Prepaid Wireless Contracts - Yes, Really!
Just saying prepaid wireless contracts seems like an oxymoron,
right?! Well, as prepaid providers become more desperate to
compete in the super fast paced mobile wireless industry, believe it or
not, they're thinking about contracts! I can't help but feel
that this topic itself seems tragic, and counter to everything that
represents the value of prepaid wireless.
Let's face it; when wireless carriers can sign us up for a two or three
year contract, it makes their business that much more stable,
predictable, and even more profitable. Prepaid has been
thriving because the industry has been able to offer extreme value at a
level of quality that rivals postpaid carriers. Why sign a
contract when you can get even better value from carriers that have
great networks, and many of which use or roam (for no extra cost to
customers) on the large Tier 1 carriers?
All of this made sense, which resulted in the explosive growth of
prepaid, and even turning a legacy postpaid carrier (T-Mobile) to
essentially convert to prepaid. And lets not forget Sprint,
which has dozens of relationships with prepaid MVNOs, as well as a
number of its own no contract brands. So why are they talking
about contracts? It's simple really. Prepaid needed
to get in the handset game (ala smartphones). The challenge
with smartphones is their cost (the carrier cost). They
started the smartphone game by heavily subsidizing them to allow for
classic prepaid customers to access decent quality smartphones at
This strategy was tremendously successful, resulting in the majority of
their phone sales to shift towards smartphones. So what's the
problem? Well, that resulted in risk, and borderline
unprofitable business models. Subsidize a phone too much, and
carriers risk customers leaving them before they can actually recoup
their money. i.e. Customers can leave before the company
makes enough money to keep them in business.
As customers we love subsidies in prepaid as it means great phones at
good prices, as well as not having to sign a contract for a plan that's
also a great value! Unfortunately, this isn't sustainable,
and literally results in wireless carriers going out of business, or
consolidating with mergers and acquisitions. This in turns
results in less competition, and ultimately less choice and value for
us. So there's a balance that needs to be struck to provide
customers with the best possible value, compete with postpaid, and
maintain a healthy business model.
How Do Prepaid Wireless Contracts Work?
It's not as though prepaid carriers are just going to start making us
sign contracts willy-nilly. To address the phone cost issue,
they started offering phone financing (and leasing), which itself
requires a contract. So rather than pay $400-$700+ for a
smartphone, they now
offer us handset financing to enable more customers to afford to buy a
new phone. The challenge has been that while customers prefer
no contract plans, we still want the latest and greatest iPhone or
Galaxy, but don't want to, or can't afford to pay full price for
it. Device financing allows us to have a much more digestible
to enable this process, no contract carriers now have
sign prepaid wireless contracts for the duration of the financing
seems like a win-win, however, I propose that it carries the same evils
that I discuss in the Handset
Carriers - Watch Out!
In addition to the inherent evils of signing a contract, carriers need
to be cautious of the complexity of running such programs.
Once they start actually checking credit scores, there are a lot of
legal regulations around fair decision-making and offers,
administering the approval processes and storage of records, as well as
collections processes, risks, and costs. To mitigate this
risk, carriers have largely outsourced these processes, which
essentially eliminates their risk, including offloading the financial
liability of phone subsidies.
The thought process behind prepaid wireless contracts is actually
logical, however, is it wise? Absolutely not. I
feel that this type of program borders on predatory lending practices
(carriers' fault), and encouraging poor financial decision making
(customers' fault). So what's the solution?
- As customers we should be savvy enough to save up for
things we want to purchase, and buy the smartphone we want when we have
the money saved up. Unlike the NEED to finance a home or car,
don't NEED a $500 phone by any stretch of the imagination.
Buying pre-owned smartphones from companies like Gazelle is
also a wise alternative
- Carriers should seek to better negotiate phone pricing with
OEMs (Original Equipment Manufacturers). Particularly as
smartphones are now mainstream, the cost to build them has dropped
substantially, and will continue to go down. Carriers also
need to remember that the more customers pay for a phone, the more
invested we are, and the longer we tend to stay with them, so customers
who pay more upfront for our phones are inherently more valuable in the
long term, even though switching carriers with unlocked phones is
- Carriers should focus attention on delivering quality
products, reliable service, and excellent customer care, and all
without requiring prepaid wireless contracts! This won't be
for the faint of heart, however, with these fundamental elements in
place, they can compete on quality instead of gimmicks, which will
ultimately keep customers longer. This requires long term
vision, which is difficult for short-term focused executives, further
challenged by fickle and short-sighted market analysts who tend to
value short term results over long term profitability.