Prepaid equals Wireless Affordability

Prepaid is where the market growth is in the US market. Major prepaid carriers: Metro PCS, Sprint, Leap, and Tracfone added a total of 2.5 million subscribers in the first quarter of 2010. Major post-paid players Verizon, AT&T, Sprint and T-Mobile added about 240,000 postpaid subscribers or about 10% of the 4 major prepaid carriers. There are a number of reasons for this including: the bad economy and people’s desire to watch their spending, but the main reason is that prepaid is very affordable to the average user. The two most cost effective plans that stick out are:

• Virgin Mobile’s (Sprint) Plan of all you can text and use data, with 300 minutes of voice for $25 a month

• Tracfone’s Straight Talk plan of 1000 minutes, 1000 texts and 30 MB of data for $30 a month

In addition, if unlimited voice and text is desired it can be obtained for $45 a month or less.

Business Changes with Prepaid

Prepaid has also lead to a number of business changes in the market:

• Put more competitive pressure on voice prices and voice margins for all carriers. (More minutes used and less ARPU for those minutes)

• Changed where the value customer is going. (T-Mobile owned this space and they lost 77,000 subscribers in 1Q)

• Created a less subsidized model for phones (Virgin Mobile offers the Blackberry Curve for $300)

• Delivered stronger branding for prepaid (Helps bring in customers and lowers churn)

Where does prepaid go from here?

The wireless services market in the US is effectively splitting into two main parts: the high-middle end represented by smart phones and high data use; and middle-low end represented by typical voice and text devices, family plans and prepaid. Prepaid has become and will remain a strong option for certain segments of the middle to low end of the market including single people, people who want to add a second cellular phone line, people who are concerned about their budget, economically challenged people, and youth who want their own cell phone and plan.

There is likely to be some consolidation in the prepaid business as it a high volume, lower margin than postpaid, high churn business where operating efficiencies are paramount to a successful business. The company that is able to create the strongest brands and the best operating efficiencies in this market will be the winner.

Some market disruption is likely to occur in the high to middle end of the wireless services market when smart phone prices come down and prepaid players are able to offer unsubsidized Android phones or other desirable smart phones for under $200. The prepaid carriers will also have to recalibrate their data charges based on the typical data usage of a smart phone, but the data prices are likely to be less than the overall postpaid data deal. What creates opportunity in this segment is that nobody likes to pay $80 a month or more for a service plan with a high end smart phone ($40 for voice, $30 for data, and $10 for text). Another factor that will boost this market is when children start asking for smart phones in droves. When children want goods, their parents look for affordability, and affordability can be found in prepaid.