Summary
The increase in pre-paid mobile customers makes sense given the current economic conditions but the mobile industry, especially in the US, was built on post-paid or contract subscribers, and will not become pre-paid driven.
Analysis
2001 was the last time the global mobile industry showed signs of stagnation, when the industry sold roughly 400 million phones worldwide (versus roughly 1.2 billion in 2008) and the industry had a mere one billion global subscribers (versus approximately four billion in 2008). In the past six months the ranks of pre-paid subscribers has increased considerably, benefiting carriers who cater to this market, including Metro PCS, Leap Wireless and Boost Mobile (a division of Sprint).
As far as pre-paid taking over for post-paid in the US, however, it won’t happen. The big four US operators, Verizon Wireless, AT&T Mobility, Sprint Nextel and T-Mobile, who control roughly 85% of the market, are largely post-paid operators and have incentive to keep their higher revenue and margin contract subscriber base in tact and not convert them into pre-paid customers. In these economic times, however, major operators must be competitive and flexible, and thus are offering pre-paid plans catered to various segments. These operators would like to keep their subscribers (limiting churn) while maintaining or even increasing their average revenue per user (ARPU) and boosting mobile data revenues. This can best be done with advanced devices delivering value added data services (in addition to voice services) - devices which in the past have been offered via contracts and subsidies.
There is no doubt that pre-paid mobile services appeal to a meaningful portion of the market, especially in difficult economic times. In the end, however, the mobile industry in the US and in many developed countries has been based on the contract in exchange for device subsidy agreement. For this cycle to be undone completely, operators would risk revenue and margin compression to save current customers and possibly attract new ones, and customers would have to settle for lower cost and presumably less appealing devices or extend the time between upgrades, something they have heretofore resisted.
While the current shift to pre-paid is a noticeable phenomenon driven by current economic conditions and innovative offerings, the mobile industry has a 15-year history of contracts and subsidies and will not become pre-paid driven anytime soon.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
