USA: The arrival of competitive prepaid offers may trigger a wireless price war

[cnet] The prepaid cell phone market has finally hit the U.S. in a big way as economically strapped consumers flock to inexpensive pay-as-you-go services. The result will likely mean that big cell phone providers may be forced to slash prices on contract service plans to keep consumers from defecting.

This is good news for consumers, who could see lower prices on both prepaid and post-paid service plans. But it is very bad news for cell phone operators, which make more money from their post paid customers than they do from prepaid customers.

Prepaid cell phone plans, which have been very popular in Europe and other parts of the world for several years, allow consumers to buy a phone at full retail price, without committing to a contract, and pay for service in advance. By contrast, post-paid services require consumers to sign a one- to two- year service contract, and their usage is billed on a monthly basis. In exchange for signing a contract, wireless operators often subsidize the cost of the phone.

For years, the post-paid business model has dominated the U.S. cell phone market, providing strong growth for U.S. wireless operators. Meanwhile, the prepaid market in the U.S. has been largely left to consumers who are young, price-sensitive, or considered credit risks. While all of the major cell phone operators offer prepaid services, smaller operators, such as Leap Wireless, MetroPCS, and Virgin Mobile USA, have largely dominated this market.

Now, it looks like the tide is turning. First-quarter earnings from all of the major cell phone operators indicate that consumers are flocking to new all-you-can-eat prepaid plans instead of the contract-bound post-paid plans.

"Post-paid (wireless service) growth is arguably over," Craig Moffett, a Sanford Bernstein equities analyst, said in a research note published this week.

Post-paid subscriber growth came to a "virtual halt" in the first quarter of 2009, Moffett noted. He estimates that net additions of post-paid customers across all major carriers fell 58 percent from the first quarter of 2008 to the first quarter of 2009.

Meanwhile, prepaid customers are on the rise. A year ago about 50 percent of new cell phone users signed up for prepaid cell phone service, Moffett said in his note. But in the first quarter of 2009, about 80 percent of cell phone subscriber growth came from prepaid plans.

Prepaid wireless service could spur price war