Lowenstein: What’s the roadmap for prepaid in the United States?

Mark Lowenstein

The prepaid market in the United States has been fairly staid over the past few years. The number of prepaid subscribers as a percentage of total subscribers has stayed about the same, changes in price have tracked fairly closely with postpaid, and there have not been significant share shifts. As of the third quarter of 2020, there are about 74 million prepaid subscribers in the United States, according to New Street Research. Nearly 80% of those subscribers are relatively evenly divided by Tracfone (soon to be Verizon), T-Mobile (mainly Metro) and AT&T (mainly Cricket). Dish (via Boost) has about 13% of the market, with the remaining 7% being ‘Other’ including Verizon’s existing prepaid business.

However, there have been some important developments during 2020 that point toward a changed and much more vigorous prepaid landscape over the next couple of years. First is the significant structural change that has occurred, including:

  • The closing of the T-Mobile/Sprint deal led to the divestment of Boost. The re-branded Metro by T-Mobile is now T-Mobile’s main prepaid offering
  • Dish’s acquisition of Boost Mobile (9 million customers) from Sprint, as part of the T-Mobile Deal. Dish is using T-Mobile’s network as an MVNO as it builds its own 5G network. Dish also acquired MVNO Ting, which operates a postpaid business.
  • Verizon announced its intentions to acquire TracFone from América Móvil. TracFone has 21 million customers spread across some nine brands including Straight Talk and Simple Mobile. Among the major operators, Verizon has historically paid little attention to prepaid.
  • Consumer Cellular, among the fastest-growing prepaid operators in recent years with 4 million customers and a focus on the 50+ demographic, has been acquired by the private equity firm GTCR.

RELATED: Dish names Ting Mobile leader, launches new postpaid plans

The other major development this year is COVID-19 and its impact on the economy. At COVID’s onset in March, several Wall Street analysts predicted a “shift to value,” which would mean a rise in prepaid’s share of the market, which occurred in a major way in the 2008-2009 recession. That hasn’t really happened yet. This is due, in part, to the fact that the delta between postpaid and prepaid prices is much narrower than it was 10 years ago. Another factor could be that the Cable MVNOs have taken some share that might have drifted to prepaid. However, if the recession deepens and the economic disruption is protracted, we could well see some significant shifts in subscriber behavior toward prepaid.

So, what do these major developments mean for the direction of prepaid going forward? Here are a few key themes and predictions.

Shifts in Share. There is going to be a pretty significant shift in the share of how prepaid traffic is apportioned. Life for Boost Mobile subscribers has become instantly better now that they have access to the full T-Mobile network, which means much better data coverage. However, Dish’s ability to do anything really aggressive on price is somewhat hamstrung until it rolls out its own network (though their economics on T-Mobile are better than cable’s with Verizon). Also, it certainly appears that Metro will benefit from MFN status on T-Mobile: we’re seeing defections of Boost dealers to Metro, and it doesn’t look like Boost has access to T-Mobile’s 5G network, at least for now.

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The other major shifts in share will be focused on Tracfone. Verizon had already been growing its share of Tracfone’s overall traffic in recent years, particularly the Straight Talk brand. Over time, the remaining share of Tracfone’s traffic will shift to Verizon. This will mean two things: Verizon won’t exactly be courting the traffic of other prepaid brands; and other facilities-based operators (including, and most especially Dish, over time) will be more aggressively pursuing wholesale business, particularly with all the added capacity resulting from significantly enhanced spectrum positions.

Entry of Verizon. Though it could be well into 2021 before the Tracfone deal closes, Verizon goes from being a virtual non-player in prepaid to having a third of the market. Under Hans Vestberg, Verizon has shown renewed and laser-like focus on its core wireless business, rather than being distracted by other adventures (media, cloud, etc.). Tracfone has been sort of stagnant over the last couple of years and it’s clear that América Móvil has under-invested in the brand.

I believe that Tracfone will be key to Verizon’s developing a more sophisticated segmentation strategy to leverage its 4G and 5G network over this decade. The Millennial-focused Visible brand has been a good start. Expect that Verizon will do some major cleaning up of Tracfone’s nine brands, some of which have been performing well and others looking like they’re ready to be phased out. There’s also a lot of overlapping distribution relationships, especially including Verizon postpaid, that will have to be looked at. Finally, a major deal here will be migrating Tracfone to Verizon’s much more sophisticated back office systems. Tracfone’s operational functions are antiquated and unsophisticated compared to the competition.

Cleaning Up the House. This is the unsexy underbelly of the business, but one of the biggest differentiators in the prepaid subscriber experience is the back-office operation: e-commerce, activation, fulfillment, plan optimization, billing, customer service, etc. I think the delta has widened in this regard over the past few years. I’d put AT&T’s Cricket brand at the top, while Tracfone has lagged. It was notable that a key reason Dish acquired Ting was so it could leverage its back-office systems for Boost and other likely future brands.

A Vastly Changed Capacity Situation. More new spectrum will come online over the next 3-5 years than the total available today. This means that the facilities-based operators will have vastly more capacity in their networks to play with. Historically, the operators (save Sprint) have largely eschewed wholesale traffic. Now, they’ll be actively courting it. In Dish’s case, wholesale is fundamental to its survival as a facilities-based operator.

This will shake up the whole MVNO/wholesale/prepaid ball ‘o wax. Cable will be part of the mix here, as it looks for more favorable MVNO economics and it has its own spectrum to play with. We could also see the emergence of new prepaid brands and MVNOs to compete with today’s prepaid services which, after the close of the Verizon-Tracfone deal, will be 90%+ in-house at the three incumbent operators plus Dish.

The Economy. We still don’t know what the longer-term effects of COVID-19 will be on the economy. But we do know that it is disproportionately affecting those with lower incomes. If the recession continues to affect more people, there could be some migration from postpaid to prepaid, out of financial necessity. At the outset of COVID, Metro, Boost, and Cricket responded nimbly with temporary $15 per month rate plans (talk, text, 2 GB of data). These sorts of offers could be re-introduced depending on the state of the economy.

Lifeline Services. This has been a black mark on the wireless industry. Lifeline services, through vehicles such as Assurance Wireless, SafeLink (Tracfone), and others have suffered from fraud, mismanagement, and inattention. This area needs to be cleaned up, and there is growing urgency to do so, especially with COVID shedding light on the digital divide.

We hear anecdotally from some of the leading prepaid brands that a measurable number of their customers use wireless as their main internet service as well, since they can’t afford both wireless and broadband. Just as Verizon and T-Mobile have been expanding their fixed wireless access services (both LTE and 5G), I could see prepaid brands carving out a segment of this market as well. As the Lifeline program is revamped, I’d love to see subsidies that would facilitate the ability of financially challenged consumers to use their wireless phone as an internet hotspot. This type of service would have to be at sufficient speeds and with generous data allowances.

I’ve long thought that a discounted fixed wireless or internet hotspot business could be a compelling opportunity for brands such as Cricket and Metro. In some ways this arena is more of a natural for them than their host operators.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is managing director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceWireless staff. They do not represent the opinions of FierceWireless.