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U.S. wireless: Prepaying the piper Add to ...

From the FT's Lex blog

It is a rare business indeed that eschews customers who pay now rather than later, unless there is some usurious interest rate involved. America’s large wireless carriers are such an oddity. They covet those who sign two-year contracts and expensive data plans -- typically a wealthier and more established group, not to mention less fickle, than those who top-up more basic devices ahead of time.

Measures critical to profitability, ARPU (average revenue per user) and churn (customer turnover), are higher and lower, respectively, for postpaid, which explains the superior profitability of market leaders AT&T and Verizon Wireless versus smaller nationwide carriers Sprint and T-Mobile, who rely more on prepaid.

But prepaid is now growing much faster and will reach a quarter of the U.S. market this year, according to research firm Mobile Ecosystem. One reason is that smartphones running Google’s Android software are now cheap enough that customers can afford them without a handset subsidy, enticed by cheap data plans.

Regional carriers such as Metro PCS and Leap have made more money than national carriers off prepaid accounts by keeping customer acquisition costs low -- around $150 as compared to $350 for postpaid. They are being squeezed by price wars and rising costs though. On one side are nationwide carriers or their budget affiliates and on the other are even lower-cost resellers such as Tracfone, a unit of América Móvil, which lack their own network.

At the moment, commoditization of the prepaid market is no bad thing for the two postpaid market leaders. It harms Sprint and probably helped push T-Mobile into AT&T’s arms. But the value proposition of prepaid has improved. Eventually prepaid’s popularity may either sap contract-providers’ growth or force them to offer customers better and more flexible deals. For the incumbent leaders, that would be the start of a slippery slope.

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