Europe - MVNO

Sales Of SIM Cards Might Shuffle Deck In Wireless Services

SIM-only marketing has roiled Europe's wireless phone market, as consumers shy away from signing long-term service contracts often required in cell phone purchases.

Instead of buying new phones, many wireless users in Europe have been choosing a new type of rate plan. They're buying subscriber identity module, or SIM, cards, which they insert inside their existing phones. SIM cards work with all phones that run on the wireless standard called GSM, which dominates in Europe and is popular in many other regions.

Consumers pay in advance for SIM card call minutes and text messages, usually at discounted rates. This type of service helps users save money, but it lowers average revenue per user for carriers and can delay cell phone upgrades.

Nonphone companies such as German supermarket retailer Aldi are among the most aggressive marketers of SIM-only deals. In August, Swedish home furnishing giant Ikea jumped into the SIM-only market in the U.K.

Aldi, Ikea and other retailers don't own wireless networks, but they lease airtime from mobile phone companies at wholesale rates. SIM-only marketing sprouted first in Scandinavia a few years ago. The deals are common in the U.K. and Germany, and have spread to southern Europe and even to the U.S., though SIM use isn't popular here for a number of reasons.

It is, however, becoming more popular in Europe. As a result, wireless firms are fighting back with their own SIM offers. Spain's Telefonica, U.K.-based Vodafone (NYSE:VOD - News), France Telecom and Germany's Deutsche Telekom have rolled out SIM-only products.

Wireless firms realize SIM-only deals are going to be a big part of the market, says Mark Newman, an analyst at research firm Informa.

With Europe's economies slowing, cost-conscious consumers are turning to SIM-only deals to avoid buying new phones and to pay less for service.

"European operators aren't fighting the marketplace," Newman said. "They accept that the prepaid segment is growing and, with the credit crunch, SIM-only services give consumers an alternative."

But the shift to SIM-only deals has more downside than upside for wireless firms, analysts say. The trend could affect some financial metrics that wireless firms are judged by, such as average monthly revenue per subscriber or the mix of higher-valued contract vs. prepaid subscribers.

Prefer Contract Subscribers

Prepaid users are less valued because they switch service providers more often and spend less than customers who are billed monthly under contracts.

SIM-only customers generally get 30-day plans that roll over if users buy more minutes. Wireless firms count 30-day, SIM-only users as prepaid subscribers. But they aim to convert SIM-only users to contract plans with promotions.

There is a plus for carriers. With SIM-only offers, wireless firms don't need to subsidize the cost of mobile phones sold to consumers. Wireless firms sell high-end phones below their cost but recoup the money as customers are billed each month. No phone subsidies means that wireless firms stand to spend less to acquire new customers.

More retailers are jumping into the wireless market through SIM-only deals. They include Spanish department store chain El Corte Ingles, France's Carrefour and U.K.-based Tesco. Germany's Aldi reportedly has a few million SIM-only customers.

"Germany is at the epicenter of SIM-only activity, but it's also making waves in the U.K.," Newman said. "It's pretty much a Western Europe phenomenon."

In May, Telefonica said it had 500,000 SIM-only customers. Most of those were in the U.K., where's Telefonica's O2 unit has been pushing SIM-only offers.

Vodafone, the world's biggest wireless firm by revenue, has said it expects to step up SIM-only marketing. "We are now assuming that we'll do a little bit more SIM-only than we were thinking a while ago," Andy Halford, its chief financial officer, said in July.

In the U.K., SIM-only plans start at about 15 British pounds, or $26, a month.

O2's Simplicity service offers 200 calling minutes for 15 pounds, 600 minutes for 20 pounds ($36) or 1,200 minutes for 30 pounds ($54).

Unlike customers under contract, prepaid subscribers don't pay taxes or surcharges.

While most SIM-only offers have targeted consumers, France Telecom last month unveiled a plan targeted at business users.

Hurdles To SIM-Only In U.S.

SIM-only plans could spread to the U.S., but there are a few hurdles, analysts say.

For one, fewer nonphone companies that lease airtime on networks, called mobile virtual network operators, exist in the U.S. The networks are where retailers lease airtime.

The biggest hurdle, though, is that mobile phones sold in the U.S. are usually "locked." Wireless firms sell mobile phones that only work on their cellular networks. That makes it less convenient for customers to switch to rivals.

In Europe, wireless firms use unlocked GSM-type phones, which contain SIM cards.

AT&T operates a GSM-type network in the U.S. In January, it introduced a SIM-only, bring-your-own-phone service. But AT&T hasn't promoted the service much, analysts say.

Deutsche Telekom's T-Mobile USA unit also operates a GSM-type network in the U.S. A representative declined to comment on any SIM-only plans.

In Europe, service contracts come up for renewal every 12 to 18 months on average, compared with every two years in the U.S., says Susan Welsh de Grimaldo, an analyst at Strategy Analytics.

U.S. consumers are usually ready to purchase new phones when their contract ends, she says, because during the two-year contract span more advanced mobile phones typically have come to market.

In Europe, which has shorter contract lengths, she says, many users are not interested in replacing phones that are only a year old.