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.

Why Contracts?
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 affordable prices.


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 Samsung 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 startup cost.

However, to enable this process, no contract carriers now have customers sign prepaid wireless contracts for the duration of the financing term.  This seems like a win-win, however, I propose that it carries the same evils that I discuss in the Handset Financing section.


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.

Conclusion
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?

1. 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, we 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 to consider.

2. 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 relatively simple.

3. 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.

Be Heard!  Let prepaid wireless providers know what you want; fill out the survey now.