Prepaid Principle

Prepaid wireless service allows consumers to acquire wireless access without credit checks or the traditional contracts required for post-paid services. A customer generally purchases a cellular phone and purchases access by paying for service in fixed dollar amounts (e.g. $25 worth of airtime) in advance of using the system. These increments of service can usually be purchased by payment in cash or by approved check or credit card transactions.

The transactions eliminate the risk of receivables to the wireless provider. Depending on the particular operator, some prepaid services include an actual card or voucher that contains a prepaid account number used by the subscriber to initiate access and add more airtime. Once subscribers begin using prepaid airtime, their accounts are debited in real time. Each time a call is made the system checks to ensure that the account contains available credit. When the account has been depleted, subscribers are denied service and must replenish their accounts.

Prepaid Growth

Prepaid is one of the fastest growing segments in the already hyper-growth wireless industry. "It has been recognized as an engine for growth," says Thomas Lee, an analyst at Salomon, Smith, Barney, Inc. in New York. "New users are a less elite and concentrated group. They are more likely to be younger, to have a lower household income and to have less than a four-year degree."

According to CTIA's annualized wireless industry data survey results, in the United States by the end of 1999, there were 86,047,003 wireless subscribers yielding over $40 billion in revenues.

According to recent wireless surveys of the 86 million subscriber base, an estimated 21 million representing "one in four users state that they are very likely to replace their phones within the year" The users, likely to upgrade, look for the basics first and foremost, with the most important feature besides price being a national usage area and battery life.

Fifty-seven percent (57 percent) of wireless users would rather obtain wireless phone service from a company that focuses primarily on "providing basic, no-frills service at a low cost," whereas only 38 percent would opt to receive service from a company that focused on "providing a wide array of new and innovative features and services."

"The Yankee Group predicts that prepaid subscribers will account for more than 10 percent of those wireless subscribers by 2002 (compared to less than 5 percent today). Prepaid resellers are already in an excellent position to share in this growth."

The well-known research group, Frost & Sullivan, is even more aggressive in their projections. They estimate that 6.4 percent of the total wireless subscribers in 1999 were prepaid — which is more than double its share from the previous year. The number of prepaid subscribers is expected to escalate to 10.2 percent of the total subscribers in 2000; 15.7 percent in 2002; and 24.9 percent by 2005.

Likewise, the number of U.S. prepaid subscribers is expected to skyrocket from 5.3 million (1999) to 9.5 million in 2000 and 13.3 million in 2001.

Market Niche

Therefore, by interpolating the data and estimates available, the prepaid market niche is expected to grow from an estimated 3 billion in revenue today and exceed 6 billion in revenues with over 11 million in subscribers by the end of 2002. Nearly 6 million of those prepaid wireless subscribers will be "new additions," generating nearly $3 billion in new revenue. The Company is targeting this estimated $3 billion in new wireless prepaid revenue growth expected over the next 2-3 years.

Market Trends

There are 10 foundational market conditions that heighten the demand for prepaid services in today's wireless communications arena.

1. The domestic wireless communications market currently boasts nearly 87 million subscribers (as of year end 1999); revenue in the industry grew to 40 billion in 1999.

2. The US cellular market is projected to grow at 20 percent per year for the foreseeable future.

3. More than 35 percent of cellular applicants are declined due to credit issues. This represents nearly 7 million lost potential subscribers in 1998 alone.

4. Key market growth segments are identified as credit-challenged women; teenagers; business cost control; immigrant population; ethnic groups; no bank accounts (25 million in US); married with children; empty-nesters; fixed income; and safety; each of which are looking for cost-controlled methods for acquiring wireless services.

5. Personal Communications Service (PCS) providers, the newest entrants to the wireless service market, have introduced their services on a no-contract basis. This has sparked heightened consumer demand for a "no contract" relationship with the service provider. With equipment still being highly subsidized by the service provider to the consumer, now without the contract guarantee of service revenue, service providers are seeking ways to ensure revenue flow, customer retention, lower administration costs and reductions in bad debt.

6. As wireless products and services continue to target growth through the mass market, retail points of distribution are highly contested by carriers. Retailers are demanding access to "airtime" as a product sale, driving significant demand for prepaid wireless products — similar to the merchandised means of retailing prepaid long distance services.

7. Prepaid long distance providers (example: MCI) have announced the addition of wireless services as a "line extension" of their prepaid category. This challenges traditional wireless service providers to step up their prepaid marketing efforts, as well as continuing to legitimize the category as being not simply for the credit- challenged.

8. Emerging players, such as MCI, must enter the market through resale relationships established with the local wireless service providers. In the majority of these cases, the resale agreement does not provide full access to the carrier's switch. This encumbers the reseller's ability to provision full-service cellular with a network-based solution.

9. Additionally, RSA Carriers are seeking low-cost solutions to provide prepaid service. Current options to deploy network-based solutions — requiring significant hardware and personnel investments — are cost-prohibitive for rural carriers.

10. Wireless handset manufacturers continue to vie for an increased share of hardware sales to carriers. As handsets become a more flexible communications tool, manufacturers are seeking software applications to enhance the value of their hardware. The prepaid application provides manufacturers with an application asset to assist carriers in opening new channels of distribution and reaching untapped consumer segments.

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