‘Prepaid’ Idea Is Catching On in U.S. Market

Prepaid phone service, already popular among long-distance callers, has become one of the fastest-growing services among U.S. mobile phone users.

Using the model of long-distance debit cards, the wireless service allows customers to buy a phone and pay in advance for a set amount of usage, or minutes. This allows users and businesses to avoid the hassles of credit checks or service contracts.

“The nice thing about prepaid is that there are no strings attached at all, and that’s been a huge attraction for people,” said Mark Newman, editor of the Global Mobile trade newsletter based in London. “It used to be that if you gave someone a mobile phone as a gift, you’ve given them the privilege of having 12 monthly bills.”

Wireless carriers in the U.S., eager to land new customers as competition heats up, have embraced the concept.

With the prepaid option, carriers can afford to adopt a more egalitarian approach to selling service. The companies can, in effect, welcome the “huddled masses” of wireless: infrequent users, youth and immigrants without established credit records, the budget-conscious or people with poor credit histories.

Carriers typically offer service only through monthly plans, a process that often involves a credit rating review. As a result, nearly half of all potential wireless customers in urban markets are rejected, according to Ken Hyers, a wireless industry analyst at Cahners In-Stat Group of Newton, Mass.

That approach was fine when carriers were focused on heavy mobile users and business customers. But that market has become fairly well-served--and highly competitive--so companies can no longer afford to throw away potential customers so quickly.

For now, most U.S. carriers seem to view prepaid as a niche market. But it is much more than that in Europe, where wireless use far outpaces that of the U.S.

Throughout Europe, three out of four new mobile users last year picked a prepaid plan in the fourth quarter, said Newman, who is also an analyst for Baskerville Communications Corp.

“In Europe, it has become the most compelling way to sell to consumers, and it’s taken everyone by surprise,” Newman said. “They’re scooping up customers who have fancied a mobile phone but were worried about the cost, and people who used to be mobile phone users and got fed up with it.”

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European carriers collected nearly $7 billion in prepaid wireless revenues last year, compared with an estimated $990 million in the United States, according to figures from Baskerville. However, the U.S. figure is expected to nearly quadruple--to $3.7 billion--by the end of 2000, according to Baskerville.

Still, U.S. acceptance of prepaid services faces hurdles. One is pricing. Most U.S. carriers sell prepaid services at per-minute rates that are much higher than those available through monthly plans. The price gap for European carriers, by contrast, is much smaller, with per-minute prices averaging 30 cents.

“For the consumer, who is seeing everybody getting these deals for 10 cents a minute, they’re sitting there saying, ‘Wait a minute, I’m paying 35 cents, 45 cents, 75 cents or even $1 per minute,’ ” Hyers said.

That price penalty is evident in plans offered by Los Angeles-area carriers, including AirTouch Cellular and AT&T; Wireless (formerly L.A. Cellular). Sprint PCS and Pacific Bell Wireless do not sell prepaid packages in this area.

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AirTouch, for example, sells prepaid wireless cards that include prices ranging from 50 cents to 75 cents per minute for local calls. Rates for prepaid packages sold by AT&T; Wireless are 55 cents per minute.

In addition, restrictions may be placed on prepaid services. Depending on the carrier and the plan, prepaid customers may find they can’t make long-distance calls or place calls from outside their home service territory.

And prepaid cards often have an expiration date. Unused minutes--although already paid for--could be forfeited unless the user adds more money to the account before the expiration date. Some companies impose a fee to reinstate a lapsed account.

Finally, the selection of phones may be limited and the service provided could be analog instead of the digital service that includes such features as voice mail or call waiting.