Out of the penalty box

Feb 26, 2001 12:00 PM, Vince Vittore

Long viewed as a product designed solely for the lowest end of the consumer chain—or “credit-challenged,” in the euphemistic lingo of carrier marketers—prepaid wireless services in the U.S. are slowly making the move to ritzier addresses. Namely, the mass consumer market.

Thanks to a confluence of factors, vendors and carriers are starting to realize that prepaid service no longer needs to be looked at as an evil necessity.

“In the past the majority of carriers used prepay as a product for the credit-challenged,” said Reshelle Scheffler, product manager for U.S. Cellular. “We're trying to attract people that fit in all different categories now.”

Though certainly not the only domestic wireless provider to offer a prepaid product, U.S. Cellular is at the vanguard in trying to explicitly attract new consumer groups.

The company's TalkTracker service was re-launched at the end of January with a new pricing structure, expanded coverage areas and an extension of the time in which to use purchased minutes. After talking to previous prepaid users, the company also added call waiting and three-way conferencing as basic features to TalkTracker.

The effort, which was built on the company's former prepaid offering, aims at two demographics that some analysts say have been overlooked by traditional wireless carriers: small businesses that want to equip a mobile work force and youth.

The youth market—roughly defined as anyone between the ages of 10 and 24—is particularly ripe for prepaid services and, in fact, represents the fastest-growing market for wireless voice and data services in the U.S. According to a recent Cahners In-Stat Group study, the number of youth wireless subscribers will reach 43 million in 2004, up from 11 million today. That same study said that by 2004, half of U.S. youths will own a wireless phone and nearly three out of four will use one. And while the study didn't specifically address the number that would be using prepaid services, youths are a natural market.

“From a youth perspective, I don't think they have a mindset that prepaid is a penalty,” said Becky Diercks, director of In-Stat's wireless and research services, who nonetheless sees the middle of the youth market as a fertile ground for prepay products. “Most of the kids are not paying for the services themselves. It's more in the 16-17 age group that prepay may work. At that age they're starting to earn their own money.”

Some carriers already have developed a prepay service set that addresses the youth market. Broadwing's Cincinnati Bell unit for the past year has been promoting its i-ontheweb.com site as a place for prepay customers not only to learn more about the products but also as a place to send text messages to other pre-pay users. It also sets the products apart from traditional rate plans with more aggressive, hip marketing approach.

That's a vastly different approach than U.S. carriers have taken in the past to pre-paid.

“[Prepay] was used by the new entrants without a big brand to go after those without credit,” says E.Y. Snowden, president and CEO of Boston Communications Group, which provides Broadwing its prepaid platform. “It's been a product of last resort.”

Adds Michelle Wheeler, director of product management for Lightbridge, which develops prepay software, “Pre-pay used to be perceived as a derogatory action. In the U.S. we are a credit society. That's not the case everywhere else. For us, it's a mindset shift.”

In Europe, Latin America and Asia the prepay market is flourishing in part because consumers are more leery of credit checks, which in some countries are outright illegal, said Diercks.

Entrenched retail economics also play a part. With most U.S. retailers selling not only handsets but also signing users up to service plans, carriers must pay out far higher commissions than under the prepay model, Snowden says. In the prepay model, that chain is broken and in fact is a win for both sides.

“Prepay makes wireless easier to sell,” he says. “A retailer doesn't have to do anything different than they would with a Walkman. You can lower compensation down to a more typical 35% to the retailers. You then move to the step of making the product more brandable. If you've got a process that makes your users spend more time with a retail clerk than with you or any of your own employees, then you're not delivering brand. That is what Europe has done so dramatically different.”

However, foreign carriers also have developed specific products to target demographic niches. Short messaging service, for instance, has helped push the European penetration of prepaid services, according to Diercks. In Asia, NTT DoCoMo has found some of its greatest success with simple features like the ability to download a different cartoon everyday or a different ring tone based on the latest pop charts.

“Ring tones sound silly, but it's selling,” said Snowden. “It's cheap, but if you're a kid, will you'll pay 50¢ a week to have a different phone than the kid next to him? You bet he will.”

Teens in particular represent a fertile market for new applications, including micro-transactions that will allow users to buy things as small as CDs or soda out of vending machines with their pre-paid accounts.

“Teens are tech savvy, they're early adopters and they talk a ton. So what's going on?” asks Snowden. “When you realize that only in the last quarter we've got that ability to [send short messages] to handsets, we realize why we're eight years behind Europe.”

Not everyone is buying into the near-term promise of micro-transactions, though, because of the amount of work that must be done, including creating interfaces between carriers and retail vendors.

“When you look at the complexities of dealing with taxing, that's when you have to implement technology like real-time rating engines,” said Carla Schneiderman, vice president of marketing for Lightbridge. “There are other issues like what rate do you tax it at? We won't see a significant number of micro-transactions until the end of 2002.”

Micro-transactions also present higher liability for carriers, adds Wheeler. “When you introduce micro-transactions, the carriers are now taking a deeper leap into the financial settlement component, which opens the door to more fraud. The risk is much higher because you're not just talking about airtime. Now you're talking about actual transactions.”

In the meantime, some see some of the biggest potential prepay in small businesses that want to give a mobile work force the ability to communicate but can't afford to give everyone an open tab for wireless service.

“In some ways I think it will be easier to get into the business market because there's so much control over this product as a opposed to a post-bill,” said U.S. Cellular's Scheffler. “We have the ability to restrict in-bound calls and they have the ability to build an outbound call list. The worst thing you can do is send out a huge phone bill that the customer can't pay.”

• 40% to 50% of those applying for monthly billed (postpaid) wireless services fail their credit checks (Baskerville Communications)

• 70% of the world's pre-paid subscribers are in Europe. By 2005, 38% of 80 million users in Latin America will use prepaid service (Strategis Group)

• The U.S has about 9.5 million prepaid wireless subscribers. Potential users could reach 18 million by 2002 if operators adopt marketing strategies that target new user segments (Frost & Sullivan)

• Demand for prepaid will grow by 75% per year over the next three years compared with a 20% growth rate for traditional services. Also, 50% of new wireless users in 2001 will involve monitoring to let customers know how much they will pay each month before the bill arrives (The Yankee Group)