The Push Behind Prepaid

The average prepaid phone user spends about $30 a month.
The average prepaid phone user spends about $30 a month. (By Bill O'leary -- The Washington Post)
By Yuki Noguchi
Washington Post Staff Writer
Thursday, June 2, 2005

Two years ago, 17-year-old Brittney Brooks would never have considered carrying a prepaid cellular phone, which shouted its cheap-o status through bulky, unattractive handsets twice as big as most cell phones today.

"I thought of prepaid as a bad thing," the District high school student said. "There weren't any good prepaid phones."

Now, the junior at M.M. Washington Career High School proudly carries around a small Kyocera K9 phone from Virgin Mobile USA, a prepaid phone service. It helps her control the cost, she said, and the K9 is a silver, ergonomic little number that comes with text messaging and an array of accessories.

She estimates 60 percent of her friends use prepaid service, even her mother and her cousin. "I wanted it because of good prices; Mom didn't want a contract."

And just like that, prepaid or pay-as-you-go phone service is becoming the next big wireless thing. Customers buy a phone, refill their accounts by paying online or buying a card with a code on it, then draw down from their balance with every call they make or text message they send. With calls at roughly 20 cents a minute, the average prepaid phone user spends about $30 a month, rather than the $55 a month paid by a customer with a contract.

That kind of service accounts for roughly 10 percent of the 182 million U.S. cell phone subscribers, many of whom are young like Brooks; still others have bad credit. The rate of prepaid usage is far less than the 95 percent of wireless users in Italy, or 50 to 55 percent in Germany and the United Kingdom, according to Ovum, an industry research group.

Comparing prepaid cellphone plans from Cingular, Nextel, Sprint PCS, T-Mobile and Verizon Wireless.
Prepaid has already become the standard in developing countries all over the world, because the plan doesn't require sophisticated financial or billing systems. Historically, prepaid services haven't been as popular in the United States because carriers preferred to target the bigger fish -- professionals and families with good credit who were willing to sign long-term contracts.

But now that market is nearly saturated, sending wireless companies looking for new customers. And exclusively prepaid services like Boost Mobile LLC and Virgin Mobile USA are posting the industry's biggest growth. The appeal of prepaid is that it requires no long-term contract, and because customers pay in advance for their talk time, no credit check is required. Nextel Communications Inc., which owns three-year-old Boost, generated 40 percent of its new subscribers from that service last quarter; Virgin Mobile, which is half owned by Sprint Corp., was founded in late 2001 and accounts for about 60 percent of Sprint's new subscriber additions.

Prepaid service, which primarily targets people age 13 to 24, is growing at a yearly rate of 25 percent to 30 percent, which outpaces the wireless industry's overall growth rate of about 5 percent.

"Three to four years ago, prepaid had a bad reputation," said Dan Schulman, chief executive of Warren, N.J.-based Virgin Mobile, which has more than 3 million subscribers, two-thirds of whom are under the age of 30. "It was very second-class citizen," with bad customer service and big, ugly handsets with few features, he said. Cost of such services were also high -- about 60 cents a minute -- so customers abandoned the service almost as fast as they signed up for it, he said.

"The stigma of it being prepaid is going away," said Don Girskis, vice president and manager of Boost Mobile, which has 1.5 million users, 80 percent of whom are under age 34.

Today carriers are charging far less, 20 cents or less a minute, offering better phone options, and designing services to cater to increasingly specific needs -- like cheaper international long-distance calling for immigrants, he said. "Now it's becoming a legitimate category, and you'll see a lot more advertising around it."

Drawn to the potential size of the prepaid market, companies are putting new energy into efforts to tap the harder-to-reach users.

Last week, Cingular Wireless, which bought AT&T Wireless last year, relaunched the GoPhone service under the new Cingular brand. Verizon Wireless relaunched its FreeUp prepaid service in February and renamed it INpulse.

In the next year, companies plan introductions of a slew of services offering some form of prepaid service. Amp'd Mobile, a prepaid and post-paid wireless service directed at twenty-something and thirty-something men, is set to launch this fall, offering music, gaming and erotic content.

Owners of Hispanic television network Univision are teaming up with Sprint to launch Movida, a service directed at Spanish speakers, planning to sell its prepaid handsets and phone cards at Wal-Mart stores. Viva Liberty, InPhonic's Hispanic offering, started selling service March.

"It's filling cracks in the industry," said David Steinberg, chief executive of InPhonic Inc., a District-based company that resells wireless service online and owns a prepaid service of its own, called Liberty Wireless. Roughly 40 percent of Americans have poor credit or no credit, which means prepaid has a large potential audience.

People like Brooks, who is under 18 and can't enter into a legal contract, are typical prepaid candidates. So is Brooks's mother, who doesn't want to sign a one- or two-year contract, as is standard for post-paid cell phone service. Or retirees on a fixed income, who don't want to pay monthly charges for a service they seldom use.

Brooks spends a fifth of her monthly wages earned working at an ice cream shop on her phone bill, and having a prepaid plan helps her limit her usage, she said.

"We talk about cell phone bills," she said. After school, classmates sometimes warn their friends, "Call me on my house phone because I ran out of minutes," she said.

It's not easy to make money catering to prepaid users because their spending is erratic and they aren't locked into contracts.

"You have to run your business at very low cost," said F.J. Pollak, president and chief executive of Miami-based TracFone Wireless, the largest reseller of prepaid phones, with 4.8 million customers. "We're able to make money on $20-a-month customers," while most carriers are focused on those whose bills total $100 a month, he said. But it's a challenge: The key to making it work is investing in customer service, so customers aren't inclined to leave, he said.

TracFone has figured out a way to make money on its 10-cents-a-minute service, in part because they display the number of remaining minutes on the handset screen, which minimizes customer-service calls that are expensive for the company, said Roger Entner, an analyst with Ovum. TracFone also keeps its customers happy by offering high-end phone options, he said. "So the customer can have the Porsche or the Ferrari, even if they don't drive it that much."

A sleeker phone made Brooks happy with her prepaid service. Now that she has it, she's developed a distaste for that other thing she used to use: the pay phone. "It's 50 cents to use the pay phone and no one can call you back on the pay phone," she said. "Besides, pay phones are kinda disgusting."

© 2005 The Washington Post Company