article

Phone Plus Prepaid: The Little Industry That Could

Posted: 12/2002

The Little Industry That Could

By Dr. Judy Reed Smith

THE
GOOD NEWS IS THE PREPAID CARD INDUSTRY keeps chugging along and can continue to
expect growth well beyond that of most long-distance product lines (see graph on
page 45). The bad news is that the product is maturing, and growth expected in
the future is half what it was in the past — with the bulk of the revenue
growth among the largest players.

In the early years of the industry,
compound annual growth rates (CAGR) were in the 20 percent to 30 percent range
with incredible expansion in new players that offered purely prepaid.
Atlantic-ACM research indicates, however, the growth of the industry from 2002
to 2008 will be a bit less than 10 percent CAGR. Growth will be primarily among
those companies that use prepaid as a supplementary product line and those that
began with prepaid as their core product, but have branched out considerably
(See table on page 45).

Prepaid Pure

The little "prepaid pure"
players have provided many Americans and new immigrants to America a notable
route to success. The most honest of these companies brought low prices for
service — especially international services — and provided needed value for
their customers. The less honest fleeced the unsuspecting consumer, as well as
the overly generous wholesaler. Now, the opportunities have narrowed, with
intense competition and the advantages of scale operations dimming the prospects
for the under-funded new entrant.

The past business models were
typically focused on one or more international markets, with well-connected
distributors and agents supplying cards to small, independent shops in an ethnic
neighborhood. Only an incredibly clever approach to the market, combined with
good wholesale support, can bring success for the 2003 card entrant. Although
these small players expect growth to be just short of 10 percent between 2003
and 2005, 10 percent is not effective growth for an emerging player.

By number of companies, the vast
majority fall into this business model, with 80 percent of companies reporting
that they sell through independent stores, 60 percent of the total adding ethnic
stores and 57 percent also using local retail chains.

Orion Telecommunications Corp. (OTC)
has been a mainstay the past few years in the "prepaid pure" section.
The company has retained its focus on the prepaid calling card market and has
elected not to diversify its product portfolio. Management adheres to the old
adage, "When the wheel isn’t broke, don’t fix it." Over the past years
the company has built a solid distribution system across the United States and
has inked low-cost wholesale contracts that allow the company to pass on savings
to its customers. Its solid distribution system has driven OTC cards deeply into
the ethnic niches at smaller bodega stores and created a fairly stable customer
base. The company’s wholesale contracts have allowed it to expand its low priced
international calls to more and more countries over the years, capitalizing on
calls to Latin America, Africa and Asia. In the future, competitors and industry
experts alike will watch as OTC continues to expand its "prepaid pure"
business, both through domestic and international outbound calling.


Prepaid Growth Compares Favorably
Source: Atlantic-ACM

Prepaid Adds More

The largest "prepaid adds
more" companies in the model also expect growth around 10 percent between
2003 and 2005. However, for the giants such as AT&T Corp., Sprint Corp. and
Verizon, a business department with strong 10 percent year-over-year growth
produces a significant revenue increase for the company. These business models
include distribution through large retail outlets such as Wal-Mart, Costco and
7- Eleven. The companies pay a premium for shelf space at the outlet and compete
heavily for the right to provide cards at that site. The competition includes
offering low domestic rates for the mass-market customers, as well as hefty
margins on the card for the retail outlet.

Getting a late start in the prepaid
long- distance space, Verizon has done more in the past year than any other
"prepaid adds more" company. How has the RBOC entered the market so
effectively? First, a contract with 7-Eleven has generated massive volumes
enough to make a competitor’s head turn. Then there’s the company’s distribution
in the Southeastern United States. Some experts believe this prepaid revenue
generated from long-distance calls to Mexico and Latin America were close to
overall 1+ long-distance revenue. Combine this excellent distribution to its
partnership with XO Communications Inc., which allows the company to distribute
cards in all states — those where Verizon hasn’t filed for 271 relief.
AT&T, MCI WorldCom Inc., Sprint and Qwest Communications International Inc.
should keep a careful eye on this new player.

Prepaid as Core

The most impressive growth will come
from the third business model. These are companies with "prepaid as the
core" supporting their revenue. These players began as focused
"prepaid pure," and experienced great success with their pricing,
marketing and distribution methods. As they grew, they branched out into other
aspects of telecom and now enjoy diverse revenue streams. These companies expect
growth of 12 percent to 14 percent in coming years. The 40 percent of companies
that distribute through medium retail chains include those with this business
model.

IDT Corp. dominates the
"prepaid as the core" segment. Historically IDT has captured revenue
north of $1 billion annually from card sales in the United States and abroad.
Here in the United States, its partnership with Union Telecard Alliances (UTA)
has generated more than $700 million. UTA’s strong domestic distribution network
has provided great opportunities in bodega stores as well as midsized stores.
However, IDT hasn’t stopped at selling prepaid. A glance at IDT’s marketing
shows the company’s drive to capitalize on battered long-distance providers. IDT
is heavily targeting the traditional 1+ long-distance market, stealing customers
away from the original Big Three (AT&T, MCI and Sprint) long-distance
companies. In fact, Atlantic-ACM projects growth from its long distance will be
nothing less then phenomenal. In addition, IDT has hit the wireless and prepaid
Internet access market. It formed the IDT Wireless division in March 2000, and
Nuestra Voz is its full Spanish-to-English prepaid Internet service. 1+ long
distance, wireless and prepaid Internet access are sure to help fuel IDT’s
future growth.

Atlantic-ACM research suggests there
is no doubt that the prepaid industry has, and will, provide solid telecom
growth. However, the entrepreneurial opportunities of the last decade are
primarily outside of the heavy competition of domestic service long-distance
cards, still somewhat in international cards, and primarily in the newer prepaid
products, such as wireless.

Dr. Judy Reed Smith is CEO of Atlantic-ACM,
a strategy and customized research consultancy based in Boston. She can be
reached at atlantic@atlantic-acm.com.


Prepaid Player Status and Strategies
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Source: Atlantic-ACM

 


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