The four key factors driving the U.S. prepaid market for wireless

Mike Dano

Prepaid services are clearly a huge part of the U.S. wireless market. According to the New Millennium Research Council, about one out of every four wireless customers is on a prepaid wireless plan. But what exactly are the major trends in this area of the market?

According to carrier respondents in a new survey conducted by PricewaterhouseCoopers, titled "No wires attached: 2011 North American wireless industry survey," there are some dramatic shifts going on in the prepaid market. Just as smartphones and data services are upending the postpaid side of the industry, so too is the prepaid market getting jostled with new trends.

Prepaid growth could slow: In its survey, which included responses from all the big carriers except AT&T Mobility (NYSE:T), PwC found continued growth in prepaid services. According to survey responses, the percentage of prepaid subscribers among total subscribers was 17 percent among the big carriers, up from 14 percent in 2010. Among smaller carriers, the average percentage of prepaid subscribers among total subscribers was 47 percent, up from 42 percent in 2010 survey.

Not surprisingly, PwC cited the maturation of the wireless market and Americans' worries over an economic recession as driving interest in prepaid services. However: "Given the well-developed North American credit and banking system ... we do not expect the shift to prepaid to continue toward the significantly higher penetration rates already seen in Europe, Asia, and Latin America."

Meaning, Americans' access to easy credit--coupled with carriers' continued focus on pushing shoppers to postpaid services via flashy new smartphones--will ensure that prepaid services won't dominate the U.S. wireless market in the years to come.

Prepaid subscribers stick with their carriers for almost two years: According to the results of PwC's survey, the average prepaid subscriber "life" was around 20 months in 2011. And that figure has remained relatively constant: In 2010 it was 21 months and in 2009 it was 18 months.

Even though it's a prepaid, no-contract service, carriers can still expect most prepaid subscribers to stick around for almost two years. Ever wonder how it's financially possible for prepaid carriers to sell a feature phone in a grocery store for $10? It's because they know, most of the time, that customer will keep that phone and keep purchasing more minutes for it.

Unlimited voice plans are huge: Seventy-three percent of carriers that responded to PwC's survey said they offer unlimited voice prepaid plans to their customers. And a whopping 56 percent of prepaid subscribers have selected these unlimited voice plans when offered. Clearly, prepaid customers are keen to avoid per-minute charges wherever possible.

Thus, it's no surprise that prepaid carriers like MetroPCS (NYSE:PCS), Leap Wireless (NASDAQ:LEAP) and Virgin Mobile USA have put so much emphasis behind their unlimited calling offerings. Moreover, such strategies have generated a competitive response from the likes of Verizon Wireless (NYSE:VZ), which launched its Verizon Unleashed prepaid unlimited calling service in September 2011.

But how many minutes are those prepaid customers actually using? According to PwC, unlimited prepaid voice plans cost an average of $45 per month--and subscribers made 1,419 minutes worth of calls per month. That's more than double what a postpaid subscriber would use: According to PwC, the average postpaid subscriber used only 638 voice minutes per month.

Big-box retailers are key to distribution: "National retailers" were far and away the most popular prepaid activation channel among bigger carriers, according to PwC's survey results. Among big carriers, national retailers accounted for 40 percent of all activations, ahead of retail stores and kiosks, indirect agents and branded franchises.

Among smaller carriers, the trend toward national retailers and retail stores was even more pronounced. PwC's results show the percentage of prepaid activations at national retailers grew from 16 percent in 2010 to 21 percent in 2011. During that same period, retail stores and kiosks grew from 17 percent of smaller carriers' prepaid activations in 2010 to 31 percent in 2011. The result is that smaller carriers are relying far less on indirect agents--they accounted for fully 37 percent of prepaid activations in 2010 among smaller carriers, but they accounted for only 14 percent of prepaid activations in 2011.

"In our discussions with carriers, it is evident that managing this shift presents challenges, and they are particularly focused on ensuring the profitability of both captive and noncaptive channels," PwC noted in its report.

The trend toward national and big-box retailers is most clearly seen at Cricket provider Leap Wireless, which inked an MVNO deal with Sprint Nextel in August 2010 as a way to get its brand and products into national retailers across the country. +Mike Dano