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To dial down bills, cell-phone users opt for prepaid plans [The Kansas City Star, Mo.](Kansas City Star (MO) Via Acquire Media NewsEdge) May 27--Most consumers get it by now. That new cell phone isn't really free. The real cost to you -- and the payoff to your wireless cell carrier -- comes in the contract that tethers customer and company and ultimately averages more than $2,500 a household over a two-year deal. So more and more consumers instead are opting for cheaper services that they pay for in advance rather than on contracts that obligate them to monthly bills. It's a trend amped up by recession-driven anxiety about contracts that can outlive paychecks. And it could mean that the quest for the slimmest, smartest cell phone has been overshadowed by the search for the slimmest, smartest cell phone bill. In the first three months of 2010, the top seven wireless companies added just 230,000 new contract customers, compared with 3.1 million new prepaid users. Overland Park-based Sprint Nextel Corp. -- still bloodied by a dramatic drop in customers in 2008 -- is acting more aggressively than any carrier to give consumers prepaid deals that offer everything from pay-as-you-go to all-you-can-eat options. "If customers are moving from a contract environment, we want to be there to serve them," said Neil Lindsay, chief marketing officer for Sprint's prepaid brands. The company now boasts a stable of so-called flanker brands peddling service without contracts. Boost Mobile aims at the high-end user. Virgin Mobile is geared for consumers whose phones fit into their electronic social networks. Newly launched Common Cents Mobile sells to bargain hunters out of Walmart stores. And the subsidized Assurance brand gives minimalist service to low-income consumers. The growth in prepaid services that sell time in advance for anywhere from 7 to 25 cents per minute is putting a hurt on contract deals. "It's going to force the AT&Ts and the Verizons to respond, but they won't like it," said Dan Baker, director of the Technology Research Institute. "They're going to go reluctantly. The contracts are a steady stream of revenue for them." In fact, the contract is still king. In the United States, roughly four out of every five wireless customers have signed up for what the industry refers to as postpaid plans. Yet the last three months of 2009 revealed a turning point in the American cell phone business -- when the number of new prepaid customers eclipsed new contract consumers. And why wouldn't people shift to prepaid? The rates are typically lower and make it easier to match minutes, text messages and data downloads to usage. "If I can get unlimited talk and text from Boost Mobile for 50 bucks a month, why would I agree to $70 a month from Verizon, particularly when they might throw another $10 a month in fees on my bill," said Samuel Simon, a fellow with the New Millennium Research Council. "People are beginning to figure these things out." That, in turn, has sparked competition for the prepaid market. And that is sure to eat away at some at the more lucrative contracts. "But it's better to be your own cannibal," said Rick Franklin, a telecommunications analyst at Edward Jones & Co. "You don't want somebody else to do it for you." Still, that puts cell carriers in the position of fighting over accounts that typically represent less money per customer and higher turnover rates. With prepaid service, users typically buy their own phones outright. They then buy service in advance, sometimes adding minutes or other usage to their accounts by purchasing cards or having charges put on credit. Prepaid cell service was once a low-rent world of people with sketchy credit. It then slowly attracted so-called glove-box customers who rarely used their cell phones but wanted a relatively cheap way to keep a cell phone handy in their cars. That has changed. Now some prepaid service works with Internet-friendly smart phones -- albeit not yet with the iPhone or other handsets that define geek chic -- and their fast-growing catalog of computer apps. The cheaper prepaid plans also come tailored for people who talk on their phones a lot or a little, use them mostly to text or to surf the Web. Many credit Sprint for the shift. Early last year its Boost brand started offering unlimited service. That, in turn, sparked the birth of Straight Talk -- a service sold by Mexican cell giant America Movil SA that works on industry leader Verizon's network. Then MetroPCS and Leap Wireless International -- companies that aim for low-income users in limited areas -- cut their rates by ditching sundry add-on fees. Virgin Mobile, a brand acquired by Sprint last year, also jumped into the unlimited prepaid game. "We've seen more competition in the prepaid market, no doubt," said K. Dane Snowden of CTIA, the wireless industry association. "Most are offering a prepaid model at some level. ... Some consumers just want to try a new service." He dismissed suggestions that the shift to prepaid was evidence of consumer frustration over the cost and complexity of the industry's reliance on contracts. Instead, he said, it was simply competition. "In the old days you had Ma Bell (Telephone Co.) and one choice in the design of a phone," Snowden said. "Today, you can pick from 630 phones, three or four carriers in any area, and tens of thousands of apps." Industry critics say the trend moves at least partly on consumer frustration. A survey released Wednesday by the Federal Communications Commission said 30 million Americans -- a sixth of cell customers -- have had "bill shock," what the agency defines as "a sudden increase in their monthly bill that is not caused by a change in service plan." Most said their carriers had not warned that they were about to exceed their normal usage. More than a third of those saw their bills jump by $50 in a single month; almost a fourth said their bills leaped by $100 or more. "People want to buy a la carte because they don't want to pay for stuff they don't use, and they want to understand what they're paying for," said Mike Gikas, senior editor for electronics at Consumer Reports magazine. He sees the smartest of smart phones as the industry's effort to corral consumers in a world of service contracts. AT&T has been hearing growing complaints about its service, but its exclusive offering of the much-adored iPhone still draws customers. Sprint will start selling its HTC Evo 4G, seen by many gadget reviewers as one-upping the iPhone, only to customers who sign two-year deals to pay for a slightly pricier high-speed connection. Wireless carriers have good reason to like contracts. They fight off what the industry calls "churn" -- when a customer walks away from a service. A recent FCC report estimated that AT&T, for instance, spent $528.93 to acquire a new subscriber -- money spent on promotions, advertising, sales staff. Customers who walk away from a contract typically pay a penalty. That getaway charge is increasing for those with expensive smart phones and dropping for those with simple text-and-talk models. AT&T is raising the cost of breaking an iPhone contract to $325 from $175. That figure drops by $10 for every month the customer has used the service and paid the monthly fees that underwrite the cost of the gadget. Prepaid customers have no contract to walk away from. Consequently, they abandon a carrier at three times the rate of contract customers. "The challenge for us," said Sprint prepaid boss Lindsay, "is to give them the right options." To reach Scott Canon, call 816-234-4754 or send e-mail to [email protected]. To see more of The Kansas City Star, or to subscribe to the newspaper, go to http://www.kansascity.com. Copyright (c) 2010, The Kansas City Star, Mo. Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |