Rise of the Prepaid Carriers
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Like soccer, prepaid mobile phone carriers have been huge in the rest of the world, but have been only a niche market in the U.S. If prepaid phones are so cheap, why aren't they more popular?
It seems that Americans have finally wised up to what's been the mobile industry's best-kept secret. In June the number of prepaid subscribers climbed to 25 percent of the total mobile market share. The number of postpaid or contract plans went down for the first time. The number of new subscriptions of prepaid users outpaced those of contract carriers.
One reason for the uptick is the increasing quality of the handsets. America Movil (NYSE: AMX) is a carrier based in Mexico operating under the brand names of Tracfone, Net10, and Straight Talk. The carrier has been offering Android-based phones under Net10 and Straight Talk for a while, with all-you-can-eat plans costing around $50 dollar a month.
Virgin Mobile, owned by Sprint Nextel (NYSE: S), offers both Apple's iPhone and Android-based phones with an unlimited $35 per month plan. Leap Wireless (NASDAQ: LEAP) has also gotten into the iPhone game, offering the popular smartphone under its Cricket brand.
Both Virgin and Cricket's plans show one major disadvantage of prepaid: a higher upfront cost for the handsets. The iPhones cost over $600, but the low monthly cost offsets the higher initial price of the handsets.
With postpaid contract phones, the hardware is subsidized by the carriers, resulting in an apparently lower cost for the consumer. They can do this because they check the credit of prospective customers and only accept them if they look like they'll be able to pay their bills.
If you're a contract customer, you sure do pay. There's the monthly bill, and if you've got one of those spiffy smartphones, you have to have a data plan to be able to use it in the first place. Don't forget the cost of text messages, which is steep compared to the rest of the world. Did you use so many apps that you went over your monthly allotment? Then you'll have to pay overage fees. Want to get that new model that just came out even though you're still under a contract? There's a fee for that, too.
One major benefit of prepaid is the relative simplicity of the price structure. Infrequent talkers and texters can just buy blocks of time to use as they need it, while people who have the devices glued to their faces or Bluetooth devices stuck in their ears can sign up for monthly plans. And people who love the latest and greatest devices can buy new phones without penalty, or even switch carriers.
The desire for flexibility has also prompted mainstream carriers like AT&T (NYSE: T), T-Mobile and Verizon (NYSE: VZ) to offer their own prepaid plans, though they seem to prefer that customers sign up for contract plans instead.
The growing prepaid market seems to prove Clayton Christensen's thesis about what he calls "disruptive innovations." Initially, prepaid carriers targeted people who weren't being served by traditional carriers because of their credit histories. By offering a simple product, they opened up the mobile phone market to people who never had access to it before, and from there have been able to move upmarket, offering more sophisticated devices.
It looks like prepaid wireless is growing steadily popular, and might displace contract phones the way PCs have made mainframes largely obsolete. Investors who understand the history of technology would do well to pay attention to how many PCs versus how many mainframes they use.
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