Prepaid patent portends wireless battle

Freedom Wireless, a privately held Phoenix, Ariz.-based wireless technology company, was granted a U.S. patent earlier this month for its methods of completing prepaid wireless phone calls, a service that allows a customer to pay a certain amount in advance then make wireless calls until the amount of credit is used up.

The patent--and a pending lawsuit--could have implications for wireless carriers, such as AT&T Wireless, Verizon Wireless, Cingular Wireless, Alltel Communications and Western Wireless, and for Boston Communications Group, a prepaid technology provider that serves many carriers.

The prepaid market, although a small percentage of most carriers' subscriber totals, has grown in popularity in recent years. Prepaid wireless plans are particularly popular with parents of teens, customers with poor credit histories, and other subscribers who want to ensure they are not surprised by a larger-than-expected monthly bill.

Analysts said that carriers hope to use prepaid plans to expand their business.

"Only about 10 percent of the market is on a prepaid plan or some sort of hybrid spending limit plan. But we do see it growing," said Eugene Signorini, a wireless industry analyst at The Yankee Group, a market research firm.

About 12 million of roughly 104 million U.S. wireless customers use a prepaid service, but that is expected to increase to 27 percent by 2005, according to The Yankee Group.

"Primarily the wireless operators use prepaid as a means of targeting the credit-challenged segment," Signorini said. "As much as 30 percent of potential customers fail their credit screening."

The number of youth wireless subscribers between the ages of 10 and 24 will reach 43 million in 2004, up dramatically from 11 million today, according to a new study by Cahners In-Stat Group, a market research firm. "This age group, usually lacking a credit history, represents a credit risk for carriers," Becky Diercks, director of wireless for Cahners, said in the report.

Freedom Wireless has filed a lawsuit in U.S. District Court for Massachusetts seeking damages and an injunction preventing most of the major wireless carriers from infringing upon its patents. The company also is seeking licensing deals with the carriers and Boston Communications.

Freedom Wireless representatives said they are "confident" of their position, but declined to comment further. Representatives for Verizon Wireless, Alltel and Boston Communications could not immediately be reached for comment.

AT&T Wireless representatives declined to comment because of the pending litigation. But representatives for the carrier said the company believes prepaid wireless services will continue to gain in popularity.

"It's a growing market, and it's really just starting to take off in the United States," said AT&T Wireless spokesman Ritch Blasi. "You don't have to prequalify as you do with other plans, and it makes a good gift. It's something that we think is going to be a real big seller."

Freedom Wireless says it developed a simple system for completing prepaid wireless calls in the mid-1990s when it operated as a cellular service reseller. The company first sought a patent in December 1994.

Previously, cellular customers had to dial toll-free 800 numbers or enter Personal Identification Numbers (PINs) for the carriers to check their account balances. But those methods were undesirable for many customers.

In documents from the U.S. Patent and Trademark Office, Freedom Wireless outlines its patented method for checking a database of prepaid subscribers when a call is made or received to determine whether there is enough credit in the account to connect the call.

Freedom Wireless also details a variety of additional features, including periodically checking the accounts of prepaid subscribers while they are on the phone to ensure customers don't overdraw their accounts.

The company's federal lawsuit, filed last week, is not expected to go to trial for about 12 to 18 months.