Prepaid Wireless Service: Ring It On

By Joseph Palenchar On Feb 23 2004 - 8:00am

Neither the falling cost of postpaid cellular service nor a multitude of free night and weekend promotions has kept the prepaid market from growing, a Yankee Group study contends.

In fact, the prepaid subscriber base will continue expanding and will double during the next four years, rising from 11.5 million in 2003 to 21.8 million in 2007, said senior analyst Adam Guy of the Yankee Group. As a result, about 32 percent of the industry's 32.4 million net new subscribers will be prepaid subscribers during that time.

Prepaid's subscriber base will be even higher in 2007, accounting for 89 percent of net new additions between 2003-2007, if hybrid prepaid/postpaid plans are included, Guy said. These hybrid plans, such as AT&T's Go Phone service, include prepaid-like cost-control elements. Go Phone, for example, automatically charges a credit card or debits a bank account in advance for an agreed-upon amount of usage in the following month. Once a subscriber uses up the monthly allotment of minutes, the subscribers must buy additional airtime in advance.

Hybrid plans feature lower per-minute charges than prepaid plans because users are less likely to drop the service, Guy said.

Prepaid interest has expanded beyond the credit-challenged to include "infrequent users who want to manage costs," said Guy. Though postpaid programs include hundreds of anytime minutes and free night and weekend minutes, "a lot of people don't use them," he said. These people are candidates for prepaid's lower total monthly charges even if per-minute prices are higher, he said. "It's a reasonable deal for the infrequent user," he said.

Carriers' aggressive promotion of family plans has also lifted prepaid sales, Guy contended. The promotions raise consumers' interest in buying phones for their kids, but on examining the plans, these consumers might opt for prepaid to get "more cost control for their teen."

With carrier consolidation likely, Guy expects postpaid competition to throttle down, raising demand for prepaid service. "Many carriers have loosened their credit scores for postpaid because of fierce competition," he said. He expects carriers to eventually pull back from the "land grab for remaining customers" as consolidation occurs. He also expects pull-back as carriers try to get control of churn, which is higher in prepaid than in postpaid.

As a result, Guy expects carriers will gain only 3.4 million net new postpaid additions between 2003-2007, bringing the cumulative postpaid subscriber base to 137 million. In contrast, net new hybrid additions will hit 18.6 million during that time, expanding the hybrid subscriber base to 25.8 million. New prepaid additions of 21.8 million will bring the prepaid subscriber base to 21.8 million. The total subscriber base during that time will rise from 152.2 million to 184.6 million.