Is prepaid causing wireless instability?

Verizon Wireless’s (NYSE:VZ, NYSE:VOD) mobile virtual network operator (MVNO) TracFone took prepaid plans to their lowest point ever last week, introducing an unlimited nationwide voice and text prepaid plan for $45 per month. The plan, from TracFone’s WalMart-sold brand Straight Talk, includes 30 megabytes of data in addition to unlimited voice and text. It’s clearly a positive move for price-sensitive consumers but perhaps not for the wireless industry as it battles saturation and instability.

There are just too many competitors in the wireless market, according to Bernstein Research analyst Craig Moffett, and it is this competitive environment that is driving instability. Setting a new low price is damaging for everyone, he said, but especially for the other prepaid players and for tier-one operator Sprint. Prepaid accounted for much of Sprint’s growth in the first quarter, stemming from take-up of Boost Mobile’s $50 unlimited plan.

TracFone is the biggest prepaid provider in the US. With 11.8 million subscribers, it is more than twice the size of many of its competitors, including Boost. This is also the first time VZW has marketed a low-cost unlimited calling plan with TracFone, but it has stated in the past that it will stay out of the prepaid space on its own.

“The latest round of price cuts hints at the growing difficulty of eking out growth in a wireless market that, by our estimates, is now on a pace to grow at just 3% to 4% this year (by subscriber growth), and which – even with enormous data growth – is still generating negative ARPU growth overall and is therefore growing revenues even more slowly than subscribers.” Moffett wrote in a research note. “Moreover, the new price point raises questions about whether (when?) these new price points will bleed into the post-paid market, particularly in light of Verizon's problematic co-branding of the Tracfone service. At some point, cannibalization would seem inevitable.”

While the plans may give tier-one operators reason to consider prepaid, Whitey Bluestein, founder of strategic advisory firm Bluestein & Associates, disagreed that prepaid plans are hurting wireless growth. Overall it’s a high-growth area, he said, and it is still targeting those consumers who have never had phones in the past or can’t afford long-term contracts now. Prepaid – along with smartphones on the high-end side – has become the hottest competitive space in the bifurcated wireless industry today, and customers are clearly benefiting from it, he said. 

Sprint’s Boost Mobile division was the first to take the prepaid price point lower, introducing a $50 unlimited talk, text and Web browsing plan in January. Virgin Mobile responded by cutting its prepaid plan from $80 to $50, as well as last month introducing the industry’s first contract-less mobile broadband service. Regional CDMA players MetroPCS and Leap Wireless’ Cricket Communications offer plans for around $45 per month for unlimited service.  Voice-over-IP providers are also competitors in the unlimited game, the latest being MVNO Zero01, which last week launched a $70 unlimited monthly mobile voice and data service.