Apple threatened by growth of prepaid smartphone plans
Troy Wolverton, www.mercurynews.com/troy-wolverton
In a shift that could become a big threat to Apple (AAPL),
U.S. consumers are increasingly signing up for a type of wireless service plan
popular around the world that's traditionally not been in favor here -- prepaid
accounts.
Prepaid plans typically allow consumers to purchase services
in advance in bite-sized chunks -- whether by the minute, the megabyte or the
month -- and allow them to cancel at any time. In contrast, the standard plans
offered by the big carriers, such as AT&T and Verizon, generally require
users to sign up for pricey two-year service agreements.
Although prepaid accounts still represent less than a
quarter of all wireless service plans in the United States, they're gaining
ground rapidly. Half of all new wireless accounts added between 2008 and last
year were prepaid ones.
"It's a very dramatic change in how customers in the
U.S. are buying wireless," said Sara Kaufman, an analyst who covers the
wireless service market for Ovum, a research firm.
That shift is a worrisome one for Apple, whose iPhone
provides the lion's share of the company's revenues. The vast majority of
iPhones sold in the United States come with two-year contracts for standard
plans with the big carriers, whose high-priced contracts subsidize the cost of
the phones. The company faces the prospect of losing market share -- and
eventually revenue -- to cheaper phones on prepaid plans, or having to offer a
lower-cost phone that could undermine sales of its higher-priced iPhones.
With prepaid service plans, consumers typically have to pay
up front the full cost of their phones -- or connect a device they already own
to the service. Because of that, inexpensive phones tend to sell best for
prepaid providers.
Apple, however, doesn't offer a cheap phone. Without its
subsidy, for example, Apple's new iPhone 5C -- billed as the
"lower-cost" iPhone by CEO Tim Cook -- costs $550. That's hundreds of
dollars more than the typical cost for a prepaid phone, many of which run Google's (GOOG)
Android operating system.
Investors and analysts have fretted that Apple's focus on
selling pricey, heavily subsidized phones will hurt it in developing countries
such as China and India, where unsubsidized phones and prepaid plans
predominate. But few have paid attention to how the company is being hurt by
the shift to prepaid plans closer to home.
"There's no question that (Apple's) missing out,"
said Weston Henderek, a principal analyst at Current Analysis, a technology
market research firm. "They're essentially ceding that market to
Android."
An Apple spokesman did not respond to a request for comment.
But Cook, in an interview last month with Bloomberg Businessweek, said his
company wasn't interested in the market of customers looking for inexpensive
"junk" phones, and that Apple can have a "really good
business" by focusing on the higher-end market.
"I'm not going to lose sleep over that ... market,
because it's just not who we are," Cook said.
Analysts say the company could endanger its brand or cut
into its healthy profit margins by offering a truly inexpensive iPhone.
But with iPhone sales having fallen in China in Apple's last
quarter and sales growth slowing elsewhere, the company may be forced to look
closer at making a device targeted at the prepaid market.
Prepaid accounts comprise the vast majority of wireless
agreements globally. They've represented a small fraction of the U.S. market,
but that's changing. Between 2008 and the end of last year, the number of
prepaid accounts jumped from 48 million, or 18 percent of total wireless
accounts, to 76 million, or 23 percent, according to CTIA, the wireless
industry's U.S. trade group.
Until recently, prepaid plans were offered only by second-
or third-tier carriers. But now even the four big service providers offer such
plans.
And the plans have become more varied and flexible.
Consumers used to purchase service by the minute, which frequently meant that
they would have to add more minutes to their accounts. Those plans are still
available but newer prepaid plans look a lot more like standard
"postpaid" plans: Consumers pay by the month and their service includes
a set number of voice minutes or data usage.
"The sophistication and the diversity of the offerings
has certainly changed," said John Walls, a spokesman for CTIA. "You
have a lot more flexibility as a prepaid customer than you did five to six years
ago."
Another factor driving the growth in prepaid plans has been
sales of tablets such as the iPad, many of which include cellphone radios. The
typical wireless plan for those tablets is a month-by-month prepaid agreement.
And then there's the Great Recession.
"What we've seen in the past is that when the economic
situation is a bit tougher, people think they're in more control if they move
to a prepaid basis," said Carolina Milanesi, an analyst with industry
research group Gartner.
Eric Snider, a 44-year-old San Jose mobile app developer, is
among those trying to save some money. Three months ago, he switched from
AT&T to Straight Talk, a prepaid provider whose service is offered
exclusively through Walmart. With AT&T, Snider paid $93 a month, and got only
450 voice minutes and 2 gigabytes of data. Now he's paying just $45 a month,
but getting unlimited voice minutes and unlimited data usage, although Straight
Talk warns that it slows access rates after the first 2½ gigabytes.
"There are things that aren't as good as AT&T, but
I like saving almost $50 a month," Snider said. The $93 per month he was
paying AT&T "seemed too much, and it was making me mad."
Contact Troy Wolverton at 408-840-4285.
Follow him at www.mercurynews.com/troy-wolverton or Twitter.com/troywolv.
A different kind of smartphone plan
Prepaid wireless plans, long the dominant kind overseas, are
becoming more popular in the United States. Here's how they're different from
standard plans.
No long-term contracts. With prepaid plans, customers
typically pay for service by the month, the minute or the megabyte. Users can
cancel at any time -- with no penalty.
No subsidized phones. With prepaid providers, users have to either bring a phone they already own -- or pay the full retail cost for a new phone. Standard service providers by contrast typically offer phones at deep discounts -- in exchange for lengthy contracts.
Cheaper service. Prepaid plans typically cost less than standard ones, in part because service providers don't have to recover the cost of the phone subsidy. In some cases, the difference can be dramatic -- up to half the price of the cost of a standard plan.
Different plan, same network. Prepaid providers typically lease space on the major carrier's networks -- or are simply brands that are owned by the major carriers.
No subsidized phones. With prepaid providers, users have to either bring a phone they already own -- or pay the full retail cost for a new phone. Standard service providers by contrast typically offer phones at deep discounts -- in exchange for lengthy contracts.
Cheaper service. Prepaid plans typically cost less than standard ones, in part because service providers don't have to recover the cost of the phone subsidy. In some cases, the difference can be dramatic -- up to half the price of the cost of a standard plan.
Different plan, same network. Prepaid providers typically lease space on the major carrier's networks -- or are simply brands that are owned by the major carriers.
Source: Staff research
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