Ho's Perspective: Is prepaid still relevant? Yes!

William Ho

Postpaid competition has been dominating mainstream and industry press headlines. Postpaid device and double data promotional moves by all rivals set the competitive tone as we enter the all-important fourth quarter. On Verizon's third-quarter 2014 earnings call, CFO Fran Shammo noted that the prepaid sector growth has slowed relative to previous years, and given entry price points are so close to postpaid, some of those subscribers are moving to postpaid. 

Moreover, as technology progresses, prepaid services were only limited to providers' 3G networks. Now, a majority of prepaid offerings access LTE networks. To some the line has blurred and there is little distinction between prepaid service and postpaid except for the billing approach. Given all these factors, is prepaid still relevant?

The answer is an emphatic "Yes!"  Prepaid as a category encompasses many offerings from many providers.  It serves the need for those who are credit challenged, the casual user who don't want postpaid commitment, or the emergency-only user. Offerings include the pay-as-you-go pricing and plans with features that mimic postpaid.

In observing industry trends over the years, it's clear that a lot of the marketing and customer acquisition efforts are aimed at winning and retaining the recurring monthly plan user. While there are many players in the prepaid market offering monthly plans, including a multitude of MVNOs, for this discussion, I am going to focus on the Tier 1 carriers and major prepaid player, TracFone. Though each provider haven't disclosed the subscriber mix of their pay-as-you-go and monthly plans, all five have a combined prepaid base account for more than 73 million subscribers as of the end of the second quarter of 2014. As a reference, the group's combined postpaid tally for the same period is about 230 million. That puts prepaid's size to just less than a third of postpaid.  Given the size gap, it's easy for some to dismiss prepaid, but 73 million users is nothing to sneeze at. Below is a graphic that adds further food for thought, showing prepaid's importance to some providers over others.

The five players

On one extreme is Verizon Wireless, a predominately postpaid company, with prepaid only making up 5.8 percent of its retail base. The company's prepaid brand, AllSet, anchors the thin portfolio that offers only one smartphone plan, a couple of feature phone plans, and different tablet and mobile hotspot options. Verizon's prepaid pricing can be characterized as premium, paralleling its postpaid price positioning.   

At the other end of the spectrum is TracFone, a subsidiary of América Móvil that operates as an MVNO, buying wholesale voice and data from all four Tier 1 carriers. TracFone is 100 percent prepaid with over seven brands, some that it has acquired in the last two years, targeting different segments/demographics serving over 25 million subscribers. While many associate TracFone with pay-as-you go, several of its brands including Net10, Telcel America, Simple Mobile, Page Plus, and Straight Talk, all with multiple plan levels, vie for the monthly plan user.

Sprint is a long-time prepaid player with a similar multi-brand/multi-segment strategy to TracFone serving up the Boost Mobile and Virgin Mobile brands to fight for the monthly high-value customer base. Similar to Verizon Wireless, Sprint has its own branded prepaid offering for customers who want prepaid with the Sprint name. Though the company doesn't divulge any subscriber breakout by brand, with Sprint had just under 15.2 million prepaid customers at the end of the second quarter, making up over a third of its overall retail base.  

In 2013, T-Mobile faded nearly nine million MetroPCS monthly plan subscribers, which ignited T-Mobile's prepaid momentum and grew the base to over 15.6 million. The MetroPCS market expansions, coined "Apollo," allowed T-Mobile to surpass Sprint's overall prepaid subscriber count in the second quarter. While MetroPCS is the anchor in T-Mobile's portfolio, it also offers its postpaid plans in a prepaid fashion in addition to recently launched GoSmart Mobile monthly plan portfolio.     

Absorbing Leap Wireless' 4.5 million Cricket customers early this year to its over seven million AT&T-branded GoPhone base, AT&T Mobility has relaunched the new Cricket to compete directly against MetroPCS, Boost and Virgin Mobile without using its brand. Prior to the Leap acquisition, AT&T's prepaid customers accounted for less than 10 percent of its overall retail customers. Given the resources thrown into the new Cricket and CEO Randall Stephenson's public remarks about AT&T's turn to be disruptive in the segment, it's fair to say that prepaid remains very relevant to AT&T's overall mobile strategy.

Competition and considerations

Having painted this backdrop, it's clear that four out of the five players have greater stake in growing and defending their prepaid businesses. Prepaid competition has always been tough, driven due to the demographic's price sensitivities.  What are some of the competitive components that drive this market?  In the past, device and plan pricing were the usual tools for battle and it's still the same for the most part.  Let's look at other factors that are unique to this segment.

  • Devices: Postpaid users through the Next, Simple Choice, Easy Pay and Edge handset upgrade programs are finding out what prepaid users had to do all along, pay in full for the device.  Aside from some provider programs, financing is not available except for those with good credit.   Prepaid portfolios run the same low, medium and high-tier options. While halo devices such as the iPhone are offered in prepaid, the bread and butter devices sub-$100 draw the most attention.  These price points are usually populated with less known brands, such as Alcatel One Touch and ZTE, or lower-end models of global brands not seen in postpaid  However, with the lower price points comes the risk for churn, especially when the there is an active aftermarket.
  • Pricing and promotion: Monthly prepaid price plans range from $35 to $60 catering to individual users. Multi-line plans can drop a line to $25 per month. Data level options mirror postpaid but there are usually just three categories, low (1 GB), medium (3 or 5 GB) or high (5 or 10 GB), depending upon the provider.  Similar to postpaid, prepaid providers have many promotional resources in their tool chest, including $100 switching credits, free month of service, and double data promotions.  
  • Distribution: Sometimes referred to as "doors" in industry vernacular, distribution is an important battleground. Simply put, the more doors to push one's product, the likelihood for growth increases.  In addition to corporate stores, depending on the provider, prepaid competitors depend on the network of exclusive agents, independent dealers, and national big-box channels such as Walmart, Target, Best Buy, RadioShack. Below is a current snapshot of prepaid monthly plan points of distribution.  These will likely increase as competitors race to lock in more doors in the coming year.

Boost Mobile & Virgin Mobile

>6,000

Cricket Wireless

6,800

MetroPCS

11,000

TracFone Straight Talk

>3,000 WalMart

  • Network: Aside from TracFone, the three other competitors are undergoing a network transition. Sprint had its iDEN shutdown severely impact its Boost Mobile subscriber base along with its overall Network Vision "rip and replace" fallout.  Sprint's Spark initiative will likely help its prepaid unit differentiate when fully available. T-Mobile has acted aggressively in migrating CDMA MetroPCS users over to its LTE platform.  AT&T has the same migration task to move CDMA Cricket users to the bigger LTE platform.  In the latter cases, both providers have used the expanded national LTE coverage as the beneficial value proposition to remaining with MetroPCS and Cricket, respectively.

Not all carriers have disclosed their third-quarter prepaid results yet. Growth may indeed slow relative to previous years but prepaid competition continues to heat up. For some prepaid may be less impactful, but for those it the 73 million subscriber ecosystem, the urgency and relevancy is paramount.

William Ho is a leading industry analyst, consultant, and commentator at 556 Ventures. He has over 25 years experience in the fixed, internet and wireless sectors. Follow him on Twitter @billho888.

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