Prepaid: The necessary evil for operators

Operators always seem to have a love-hate relationship with prepaid offerings. On the one hand, they need them to penetrate deeper into the market as postpaid growth flattens. On the other, operators usually have to weather the bad side effects in terms of higher churn and lower ARPU.

Prepaid offerings have turned into a necessary evil, as Verizon Wireless appears to understand. The operator, which has focused for some time on capturing high-end postpaid subscribers, is now pushing into the prepaid space. Last week, it announced pay-as-you-go INpulse prepaid plans with rates starting at 2 cents per minute for voice calls and text messages. The plans are called INpulse Core, INpulse Plus and INpulse Power and charge customers only on those days the customers use the service. They all include unlimited "in-network" calling to Verizon Wireless users.

The challenge for prepaid services, which operators during the last seven years have repeatedly pushed aggressively and then retreated when the financials got too bad, is to build customer loyalty. Prepaid customers aren't tied to any particular carrier through a contract so they have no reason to stay loyal.

Verizon has to be banking that its strong network reputation will be a big force in keeping prepaid users loyal. Another way is to offer prepaid customers the same types of features as postpaid users get, rather than treating them as second-class citizens. On that front, Verizon is offering services such as downloadable applications like those from V Cast Music on demand and VZ Navigator.

Still, these new prepaid plans will inevitably have an impact on Verizon's industry--low churn, which currently is 1.21 percent, and high ARPU. But the operator needs another tool in its arsenal to combat AT&T. AT&T's growth was fueled by the iPhone in the third quarter but prepaid services were also a big part of AT&T's growth in the quarter. About 400,000 of the 2 million subscribers AT&T added were prepaid users. Comparatively, Verizon added 1.6 million net customers in the third quarter, the majority of which were postpaid.

With Verizon's more aggressive entrance into the prepaid market, we can expect to see competitors fine-tune their prepaid offerings in time for the holidays. In fact, we could very well see a frenzy of prepaid offerings--that is until the financial risks become too steep and dictate a market retreat. --Lynnette