Prepaid Mobile: New Models or Market Definition? By Aaron Blazar The prepaid mobile business has been back in the thick of things recently with controversies surrounding low-end government subsidized lifeline offerings, the emergence of new MVNOs looking to change wireless business models and the continued prepaid dabbling of major carriers. All in, ATLANTIC-ACM expects the prepaid wireless space to grow by 2.1 percent from 2012 to 2017; however, what form that growth will take remains to be seen as carriers in multiple avenues are either redefining their business models to meet new market opportunity or are building new models. Analysis: In each prepaid subcategory, several areas of critical discussion have emerged. We believe these will have to be conquered for the industry to achieve the growth we expect. Look for the next two years to effectively redefine this market: Lifeline wireless: The much publicized – and much needed – reregulation of the lifeline mobile market is fully under way, leaving the sustainability of many current providers’ business models up in the air. At current count there are 15+ operators earning greater than $14 million per year in lifeline subsidy revenue, with a third of these having only having entered the market in the last two years. Large operators with scale, like Sprint and Tracfone, face a very different path than small, subscale operators, as their customer bases will come under significant pressure from recertification and new eligibility standards. The 20+ small and midscale operators are revaluating (or will be forced to reevaluate) their ability to maintain relevance and profitability as large operators are looking to Lifeline as a chance to provide discounts to their low-end bases that use higher-end phones, representing a model that departs significantly from the classic model of providing feature phones with basic voice and texting plans. With traditional players facing increasing scrutiny from regulators and competitive pressure – combined with the entrance of large, high-end prepaid plays with network ownership and unique offers – the question has emerged: Is now the time to pivot or look for an exit? Prepaid MVNOs: Much like their Lifeline-focused brethren, prepaid MVNOs have gained new life in the last two years with the emergence of multiple forms of new business models focused on different niche plays. These plays have ranged from technology innovators (think: Republic Wireless) to demographic-oriented plays (think: Great Call/ Kajeet) to pricing innovators (Ting, Freedom PoP). These MVNOs have executed big launches emphasizing their niche plays in the market, but the question of scale eludes all of them. With the U.S. postpaid and prepaid market holding an estimated 304 million subscribers at the end of 4Q12, penetration is now over 97 percent. With penetration this high, the probability of new business-model success gets lower without significant, game-changing innovation, and at this point, new MVNO entrants have not innovated enough to drive enough of a game change to alter the ecosystem and enable them to scale into successful long-term players (i.e. Tracfone, Boost, and Virgin Mobile). In coming years, further innovation must materialize if these new standalone MVNO models are to succeed. How the innovative models will take shape remains to be seen – players could subsidize devices and plans with advertising or take advantage of emerging, bring-your-own-device (BYOD) models to open networks, giving consumers more choice or long list of other alternatives. In any case, the MVNO model requires further “outside the box" innovation to succeed and be sustainable. Mobile Network Operator Plays: In the last year, AT&T and Verizon have followed Sprint’s lead and regained interest in their prepaid businesses, driving subscriber gains through unique pricing plays and device availability. In total, AT&T, and Verizon have added nearly 2 million prepaid subscribers since first quarter 2011 (including some data plans for tablets here and there). This has produced some small successes for the major carriers even though the model has not been a core focus. In the last two months, as T-Mobile has roared back to life, the prepaid and postpaid model has begun to blur as T-Mobile is beginning to play a card that could disrupt both markets by changing the method by which they are charging for devices. Struggling T-Mobile is coming to market with a plan that reflects a hybrid model of prepaid and postpaid plans with its new Equipment Installment Plan offer. The plan works as follows: T-Mobile charges an equipment fee up front and then, over the course of use of the service, charges an ongoing equipment installment (or the user pays in full for the device up front). The kicker is that T-Mobile offers a no-term service contract with the device at a significantly lower rate for one or two individuals on the plan (compared to current postpaid offers from AT&T, Sprint and Verizon). T-Mobile is effectively changing the game when it comes to differentiating between prepaid and postpaid markets by offering a hybrid model that can compete on service pricing while allowing access to high-end devices. Whether consumers can swallow the upfront cost of devices remains to be seen, but this new spin on device charges and low-priced plans is a differentiator. AT&T, Verizon and Sprint have responded by saying they won’t respond (read: they’re not altering their postpaid products). Does this make their prepaid products the place to go to war against T-Mobile, or does it simply mean that T-Mobile is becoming closer to a full-on prepaid carrier with a postpaid problem? (The pending acquisition of Metro PCS would even further move T-Mobile into the world of prepaid.) If T-Mobile were to be considered a full-on prepaid carrier it would be the largest from a subscriber-base perspective and would be able to leverage its new LTE network more effectively than all others in the marketplace. The scale and advanced network would enable it to assert itself in both the low and high ends of the prepaid market. The network density alone with HSPA+ and LTE would put T-Mobile out ahead of its prepaid competitors, making the provider a compelling prepaid player with an innovative strategy. All in, T-Mobile’s mostly postpaid-positioned device pricing play may effectively blur the line between prepaid and postpaid, changing the overall prepaid market dynamics for many years to come. Ultimately, the U.S. prepaid mobile market boils down to the scaled players (Sprint, Tracfone, Metro PCS, Leap, Verizon and T) vs. the sub-scale innovators. These innovators face an uphill battle as the low-hanging fruit (Lifeline) has gone bad and it is time for the business models to get real or get out. Look for the market to continue to grow (albeit with some hiccups) and consolidate as players look for scale to drive enticing pricing and powerful network plays to score with prepaid converts. Aaron Blazar works as a vice president for ATLANTIC-ACM on projects ranging from market sizing and forecasting to corporate strategy covering both the wireline and wireless telecom markets. Mr. Blazar has a broad perspective on the telecommunications industry and expertise in market segmentation, market analysis, market entry strategies and statistical analysis.
Posted on: Sat, 17 Aug 2013 16:06:40 +0000
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