Skip to content “We believe an industry sea change is already under way, one that will heavily favor the prepaid business model”

May 26, 2011

We believe an industry sea change is already under way, one that will heavily favor the prepaid business model

prepaid providers offer consumers a certain value proposition that the national carriers have thus far been unable to match

And Then There Were 3: became the third major tech outlet to report on the dismantling of wireless contract plans.  This follows two other recent predictions of prepaid growth:

Yes, we’re keeping a sharp eye on this trend.  Why?  Because we’re part of the industry shift, by saving people money on a bill they already pay, showing them how to switch from contract to prepaid wireless.

—— [Make sure you see the
Walmart vs. “mom-and-pop” stores analogy
at the end of this posting!] —— reported yesterday in a story titled “AT&T, Verizon To Be Challenged by Smaller Carriers in Prepaid Market“:

Regional U.S. carriers with a focus on the prepaid market may not be able to compete as aggressively for customers as the nation’s four largest players—Verizon, AT&T, Sprint and T-Mobile—but changes in the market are nonetheless working in their favor, according to a May 25 research report from financial services firm Citadel Securities.”

The story says that Citadel Securities “expects prepaid subscriber growth to increase by an average of 11 percent a year” over the next five years, “while postpaid growth flattens,” and “by 2015, we expect that total U.S. industry connections will be ~365MM, with almost 40 percent of those connections categorized as prepaid.”

If you’ve read the other 2 articles I mentioned above, then you know the other two reports (and I) think the “40%” number is way low, since the prepaid stampede will probably result in the END of contract plans, not take a bite out of them.  Do the math:  if Jim Patterson’s “46 million” prepaid subscribers count for the end of 2010 is accurate, that’s approximately 15% of the 303 million total USA wireless users.  (Some say the prepaid number was much higher at the end of 2010.)  Adding 11% a year would only take the 46M to about 80M by 2015.  The NMRC report basically predicts that number will be surpassed in 2011 alone!

Citadel Securities identified the bad economy as a factor in driving the growth of prepaid wireless, as consumers look to save money.

The article said the Citadel Securities report named Leap Wireless as an example of a smaller carrier that may benefit from 4G LTE (Long-Term Evolution) fone prices rising “above the consumer-expected $200 mark” while “3G smartphone prices fall,” creating an attractive entry point for large numbers of consumers to switch to prepaid with an inexpensive smartphone, whether it’s an Android or iPhone.

A specific demonstration of the power of this pricing, according to the article, was the impact of the iPhone 3G price being reduced to $49 (because of the release of iPhone 4), making the older iPhone 3 much more attractive than even newer AT&T “Android smartphones such as the Motorola Atrix 4G.”

eWeek’s story said the report stated:

We believe the regional prepaid providers offer consumers a certain value proposition that the national carriers have thus far been unable to match,” and “As the entire wireless industry moves toward the rapid adoption of smartphones, we believe the prepaid specialists are poised to gain an ever greater portion of the economic pie from their current subscriber bases (who have likely stood by with envy for years watching their postpaid counterparts enjoy the best devices).”

Analyst Shing Yin, the lead author on the report, is quoted as saying:

We see the traditional line between the regional prepaid operators and national carriers as becoming increasingly blurred,” and “We believe an industry sea change is already under way, one that will heavily favor the prepaid business model—and Leap Wireless in particular—going forward.”

The Citadel Securities report predicted a “trifurcation” of the wireless market, with 3 levels of wireless users forming:  “low-end, mid-tier and high-end.”  Citadel sees the big-4 wireless companies targeting the high-end, while smaller carriers may own the lower-end.

Citing trends we have consistently pointed out here at The Antipaper Blog, Citadel said:

The subscriber mix moving toward the prepaid (i.e., ‘no contract’) tier has been shifting of late.”  The reason for that shift is the “blurring” of plans, as the smaller “prepaid operators have made bold attempts to extend their reach by negotiating national roaming plans and have begun offering premium hardware devices (smartphones), making their service offerings more akin to—and therefore more competitive with—their larger rivals.”

Towards the end of the article, a curious reference is made to a May 12 Senate hearing about AT&T’s proposed $39 billion swallowing of T-Mobile.  “One witness, Gigi Sohn, president and co-founder of Public Knowledge, a public interest group focused on citizens’ rights in an increasingly digital culture, rhetorically asked whether anyone had ever seen AT&T advertise against MetroPCS or Cricket—her point being that the smaller carriers aren’t its real competition.”

Then Ms. Sohn is quoted:  “Saying that a behemoth like AT&T competes against [Cellular South], U.S. Cellular or Cricket is like saying that Walmart competes against the mom-and-pop stores.”  Huh?  I was left scratching my head at her confusion:  Walmart DID compete against “mom-and-pop” stores!  Walmart shut them down left and right, by using economies of scale and new technology to provide much lower prices to consumers, making the “mom-and-pop” stores’ higher prices unattractive.  Here’s the mystery: never connected the dots, but we will:  for the Walmart vs. “mom-and-pop” analogy to be compared to the wireless battle, you have to flip it around, because Walmart had the lower prices.  In wireless, who has the lower prices?  The smaller prepaid companies do!  So the prepaid companies are in the position of Walmart and the big contract companies are the “mom-and-pop” stores with higher prices.

Remember, in Walmart’s early years, they were the tiny upstart competitor, trying to take market share by helping people save money on a bill they already paid.  You’d think that is obvious … 😉

Consider the mission we have:  saving people money on a bill they already pay (the same as Walmart’s initial purpose).  Then consider the tremendous money that’s being made in wireless, just as there was in retail goods in the 70s & 80s.  There’s a wide-open space for lower-cost providers to jump in and take huge market share.  Join us!

AT&T, Verizon To Be Challenged by Smaller Carriers in Prepaid Market: Citadel
By: Michelle Maisto

One Comment leave one →
  1. sun lee permalink
    May 27, 2011 21:19

    I think you are correct in that prepaid subscriber will grow rapidly. But to my knowledge of wireless industry as a whole, we’ll see 60% of customers will be on prepaid. The economy will pull down all of spending income for average family. We see HAVES spend money but HAVE NOTs are spending less and less. So, when look at all the factors, we will see higher growth in prepaid market.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: