Prepaid phones are hot items for tight budgets
Posted on Monday, December 15, 2008
As the economy soured, Jerri Konczak of Duluth, Minn., looked for ways to reduce expenses. Her family cut back on fast-food trips and downgraded its cable-TV service. Then Konczak dropped her cell phone service and got a prepaid phone - not an easy switch for someone accustomed to nearly unlimited talking and texting.
At first "I thought I was going to die," Konczak said, as she was forced to slash her cell phone use. The 46-year-old said she had to put an end to "frivolous calls," like phoning her sister to pass the time as she drove to the grocery store, but which contributed to her $85 monthly wireless bill. She now pays $10 a month to Virgin Mobile USA Inc., a prepaid wireless carrier that charges based on minutes used instead of a monthly fee. With about 100 minutes available per month in her plan, she uses her new phone mainly for emergencies and short calls.
Prepaid, or pay-as-you-go, phones used to be the province of consumers whose weak credit didn't qualify them for traditional cell phone plans. But lately, more people looking to trim household budgets appear to be discovering them.
The phones are sold at discount retailers with service provided by carriers such as Trac-Fone Wireless, a unit of America Movil SAB; MetroPCS Communications Inc.; and Leap Wireless International Inc. Many of the big national wireless companies, including T-Mobile USA, a unit of Deutsche Telekom, and AT&T Inc., also offer prepaid options, although the service remains a niche market in the cell phone industry.
The prepaid sector represents one of the few bright spots in the U.S. wireless market, where growth has slowed along with broader consumer spending. Price is a big reason. The average monthly wireless bill for an individual in the United States is $48.54, according to industry group CTIA, but data plans, text messaging and other fees can push charges for some people above $100.
People switching to prepaid service usually have to choose among variously priced packages, depending on how many minutes they expect to use. Customers often must finish their minutes or top them up with an additional order, or the unused minutes will expire.
Charges can start at a few cents a minute, but can also go higher. Typically, the more minutes a person buys, the cheaper the per-minute rate. Virgin Mobile's pay-as-you-go plan, for example, costs 10 cents a minute if 200 minutes are bought, but only 5 cents a minute if 1,000 minutes are bought.
Newcomers to prepaid services often need to buy a new cell phone. The selection is weighted toward simpler handsets, although prepaid carriers have begun offering higherend selections that may include cameras and Internet access and more comprehensive services. Many smart phones, which offer a greater number of features, require an annual con- tract, so they're not available for prepaid customers. The Apple Inc. iPhone 3G, for example, is sold in the United States with a two-year AT&T contract.
Josh Gianni, a systems administrator in Torrington, Conn., bought an iPhone 3G as soon as it became available last summer. Now he is considering trading down to a prepaid phone to reduce his wireless expenses of $86 a month.
"I love the phone and everything that comes along with it. But the monthly costs, I think, are a little bit too expensive," he said. Gianni, 30, also said he has made some impulsive buys on his iPhone of video games, which can be ordered and downloaded directly from the device's interface. "They're only $2, $5, but it adds up," he said.
There are no national statistics for how many consumers are switching from cell phone subscriptions to prepaid services, since the plans don't require a signed contract or provide much personal information. But individual carriers are reporting growth. MetroPCS says it added 249,000 net new customers in the third quarter, doubling its year-earlier increase, and Leap Wireless says it gained 156,000 net customers, more than tripling its year-earlier growth. T-Mobile, which also has traditional cell phone plans, says it added 670,000 customers in the third quarter, more than half of which were prepaid. By contrast, prepaid represented 35 percent of the company's new customers a year earlier.
With demand growing for prepaid service, some carriers are seeking a competitive edge. Boost Mobile, Sprint Nextel Corp.'s prepaid arm, halved its per-minute rates in October. It also rebranded itself more broadly as a low-cost option, tilting away from its previous focus on the youth market.
Regional players MetroPCS and Leap Wireless announced a roaming pact that allows them to compete more effectively with national carriers.
The sector is also seeing trouble as Virgin Mobile engages MetroPCS in a legal tussle over Metro's MetroFlash service, which lets consumers buy prepaid minutes and put them on any phone, even ones sold by rival companies.
Prepaid customers generally produce less revenue than users of traditional services, which is one reason big carriers have been reluctant to promote the plans. These carriers can make more money when subscribers sign contracts and commit to paying monthly fees.
Meanwhile, the prepaid companies are seeking to increase their revenue per customer. They are offering higher-end services, like data packages and unlimited plans, in addition to the pay-as-you-go options.
Daniel Smith, a software engineer in Norwood, Mass., was paying about $70 a month for cell phone service for himself and his wife from Verizon Wireless.
Then Smith paid $80 for 400 minutes in prepaid service from TracFone. Since he doesn't use his phone frequently, those minutes have lasted more than a year.
"What I was really trying to do is to match the phone to my actual needs," he said. The 62-year-old said his wife is planning a similar switch when her twoyear Verizon contract expires.
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