Adverse. Unlike postpaid, no contracts are required by prepaid mobile plans. Consumers buy prepaid mobile right off the shelf. Prepaid wireless has no minimum usage periods and affords greater flexibility for temporary users, travelers, and new entrants who have never used a wireless phone before and would like to try the service without long-term commitments. These people appreciate prepaid for its greater flexibility.

Budget Conscious. Also unlike postpaid, prepaid gives wireless users complete budget control. With prepaid, users are never surprised by higher-than-expected monthly bills which result from exceeding contracted monthly minutes. A survey among users shows that 73 percent of today’s prepaid subscribers appreciate the improved ability to budget outflows.

Credit Challenged. It is estimated that there are 28 million credit-challenged consumers in the U.S. alone. These consumers usually show high interest in owning a mobile phone but lack the credit rating to qualify for postpaid plans. Today, as in the past, about one out of every three U.S. postpaid wireless applicants are denied contract service due to insufficient credit ratings. Last year, AT&T alone turned down 4 million customers. For the credit challenged, prepaid is often their only viable choice.

Cash Based and Ethnic Groups. Although credit is widely available in the United States, more than 90 million Americans pay for services in cash. In fact, whether by choice or not, 28 percent of American households have no credit cards. The people in these households include ethnic groups and others who prefer to use cash over credit. The U.S. Census says that nearly 1 million immigrants enter the United States each year. Not only have they not had an opportunity to establish credit, these and other ethnic groups are culturally accustomed to cash prepayments and tend to prefer prepaid services. Today, ethnic consumers already account for a large percentage of telecom expenditures in the United States. Insight Research shows that ethnic and minority groups represent 27 percent of the annual business in the U.S. wireless industry. By 2005, telecom expenditures by ethnic groups are forecast to hit $65 billion.

Prepaid at Retail. The vast majority of prepaid wireless sales occur at retail. Atlantic-ACM market research firm says that 92 percent of all U.S. prepaid market revenues (including prepaid wireless, long distance and other services) stem from sales in retail stores. Wireless carriers, telecom distributors and various retailers struggle on several fronts to sell prepaid wireless under the traditional “scratch” card format. New technology called point-of-sale activation (POSA) now solves the problems of distributing prepaid wireless airtime by enabling secure, electronic distribution or electronic recharge of prepaid wireless services at the point of sale. (For more information about POSA technology, how it works and the problems it solves, just click here to go to a report on Electronic Distribution.) For the many solutions it provides, Atlantic-ACM says that POSA will completely reconstruct the way in which prepaid services are sold. As a pioneer in POSA technology, Precomm, Inc has been solving prepaid wireless distribution problems with its leading POSA systems since 1999.

Summary. With access to wireless improving and additional services constantly being added to mobile handsets, wireless telephone services are becoming more and more central to the lives of people around the globe. This is evidenced by mobile’s rapid growth the world over. Today, the majority of mobile users around the world prepay their services. While there are a few countries where postpaid remains the dominant payment form, changing market conditions in these countries are beginning to support the prepaid model. For example, new market conditions in the U.S. are beginning to provide fertile ground for prepaid to flourish as it grows from about 14 percent of subscribers today to about 30 percent in 2006. Most prepaid wireless sales occur at retail where traditional “scratch” cards are the predominant distribution vehicle. However, the problems of distributing prepaid wireless services with “scratch” cards are providing mobile operators, telecom distributors, and various convenience retailers with a strong impetus to convert to efficient electronic POSA systems. As a POSA pioneer, Precomm, Inc is proud to participate in solving prepaid wireless distribution problems with its leading POSA systems.