NPD: From burner to coveted, the prepaid transition

Eddie Hold

The classic prepaid market will forever, to me, be associated with the term "burner", as popularized in the HBO series, The Wire. The show's portrayal of the prepaid phone as a disposal (and importantly) anonymous device that could be used and then "burned" (discarded) by the underbelly of Baltimore was classic and summed up the low-value, bottom of the line devices that defined prepaid. But that was 2004 and the burners discarded in the streets of The Wire's Baltimore bear almost no relation to the prepaid market of today.

First of all, there is a mindset change: the market is less about "prepaid" and more about a relationship between the consumer and carrier that comes with fewer ties: the "no contract" option. While this may appear to be a semantic issue, the value is far greater: the market has morphed from one of attempting to serve "just" the credit-unworthy to a focus on meeting a wide range of consumer needs and desires. There is less emphasis on paying up-front (from a marketing perspective) and far more on providing freedom from a long-term carrier commitment. The carrier also gains from such as relationship, as it is not expected to subsidize the phone to the current extremes of the contract market. Instead, the carrier can charge--and consumers are somewhat willing to accept--almost the full cost of the device.

This leads to the second tectonic shift in the no contract offering: the type of phone offered for a "no contract" service. What used to be one (small) step above a disposable phone has been replaced by the type of phone that we all expect to carry. Yes, you too can have a smartphone, even an iPhone if the price is considered worth the benefit. And again, from the carrier's perspective, this is a smartphone that doesn't need the same level of subsidies. A case in point is Virgin Mobile's recent launch of the iPhone at $649, rather than the standard contract price of $199.

Source: The NPD Group: Connected Intelligence Assumptions: Contract Plan Sprint Simply Everything ($109); iPhone 4S $199 No Contract: Virgin Unlimited ($55); iPhone 4S $649

Virgin's success with its iPhone launch will be closely watched to see just how expansive and flexible the no contract market has become. Store visits since Virgin's launch of the iPhone have seen evidence that consumers are indeed buying the iconic device, regardless of the large price tag. While the launch did not generate the long lines many have come to expect from iPhone activity, this is hardly surprising. Pushing the iPhone into the no contract market was never going to cause an overnight sensation but rather is a creeping example of how the no-contract market is evolving.

And there's a good reason why the market is evolving in this direction, and why consumers may indeed be willing to shell out $600+ for a device. Taking the Virgin Mobile example, and comparing it to a similar contract-based offering from parent Sprint, the no contract solution shows a cost saving starting in the 11th month (see chart). This may not be so obvious to many consumers at first glance (the $649 device cost does invite quite a "gulp" when initially considered).

The net result is that the no contract market is healthier than it ever has been. According to NPD's Mobile Phone Track, 33 percent of phones bought are for no contract plans. Even carriers that traditionally tried to avoid the no contract market have made some significant steps in that direction. Verizon Wireless offers an unlimited voice and texting solution for just $50, although the carrier does steer clear of providing the more attractive phones on this plan. Conversely, T-Mobile has placed a significant emphasis on no contract, a decision that has helped stave off the worst of a consumer slump for the carrier over the past couple of years. T-Mobile's approach certainly embraces the new school of thought, allowing the consumer to purchase almost any device as a no contract device, and with an affordable installment plan if they are unable to shell out $300+ at once for a phone.

Source: The NPD Group: Mobile Phone Track

There is a new potential driver for the no contract market. As the contract market settles into a small number of unlimited plans, similar to Verizon Wireless' Share Everything plan, consumers looking for a closer fit between their usage patterns and a plan will begin to cast an eye at the flexibility that comes without a contract. After all, not everyone wants to share data and texting across a family, or people, or devices, and for this audience, a $45 "prepaid" offering such as StraightTalk's unlimited voice, messaging, and data will seem like a strong alternative. Throw in some well-aimed marketing to highlight the price efficiencies (longer term) of a no contract option and the calling plan variety that is disappearing from the contract market will be supplanted by no-contract solutions.

The rise of less subsidized smartphones in the no-contract channel also brings a new sense of ownership to the market. Indeed, the very need for a contract disappears. After all, having just shelled out $600 and change for a new smartphone, the consumer is unlikely churn quickly. The new "handcuffs" are not a two year contract with high-priced early-termination fees, but rather the fact that the device the consumer has just bought was darn expensive. Should Season Six of The Wire ever be written, it is unlikely to show the streets of Baltimore strewn with burner smartphones.

Eddie Hold is the vice president of The NPD Group's Connected Intelligence business unit. In this role, Eddie is responsible for managing the overall unit, maintaining the direction, creation and expansion of the content.