Why Doesn’t Everyone Go Prepaid?

by on October 23, 2012 · 2 comments

There’s been a resurgence in interest in non-contract (prepaid) phone plans and MVNOs in tech reporting lately, which makes sense given recent market dynamics.  Prepaid subscriptions number over 100 million, are now 25% of the mobile subscriber market, and Ars Technica recently reported that post-paid subscriptions declined for the first time ever in mid-2012.  Prepaid is definitely attracting people other than the usual lower-income folks, students, and the tech-savvy, who have the patience (or need) to navigate the hurdles prepaid sometimes presents.  The prepaid market has come a long way since Adam wrote about Straight Talk three years ago, and as one of the newest customers of Straight Talk—an MVNO that leases their networks from the Big Four carriers—I’d like to weigh in on these prepaid market challengers.

This post is mostly inspired by a conversation I had with a telecom expert at a recent event.  I asked her if she thought Americans would, like the Europeans have, shift towards prepaid in the next few years.  I was optimistic but she didn’t think Americans would go to a prepaid model anytime soon.  (She did say, however, that some carriers would prefer we switch to a prepaid model.)  So why hasn’t the US market shifted towards prepaid plans like much of the world?  I suspect if we polled economists, carriers, and tech writers, most would agree that prepaid is a better model.  It’s almost always cheaper to use a prepaid plan and you can avoid a two-year contract.  So why hasn’t there been even more adoption of prepaid?  I offer a few possibilities from the demand side (there are likely supply-side issues too, but let’s save that for another day).

1.   Crappy phones

Perhaps this is a symptom of weak demand for prepaid, not a cause, but the sub-par nature of many phones offered by prepaid carriers is certainly a deterrent for many people.  Prepaid evokes images of smartphones your grandma would be embarrassed to own and clunky feature phones.  Prepaid plan customers tend to be budget-conscious and don’t need the newest, most advanced hardware, so this may be a demand issue – if prepaid carriers offered nice phones, few would purchase them.

But prepaid does not mean you’re stuck with a lame phone.  (Straight Talk has some respectable smartphones, but most can be described as “entry-level” at best.)  Consumers willing to do a little research can have their cheap plan, no contract, and a good phone.  Before moving to Straight Talk from AT&T, I made sure I bought a phone that I’d be happy to use for awhile.  I purchased an unlocked Google Galaxy Nexus, popped in the activated Straight Talk SIM, and a few minutes later I was up and running.  Really, any consumer with an unlocked or already-purchased GSM phone doesn’t need to sacrifice phone quality by moving to a prepaid MVNO.  Likewise, I imagine consumers with CDMA (Sprint and Verizon) phones could also enjoy their phone of choice in prepaid, which brings me to my next reason I believe consumers don’t flock to prepaid….

2.   Two Technology Standards

Particularly when switching to an MVNO like Straight Talk, which leases networks from both CDMA and GSM carriers, figuring out which prepaid plan suits your current phone can be a deterrent.  The US is unique in that neither GSM nor CDMA has prevailed as the dominant technology in mobile phones.  Even the four major carriers mirror this phenomenon.  Sprint and Verizon are CDMA, AT&T and T-Mobile are GSM.  I suspect your average consumer doesn’t want to shop around and investigate whether they can bring their phone to, say, Virgin Mobile, or whether the Straight Talk or MetroPCS network is compatible.  This dual-standard problem may lessen in the next few years, however, if all carriers shift to voice-over-LTE.  If that does happen, we can expect more folks to switch out of two-year contracts since another hurdle is removed.

3.   Sticker Shock to Unlocked Phones

Many Americans have spent their phone-owning lives on post-paid plans, enjoying the subsidized phones they receive in exchange for a binding two-year contract.  Of course, the phone is not truly cheaper; the costs are simply spread out over the two-year contract, which you can get out of only at great expense.  Nevertheless, paying $700 -$900 for an unlocked iPhone 5 knowing that it’s available (subsidized) with AT&T for $200-$400 is daunting.  Even I wasn’t immune to this irrationality.  While I would have liked a Galaxy S III, and it costs around $200 when offered by AT&T, it’s $800 when not subsidized by a carrier.  At $350, my Galaxy Nexus was much less painful (and comes with Jelly Bean).  I’m not sure this sticker shock effect is going away soon.  Subsidized phones are an established norm in the US, and until we become accustomed to the truer cost of our phones, most will be reluctant to drop several hundred dollars on a phone, even if it means their monthly phone bill is cut in half, or more.

There may be other reasons people aren’t fleeing to prepaid.  Retail operations for smaller carriers seem meager (Straight Talk is an exception since they’ve paired up with Walmart for distribution.)  The chipset in your phone might not allow you to change carriers.  I’ve seen rumors on online forums that the larger carriers prioritize their own traffic over that of the MVNOs they lease to, which will degrade service quality.  And customer service may be more of an issue with prepaid carriers as well (I had one minor issue here during activation).  But for me, a month into my Straight Talk switch, I don’t plan on going back to expensive two-year contracts anytime soon.  I like having my HSPA+ phone, paying only $45 per month for (basically) unlimited data, text, and minutes, and no contract.

Five years into a recession, these budget-friendly plans should only become more popular and should provide some effective price competition to the major carriers.  It will be interesting to see how the major carriers respond to these prepaid challengers if trends continue.  After years of benign neglect of prepaid customers (I think all major carriers have small prepaid offerings), I doubt they’ll stand for the cannibalization of their post-paid subscribers to the MVNO carriers they lease networks to.  And it seems the major carriers are becoming interested in capturing budget-conscious consumers, if the proposed T-Mobile – MetroPCS merger is any indication.  Time will tell.


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