Posted: 09/1999
Prepaid Wireless: Will the International
Phenomenon Come Stateside?
By Liz Montalbano
Like topless sunbathing, Vespa motor scooters and convenient rail travel, prepaid wireless primarily is an international phenomenon. But if industry pundits are correct, this soon may change. The number of prepaid wireless subscribers in the United States is expected to more than double between 2000 and 2002, from 977,000 subscribers to about 2.7 million, according to The Yankee Group, Boston (see chart, below).
Chart: Prepaid Wireless Market Forecast (1997-2002)
This forecast doesn't mean an impending credit plague among U.S. consumers, driving them to forgo credit checks and purchase wireless service on a prepaid basis. Instead of simply appealing to the credit challenged, its traditional demographic, prepaid wireless is finding a niche among an entirely new customer base, says Ayesha Ahmad, research analyst, wireless services, Current Analysis Inc., Sterling, Va.
"The service itself is appealing to a growing base of nontraditional wireless users--older people, teen-agers who don't qualify for credit checks, even people who can qualify for credit checks but want to control costs and figure it will just be up front, as opposed to getting bills that often have hidden costs," Ahmad says.
She adds that for a carrier that has yet to venture into the wireless market, prepaid is as good an entry point as any.
"All the wireless companies pretty much have got all the heavy-volume users at this stage," she says, "so now prepaid is a really good way to tap into the nontraditional wireless user market."
Handset- vs. Network-Based Systems
There are two options for carriers that want to add prepaid wireless to their portfolio of services: handset-based and network- or switch-based systems. With handset-based technology, which Kenin M. Spivak, pres-ident and CEO of Los Angeles-based Telemac Corp., says his company invented, the rating system that tracks the customer's usage vs. the time he or she has purchased is in the handset (see chart, below).
Chart: Handset-Based Prepaid Wireles Infrastucture
"What Telemac did was invent a technology that allows a handset to be programmed so that it has the ability to compute for multiple rates [and] the amount of time that's being used," he says. "It can decrement balances internally in the handset, and the rate can be changed at any time."
Switch- or network-based prepaid wireless holds the rating system in a carrier's switch (see chart, below). This, according to Spivak, "requires a carrier to purchase expensive equipment," which he views as cost-prohibitive to implementing the service.
Chart: Network - or Switch - Based Prepaid Wireless Infrastucture
While this is true, network-based prepaid wireless also means the service works with any wireless phone. The opposite is the biggest downfall of handset-based prepaid wireless: It only can be used with a phone specifically configured with a provider's rating software.
This is one of the only differences between handset-based and network-based prepaid wireless service visible to end users. Another is that to find out how much air time is left with handset-based technology, all customers must do is punch a code into their phones and the information will be displayed. Switch-based prepaid wireless users must dial into a toll-free number to acquire account information, which also means more expense for a wireless provider to set up an automated interactive voice response (IVR) system for its prepaid customers to use.
Another benefit of handset-based technology is the ease of roaming. Since the ability to communicate with the provider is in the handset, not the provider's switch, the phone can be used anywhere in the country without added roaming charges or significant technological investments on the part of the provider. Network-based prepaid wireless providers either must have an extensive national network or have partnerships with other providers for roaming capability, since the prepaid rating system is in the switch. Therefore, if a prepaid customer travels outside the provider's signaling area, there is no way to calculate how much air time he or she has left.
The Customer's View
To an end user, both forms of prepaid wireless work in basically the same way. A customer purchases a wireless phone and prepaid wireless phone cards, which are distributed at convenience stores such as Circle K and 7-Eleven and retail stores such as Radio Shack, Best Buy and Toys R Us, depending on the provider. The cards come in "unit" increments, and the price per minute for the service is substantially more expensive than it is for postpaid--usually about 50 cents to 75 cents per minute, although San Francisco-based AirTouch Communications Inc. (which recently merged with Berkshire, U.K.-based Vodafone Group plc to form Vodafone AirTouch plc) cut its prepaid wireless prices to about 35 cents per minute in April, increasing competition in the market.
Typically, handset providers will offer a prepaid wireless starter kit, complete with a phone. For example, Miami-based Topp Telecom, a handset-based platform provider and reseller of prepaid wireless, offers its Tracfone product in five handset models. A starter kit is comprised of a phone and 10 minutes of air time, and retails for about $99.95. Topp also offers 30-unit, 60-unit or 150-unit cards in which a unit equals a local minute, 1 1/2 units are a long distance minute, and three units are a minute of roaming. The cards sell for $25, $45 and $90, respectively.
"It's basically off-the-shelf technology," says John J. Wiesenhan Jr., president and CEO for Topp. "You literally walk in, you grab the box, you buy airtime cards, you go home, you activate it, and it's a phone."
AirTouch's prepaid service, which is network-based, works in much the same way. AirTouch offers a starter kit with phone for about $80, and offers prepaid cards in many of the same retail outlets as Topp. The only difference for an AirTouch prepaid customer is that he or she must dial in to a toll-free number to activate service, says Patti Finley, manager of media relations for AirTouch's western region.
"We have a separate prepaid center that takes these calls," Finley says. "The customer rep walks them through, helps them program their phone and basically gives them an overview of the program. Then, at the beginning of each call, an automated message tells the user how many minutes are available, and at the end it tells them how many minutes remain."
AirTouch and Topp both are providers of prepaid service, but the similarities between the companies end there. Beyond the handset vs. switched difference, the two perform very different functions in the prepaid wireless family tree, which can have more twists and turns than a Hitchcock movie. Although prepaid wireless service may appear as if it's coming from one provider, there may be three or even four companies that have a direct hand in providing one company's service.
There are several categories under which these companies fall. There are the wireless companies from which an end user can purchase prepaid service, which include the usual suspects such as AirTouch; Topp; Cellular One, Atlantic City, N.J.; AT&T Wireless Services Inc., Kirkland, Wash.; MCI WorldCom Inc.; and Sprint PCS.
The complication arises behind the scenes, because while these companies sell the service, they may or may not actually be providing it.
For example, an end user can buy service from AirTouch, but AirTouch itself does not have the resources to provide end-to-end service to the consumer. What it does is brand and market the service, and it travels over the AirTouch network.
Enter Woburn, Mass.-based Boston Communications Group Inc., the largest prepaid wireless service bureau in the U.S. market. Boston is the brains of the operation behind some of the largest prepaid wireless providers in the United States, including AirTouch; AT&T Wireless Services; Bedminster, N.J.-based Bell Atlantic Mobile; Atlanta-based BellSouth Corp.; San Antonio-based Southwestern Bell; and Rochester, N.Y.-based Frontier Corp.
In most cases, Boston Communi-cations acts as a service bureau, running the network-based prepaid wireless infrastructure and back office so providers with more recognizable brands--or that just don't want to invest in the technology--can market and distribute prepaid wireless service. In the case of AirTouch, which has its own proprietary network, Boston simply provides the company with a call rating and processing system.
Kevin Thigpen, vice president and general manager of the Prepaid Services Division for Boston Com-munications, explains what his company does in this way: "We run a national, private network. We have invested in hardware, software and business support services that manage the carrier's prepaid wireless program. The carriers can stay focused on the distribution, marketing and promotional efforts of the program, and we handle all of the technology and back-room applications."
Thigpen says Boston Communi-cations has been in commercial operation as a service bureau for about 2 1/2 years, offering an any-phone solution supporting analog, both time-division multiple access (TDMA) and code-division multiple access (CDMA) digital and global systems for mobile (GSM) networks. Along with its prepaid wireless services, the company also provides roaming services, outsourced customer care services and enhanced services.
Other companies that act as prepaid wireless service bureaus are National Telemanagement Corp., Dallas; Brite Voice Systems Inc. (which currently is negotiating a merger with Dallas-based InterVoice Inc.), Orlando, Fla.; GTE Telecommunications Services Inc. (GTE TSI), Tampa, Fla.; and Priority Call Management, Wilmington, Mass.
While service bureaus will oversee a company's entire prepaid wireless service, platform providers such as Comverse Network Systems, Wakefield, Mass.; Corsair Communi-cations, Palo Alto, Calif.; and Centigram Communications Corp., San Jose, Calif.--which recently entered the market with the rollout of its C-PrePaid platform in July--manufacture the platforms that enable the service. These include the functions that look up a customer's balance, determine the rate at which the service is billed and perform real-time rating.
It's with platform providers that the lines blur between prepaid wireless providers' service functions. Some companies strictly deal in platforms, selling their technology to companies that want to incorporate it to implement prepaid wireless service. Others, such as Topp Telecom, actually provide service on a platform they've developed.
Topp is a more vertically integrated company. It has designed its own platform and markets and distributes wireless service, which it accomplishes by buying lines and airtime minutes from carriers and forming alliances with handset providers to build Topp technology into their handsets.
"We have some carriers that call us a retailer, we have some carriers that call us a value-added distributor (VAD), we have some carriers that call us a carrier," Wiesenhan says. "You can think of us as we buy the line and the minutes from every carrier, and yes, we do resell it to the consumer."
Then there's Telemac, which doesn't provide service, sell prepaid platforms or worry itself with marketing and distribution. Instead, it licenses handset manufacturers the right to integrate its patented IMA-Module into handsets, and licenses wireless service providers and resellers the right to operate Telemac's patented DAS software, which communicates with the IMA-Module. Together, the IMA-Module and DAS comprise Telemac Prepaid Technology, a complete real-time billing system for prepaid wireless technology.
In this way, Telemac acts on both sides of the prepaid market--the original equipment manufacturer (OEM) side, in offering licenses to handset manufacturers, and the carrier side, in licensing providers so they can develop relationships with Telemac OEM partners to offer prepaid wireless to end users. And while Telemac is seeking to cash in on the prepaid wireless opportunity as it grows in the United States, it also has a strong international presence through its handset partnerships with Phillips Royal Electronics, Eindhoven, Netherlands, and Sensei Ltd., Aylesbury, United Kingdom, which manufactures GSM handsets in Europe.
Prepaid Overseas
For prepaid wireless providers and others involved in facilitating the service, targeting the European market is a good bet. AirTouch's Finley says that while only about 5 percent of U.S. cellular customers are prepaid, that number jumps to about 35 percent in Europe. In some European countries such as Italy, says Mark Haas, senior director, product management for Comverse Network Systems, the number of prepaid wireless subscribers is even higher than that.
"Telecom Italia has over 14 million prepaid subscribers," he says. "Close to half of the people with mobile phones in Italy are prepaid."
There are several reasons prepaid wireless is a more viable option overseas--especially in Europe--than it is in the United States. Ahmad says that other parts of the world are not as credit card-dependent as the United States, so prepaid is seen more as a primary way to purchase wireless phone service rather than an alternative way if a consumer cannot pass a credit check.
Haas mentions a more financial reason--what he calls the "break-even point between postpaid and prepaid." In the United States, he says, postpaid becomes less expensive when a customer is using between 80 to 100 minutes per month.
"In Europe, it's closer to 200 minutes," he says. This means that moderate-to-heavy users of wireless phones can purchase prepaid service in Europe without postpaid being a much less expensive option. Currently in the United States, only low-airtime users of wireless service might find prepaid wireless a less expensive way to purchase cellular service.
For now, Haas says, that's the market U.S. carriers are beginning to tap into.
"Somebody who puts a cell phone in the glove compartment of their car for emergencies makes only a couple of calls a month," he says. "They don't want to pay $20 a month, they don't want two-year contracts. Parents who have teenagers and the parents both work--they want to give the kids a cell phone but they're afraid to give them a phone with unlimited credit. So what we're seeing is this [prepaid wireless option] is extremely popular [with these customers]."
Haas adds that while U.S. carriers are becoming a little more savvy to the advantages of providing prepaid wireless, they were a bit slow to come around in the beginning.
"U.S. carriers did not see prepaid as part of their main-line business," Haas says. "They saw it as sort of a sideline: 'We'll outsource it, let somebody else worry about it and we'll take a percentage of the cut.'
"Right now, what we're beginning to see is some of those companies are really beginning to rethink that strategy," he adds. "I think they're seeing the rate of new prepaid subscribers are growing much faster than the rate of new regular subscribers in lots of places."
Liz Montalbano is news editor for PHONE+ magazine.
