March 1999

Prepaid Wireless: It's Not Just For The Credit-Challenged Anymore

BY CARLYN TAYLOR

Prepaid telecommunications products were first introduced widely in 1993, and current estimates of the worldwide market, including calling cards and wireless products, range from $2.5 to $3 billion. While U.S. companies have launched many prepaid calling card products, until recently prepaid wireless was viewed as a tool to attract credit-challenged subscribers, a market that was considered less desirable. Historically, as many as 30 percent of all U.S. applicants for wireless service did not qualify due to their credit profile. Until prepaid cellular was launched, this large pool of potential subscribers was generally turned away.

Recent experience in Europe and Latin America demonstrates that prepaid plans are appealing to other types of users and that prepaid products are rapidly expanding the market for wireless service. Italy has seen the most dramatic growth from prepaid wireless plans. Approximately 95 percent of new activations for Telecom Italia Mobile (TIM) in 1998 chose a prepaid option, and over 40 percent of TIM's customer base now prepays for service. In Portugal, prepaid plans accounted for 50 percent of 1998 activations. Telcel, the largest wireless carrier in Mexico, introduced the "Amigo" plan in 1996 and took the market by storm. In 1998 both Mexican cellular carriers increased their subscribers by 100 percent, with multiple prepaid plans accounting for the vast majority of new users.

Until 1998, U.S. companies largely ignored the success of prepaid products in Europe and Latin America, and Wall Street is most likely to blame. Analysts evaluate wireless companies on a series of variables that prepaid products distort, including average revenue per user (ARPU) and churn. As long as prepaid products were viewed as a tool for the "poor credit" market, it was not worth the risk of degrading the traditional value drivers, even if prepaid plans were profitable.

U.S. wireless carriers finally began to introduce a wide variety of prepay products in 1998, and they have found that many categories of new users are choosing prepaid plans as the most appropriate option. These groups include students, security-only users, users on a fixed budget, corporations wanting to restrict non-business use, subscribers wishing to remain anonymous, and users who value the flexibility of not having a contract. Prepaid packages are also much easier to give as gifts or to resell in affinity programs run by clubs and community organizations. A pre-activated phone can be given or sold with the initial prepaid minutes, and the entire package can be distributed through new channels, including supermarkets and convenience stores.

It looks like 1999 will be the year when prepaid wireless products have a measurable impact on market penetration in the United States. Two major carriers are aggressively pursuing the products, and more will follow. BellSouth Mobility is targeting 30-40 percent of its new customers on prepaid plans, and SBC Mobile is targeting 20 percent. Now is the time for analysts and carriers to compose a different set of measures to assess the value of prepaid subscribers. The focus should be on profitability, not ARPU or churn. Revenues from prepaid customers may be lower, but the costs associated with prepaid customers (e.g., billing, bad debt, customer service, and acquisition costs) are much less as well.

Carlyn Taylor is a partner with PricewaterhouseCoopers. Based in Los Angeles, she leads the telecommunications practice for the western United States in the Financial Advisory Services Group, specializing in litigation, strategy, and corporate restructuring consulting. For more information, please visit the PricewaterhouseCoopers Web site at www.pwc-global.com.