Smartphones come to prepaid wireless market

The price of owning a smartphone is getting a lot cheaper thanks to some new aggressive plans from prepaid wireless companies.

Boost Mobile and MetroPCS have already been offering smartphones as part of their prepaid wireless plans. And over the next several months, other competitors, such as Leap Wireless' Cricket brand and Virgin Mobile will be adding smartphones to their lineups.

For years, the post-paid business model has dominated the U.S. cell phone market. Consumers signed lengthy contracts and wireless providers subsidized phones to the point where some handsets are even free. Meanwhile, the prepaid market in the U.S. was largely left to consumers who were young, price-sensitive, or considered credit risks. These customers paid for their cell phone service in advance and they bought the phones outright without any subsidy.

Tough economic times have enticed many consumers to cut costs and sign up for cheaper prepaid plans. According to a recent study released by the New Millennium Research Council, a Washington, D.C.-based think tank, new prepaid wireless customers exceeded the number of new contract subscribers who signed up for service in the fourth quarter of 2009. This is the first time that prepaid services have outsold post-paid or contract services, the group said.

But cheaper cell phones only go so far. One of the biggest challenges facing prepaid wireless operators is the fact that they have lacked cool phones. For the last few years, AT&T and Verizon Wireless, the nation's two biggest cell phone providers, have used exclusive deals with cell phone makers to win customers. AT&T has the iPhone. Verizon Wireless has the Motorola Droid. But providers like Leap Wireless and Virgin Mobile were left offering basic-feature phones.

That is changing. Prepaid operators are now adding smartphones to their product portfolios, which will open the market to a new set of customers and could possibly spark a price war.

"Adding smartphones as an option in prepaid means that prepaid is no longer a compromised offering," said Neil Lindsay, chief marketing officer for Sprint Prepaid products. "Now we will be able to offer a range of products and applications that customers want, so we can compete better with traditional post-paid services."

Offering smartphones on prepaid service plans is especially important because smartphones are the future of mobile. The growth in sales of these Web-enabled devices is outpacing that of traditional-feature phones. Within the next few years, smartphones are expected to overtake traditional cell phones in terms of shipments. As consumers make the switch from feature phones to smartphones, prepaid wireless companies want to capitalize on these upgrades by offering more affordable plans than the bigger wireless providers offer.

"Smartphones unlock part of the market for us," said Al Moschner, chief operating officer of Leap Wireless. "We are trying to remove barriers. And the lack of advanced phones for a post-paid customer to become a prepaid customer was a significant barrier. Our strategy is to continue to add functionality and applications and give consumers choice so they can decide."

More smartphones in '10
Leap Wireless, which sells its products through the Cricket brand, plans to offer at least two new smartphones by the end of the year: the BlackBerry Curve 8530 and the Kyocera Zio, which runs the Google Android operating system. Moschner said Leap may add a second Google Android phone to its mix near the end of the year.

Other providers have already begun offering smartphones in the prepaid market. MetroPCS has been selling the BlackBerry Curve 8330 and the Samsung Code, a touch-screen Windows Mobile phone. Boost Mobile, owned by Sprint Nextel, sells the BlackBerry Curve 8330. And Virgin Mobile, also owned by Sprint Nextel, will begin selling the BlackBerry Curve 8530 starting Monday.

The downside for consumers is that these phones are not subsidized, meaning they must pay the full retail price for the devices, which varies from about $250 to $350. Promotions are often available, though, and consumers can get certain phones for much less.

The upside of the prepaid model for consumers is that the service plans associated with the phones cost much less than comparable post-paid plans from the big carriers. Take the BlackBerry Curve offered on Boost Mobile and Virgin Mobile as an example. Verizon Wireless is running a special promotion, and the BlackBerry Curve costs only $9.99 with a post-paid plan. Buying it from Boost will cost $249 and Virgin Mobile is charging $300.

Even though the hardware cost is much lower with Verizon, Boost and Virgin Mobile are offering service plans that cost at least half as much as Verizon's plan. Boost's smartphone plan costs $60 a month and includes unlimited voice, Internet access, text messaging, and personal e-mail. By contrast, Verizon charges $120 for the same set of features for the same BlackBerry phone.

Virgin Mobile's new plans for its BlackBerry Curve will be the least expensive on the market. For $35 a month, a Virgin Mobile customer can get a plan for a BlackBerry that includes 300 voice minutes plus unlimited Internet access, texting, and e-mail. The cheapest plan offered for the BlackBerry Curve on Verizon's network costs $90 for 450 minutes of voice, unlimited Internet, texting, and e-mail.

Sprint's Lindsay said that consumers are savvy enough now to factor in the long-term cost of ownership when deciding which service to get.

"The price sensitivity for the device is no longer there the way it used to be," he said. "Prepaid customers are willing to pay a little more for a great device if the monthly cost is less."

Avoiding cannibalization
For carriers that also offer post-paid services, adding smartphones to their prepaid menu is tricky. Operators don't want to cannibalize a lucrative business, especially when they have been using exclusive deals with smartphone makers to sign up valuable post-paid customers. AT&T uses the iPhone. And Verizon now is using its Motorola Droid in a similar fashion.

Post-paid customers tend to spend more each month and they're locked into contracts, so they also generate more revenue over a longer period of time for a carrier. Meanwhile, prepaid subscribers tend to spend less money per month. They also switch providers frequently and are therefore considered less desirable. As a result, post-paid customers are thought of as more valuable than prepaid customers.

This is likely why AT&T and Verizon offer prepaid options, but they don't offer smartphones as part of their prepaid plans. T-Mobile USA, which was the first carrier to offer a Google Android smartphone, also doesn't have an official smartphone offering as part of its prepaid option. That said, it allows customers to purchase any phone in its lineup for the full retail price and pay their bill in advance every month without a contract.

Meanwhile, Sprint, the third largest wireless operator in the U.S., has been aggressively going after the prepaid market. It owns Boost and bought the Virgin Mobile brand last year. Recently it announced plans to launch a new brand called Common Cents designed to attract infrequent, cost-sensitive cell phone users.

But even though Sprint is offering smartphones to go with its prepaid services, it isn't adding every smartphone just yet. Executives recognize that they should not harm their postpaid business as they try to build the prepaid business.

"If we moved all our post-paid customers to prepaid, that wouldn't be the best thing for our overall business," Lindsay said. "So we have to make sure we are optimizing all metrics to get the right numbers and to satisfy the needs of our customers."

Wary of network hogs
But will prepaid operators be able to continue their aggressive pricing when more sophisticated, data-hungry devices come on the network and eat up valuable resources? Right now, prepaid operators are offering BlackBerry phones, which are far more network efficient than devices like a Google Android phone.

Leap's Moschner acknowledged that his company must be careful how it prices the service to ensure heavy data users don't overwhelm the network.

"AT&T's experience with the iPhone won't be unique in the industry," he acknowledged. "BlackBerry devices use the network very efficiently. And subscribers use them differently than they use touch-screen devices like the iPhone, which uses more data."

Moschner said Leap may develop different pricing tiers for devices that consume more data.

"We probably won't go to metered billing," he said. "But somewhere in the offering there has to be some constraint for the price point to work. Maybe that means different pricing for an Android phone versus a BlackBerry."

Meanwhile, Sprint's Lindsay said the company will likely keep its pricing consistent across all smartphones.

Even if prices increase slightly, Sprint and Leap executives say the prepaid market is on the cusp of truly competing with bigger players like AT&T and Verizon.

"The prepaid market has grown up," said Moschner. "And as we close the functionality gap on handsets and the features we offer, we continue to reduce the barrier for people to take a serious look at us."