Carving up the prepaid market

Sue marek

With U.S. wireless penetration surpassing 91 percent, it's clear that wireless operators are going to have to become much more creative about attracting new customers. Although Verizon Wireless (NYSE:VZ) insists there is still some room to grow in postpaid (during the firm's first quarter 2010 earnings report, CFO John Killian told financial analysts the company believes there is still strength in postpaid), most  U.S. operators are turning their attention to the prepaid side of the business.

Of the Tier 1 carriers, Sprint Nextel (NYSE:S) is clearly leading the pack in prepaid innovation. The company announced earlier this week that instead of merging its Boost Mobile and Virgin Mobile USA prepaid offerings (Sprint acquired Virgin Mobile USA last year for $483 million), it plans to market the two to distinctly different customer groups. Boost will continue to compete with Leap Wireless' (NASDAQ:LEAP) Cricket brand and MetroPCS (NASDAQ: PCS) for the tier of prepaid customers that will pay $50 per month for unlimited voice calling, while Virgin Mobile will relaunch as a youth-focused brand geared to heavy social networking users. The Virgin Mobile rate plans will range in price from $25 to $60 per month and will feature some more sophisticated handsets, including a variety of smartphones.

 (9:34:10 AM):     What market segment do you think is most attracted to prepaid?Sprint's third brand, Assurance Wireless, will continue to operate as a government-subsidized cellphone program for people under or close to the poverty line. A fourth brand, which has not yet been named, will target the middle-aged user who only wants a phone for occasional use, and who will pay for the service by the minute rather than per month.

Will Sprint's segmenting of the prepaid market work? I think it will as long as the company manages to keep its prepaid plans simple and easy for consumers to understand. Recent research from Nielsen's Convergence Audit found that the top non-credit reason consumers choose prepaid is because it's simple to use and simple to understand. The second reason is because there is no monthly bill, and the third reason is that there is no lengthy contract.

My fear is that by carving out these different markets, Sprint's prepaid plans could become as complex and difficult to understand as postpaid plans. If Sprint gets bogged down in specific offers for each of these niche markets, they could easily end up with 10 or more different prepaid offerings, which may confuse potential customers and drive them to other prepaid providers.

If the main driver for prepaid (beyond price) is ease of use, then carriers like Sprint need to be careful to not alienate those potential customers  by making prepaid complicated and confusing. --Sue

P.S. The Fierce editorial team has been hard at work delving into some different topics that we think are interesting to our readers.  Check out Mike Dano's in-depth report on cloud computing and its implications for wireless here. Also, if you want to know what industry heavyweights think about FCC Chairman Julius Genachowski's decision to reclassify broadband as a Title II common-carrier service without pursuing the regulations that are imposed on Title II services such as telephone systems, check out Phil Goldstein's Sound Off feature here.