Prepaid, Posthaste

E.Y. Snowden has been a proponent of prepaid wireless since the days when handsets still came in bags with shoulder straps and airtime under $1 per minute was a bargain.

Back in the mid-1990s, Snowden was heading up American Personal Communications (which would later morph into Sprint PCS) when he helped launch one of the industry's first prepaid wireless plans. The decision was a matter of convenience more than anything else: “In '95, wireless retailing was a complicated proposition,” said Snowden, who is now president and CEO of Boston Communications Group Inc., the country's largest outsourcing vendor of prepaid wireless services. “Retail clerks who were used to selling shrink-wrapped boxes suddenly were asked to do a lot of work.”

Not only were retail agents required to break open the box, but they often helped program phones for service providers. The financial incentive to push postpaid plans is clearly strong for retailers — they typically receive about $150 for selling a standard phone with a year-long service contract, compared with about $35 for a prepaid unit.

“But even though [retailers] like making money on postpaid, they're not set up to do it,” Snowden said. “What retailers like about prepaid is it gets them back to the model that they know and love. [Carriers don't need] any special resources from that retailer.”

Still, for years most carriers focused on the postpaid market and gave scant attention to prepaid services. They are only now starting to catch up — and ironically, Boston Communications Group's foresight may end up costing the company dearly.

The origins of prepaid service are hardly distinguished. Many carriers treated prepaid as a form of punishment, requiring huge deposits on service from customers with poor or nonexistent credit. The U.S. credit culture also played a huge role: Americans are so comfortable with credit that we have few qualms about handing over personal information such as Social Security numbers to store clerks running credit checks for postpaid service.

Carriers' attitudes toward prepaid also were shaped by market realities. “You have to look at who is the early adopter,” Snowden said. “In the U.S., it's the high-end, corporate guy. Around the world, it's the teen who buys it BEFORE the high-end corporate guy.”

That's all changing, however, as growth in the traditional domestic postpaid segments continues to level off. While the big six national carriers have recently showed signs that they are back on track after a disastrous 2002, most are growing at what can only be viewed as historically anemic rates. For a growing number of providers, the elixir could be prepaid — Virgin Mobile, which resells Sprint PCS service almost exclusively on a prepaid basis, is the most notable example, but Verizon Wireless, AT&T Wireless, Cingular Wireless and T-Mobile all have put renewed efforts into the segment. In fact, according to a recent survey from Atlantic-ACM, the market for prepaid wireless will leap from $4.4 billion this year to around $10 billion by 2007.

All of which makes Snowden — whose company provides outsourced prepaid services for Verizon, Cingular and Dobson Communications (to name a few bigger clients) — something of a seer. Indeed, after leaving APC, Snowden signed on with BCGI in 1998 in large part because it was delving into a technology he believed would make an impact.

“My experience at APC showed me that prepaid was one of those disrupting technologies,” he said. “It wasn't blazing technology — it was just a matter of someone doing it right.”

The key to getting it right lies in answering the chicken-and-egg question of retailing: If users don't have enough places to buy service, they won't know it exists. With lack of knowledge fostering lack of demand, retailers won't bother making room. BCGI, which has seen its share price jump almost 50% this year, believes the solution is in giving users plenty of ways to buy and re-buy product — late last year, for example, the company signed a deal with Verizon Wireless to let customers replenish prepaid minutes at select ATM machines in St. Louis and Boston. That's in addition to the 33,000 Western Union offices and 7100 RadioShack locations where users can stock up on minutes.

“In the early stages, we focused a lot on places where people can put money into prepaid accounts,” said Tom Erskine, vice president of product development for BCGI. “Now what we're seeing is a big pickup in people using bank debit cards and credit cards. It reduces the cost of the recharge because there's no retail involvement.”

BCGI's model isn't the only prepaid success story. Celluphone, a Los Angeles-based master agent for small retail outlets, began selling prepaid contracts in 1996 as a way to appeal to the massive Latino market in Southern California. The effort has worked in part because the company shaped its distribution model around the buying patterns of the Latino community.

“People in those communities want to buy from people they normally buy other things from,” said Celluphone President Mike Mohr, noting that Latin American countries have little history of using credit for any purchases. “We have focused not on the credit-challenged, but on the credit-deprived segment. There is no simple wireless sale, especially in the credit-deprived segment. The retailer has a relationship with the customer.”

But thanks to the improved revenue expectations and growing acceptance of prepaid service retailers — even Wal-Mart now sells Cingular and Alltel prepaid service — some carriers are starting to rethink their own models and question the wisdom of outsourcing. In July, Verizon, which represents 51% of BCGI's revenue, informed the company that it was considering taking its prepaid service in-house.

While Wall Street responded by pounding BCGI shares down 40% on the day the news broke, Snowden believes that outsourcing prepaid still makes sense, even in very large volumes. Because the company tracks prepaid billing for all its carrier partners from a single logical platform, it has the advantage of using its massive scale to keep costs down. In addition, its fee schedule is such that as carriers generate more prepaid traffic, BCGI charges less per transaction. In investor presentations, for example, the company uses a chart illustrating that when volume increases seven times over, the cost to the carrier drops by a multiple of six.

The threat of carriers bringing their prepaid platforms in-house, particularly as they move into prepaid data services, raises the stakes: some carriers, including Verizon Wireless, now offer prepaid versions of short messaging service or include text messaging as part of their prepaid packages. However, where prepaid will really shine — and where BCGI believes outsourcing will make even more sense — is when it can be integrated with other retail products. The classic example, used by Nokia in a broadcast advertising campaign, allows a user to buy a Coke from a vending machine, deducting the cost from the user's prepaid account.

While technically possible and clearly marketable — in Japan, NTT DoCoMo claims 25% of its subscribers are engaged in some form of m-commerce — the business proposition of such transactions is unclear for the rest of the world. That's particularly true in the U.S., where no single carrier can lay claim to what amounts to a true mass market.

“The large carriers have enough credibility,” Erskine said. “The issue is that Verizon still represents only 10% to 15% of the U.S. population. So even if 100% of Verizon's users are buying Coke, Coke isn't interested in serving only 10% to 15% of the market.”

In such a scenario, BCGI would be able to use its existing platform to divvy up the revenues gained from such small transactions among the various entities involved, including distributors, bottlers and, of course, carriers. From the user perspective, the transaction would look like the purchase of a minute of airtime but with different increments.

And while the concept is still in its infancy in the U.S., the growth potential in m-commerce via prepaid is significant, Snowden said. U.S. teens, for instance, represent the fastest-growing segment, and have already taken to downloading games and ringtones in astonishing numbers. “Mobile commerce is still small,” Snowden said. “But if you don't think game purchases are starting to ring up, you're not paying attention to the teen market.”

Don't forget: The guy's been right before.