A different deal: Cell phone providers use prepaid plans to lure new

Oakland Tribune, Jul 13, 2003 by Eve Mitchell - Business Writer

With the number of people signing up for cell phone service starting to slow, wireless carriers are looking to attract a new crop of subscribers with prepaid plans.

Carriers are boosting their offerings of prepaid wireless cards, which allow users to buy blocks of cell phone calling time in advance. And most recently, AT&T Wireless introduced the GoPhone, which bills a customer in advance for cell phone service through an electronic deduction from a credit card, debit card or bank account.

While such prepay plans are geared in part to people who cannot pass a credit check required for traditional long-term wireless contracts, the so-called "credit challenged" are far from the only group carriers are vying for in hopes of pushing growth.

Other potential customers are teen-agers, people who don't want to commit to long-term contracts and those who are confused by the myriad cell phone calling plans, according to a May 2003 report by Morgan Stanley entitled "Prepay Services: A Diamond in the Rough."

Prepay plans have the potential of attracting almost 15 million teen subscribers in the next three years along with more than 6 million adult subscribers with a poor credit history, the Morgan Stanley report found.

Such plans are also seen as a way for people who have been hesitant about getting a cell phone to get their feet wet in the wireless world.

Or to have a wireless phone on hand in case of an emergency. For example, Cingular Wireless and Virgin Mobile both sell prepaid wireless cards that only require buying as little as $20 worth of time every 90 days. (See related story for rates offered by different carriers.)

"I've been using AT&T's Free2Go prepaid wireless service for more than a year and I'm delighted with it," San Francisco resident Jennifer Joseph wrote in an e-mail. "The flexibility, convenience and cheap rates are perfect for me as someone who dislikes cell phones but likes to have one for emergencies."

More than 30 percent of consumers who try to get long-term wireless contracts are being rejected by carriers because they cannot pass the required credit check, according to Luiz Carvalho, a Morgan Stanley analyst who helped author the report.

"Prepaid opens up a whole range of product options for customers who cannot" pass the credit check for a prepaid account, said Jeff Schlueter, executive director of product management for Cingular Wireless.

"Prepaid allows us to put together a product offer that goes after the teen segment," he said. "Frankly, that's where we're focusing a lot of effort. (prepaid) is the fastest growth segment of the market for the first half of the year. It's a significant growth area."

Such plans offered by the major carriers represent a growing segment of the wireless marketplace, which has long been dominated by people who sign up for long-term contracts that bill for service after it is provided. In fact, 93 percent of the nation's estimated 147 million cell phone users have a long-term contract, according to the Morgan Stanley report.

An advantage for the carriers that offer prepay is that the consumer pays for the phone, which reduces up-front costs to the carrier. That's not the case with a long-term contract, where carriers absorb the cost of either making the phone available for free or at a low cost. Another plus of prepay is that risk of non- payment is zero, as all service is paid in advance, according Carvalho.

The down side, he noted in the report, is that prepay consumers tend to spend an average of $25 a month on cell phone service, versus the average of $60 spent by wireless users with long-term contracts. Also, the prepay sector has higher churn rates, meaning customers are more likely to leave a carrier.

Still, the fact that the number of new subscribers signing up for cell phone service is slowing is prompting carriers to pay more attention to the prepay side of the business.

From 1995 to 2000, wireless saw a growth rate of almost 12 percent a year, according to a J.D. Power and Associates survey. In a one- year period ending in May 2001, new subscribers increased by 7.6 percent. This year, only 5.8 percent of the 44 percent of U.S households without a cell phone said they intended to get wireless service in 2003.

The prepay segment is expected to make up 10 percent of all wireless subscribers by the end of 2004, a number predicted to reach 15 percent by 2007, the Morgan Stanley report said. But more importantly, the report estimated that prepay subscribers are expected to account for about half of all new wireless subscribers signed up by carriers through 2006.

With prepaid wireless calls, people stock up on air time ahead of time in the same way that people buy prepaid phone cards to make landline calls. Cards can be purchased in retail locations or online. Additional air time is added by buying more cards. Many prepaid cards have expiration dates.

Traditional prepaid wireless card services first began to roll out about three years ago. Prepaid wireless cards are sold by AT&T Wireless, Cingular Wireless, Verizon Wireless and T-Mobile.