After another year of spectacular growth, the wireless industry has almost nowhere to go but down -- downmarket, that is.
With so-called prepaid plans from
targeting young users, and
GoPhone focusing on poorer customers, the big players are starting to carve up the market.
Now more than ever, teens and customers with poor credit histories are the new growth frontier for mobile phone operators, who see prepaid service as an opportunity to pocket some more of the nation's calling dime.
At this point, nearly everyone with a solid credit history and some disposable income who has ever fancied a cell phone has signed up with a phone service. That means about 52% of the U.S. population, and roughly two out of every three adults, is lugging around a mobile phone. So the telcos must reach out to the rest of the population if they hope to sustain the growth streak that has boosted many of their shares.
"This is definitely a growth market," says SG Cowen analyst Tom Watts. "Next year will be the first full year we see prepaid's impact. Most people think it could take penetration from 50% to 70% of the population."
But cracking the poor-credit market successfully has never been easy. Previous attempts across the industry have been plagued by deadbeats, credit card scams and an assortment of consumer frauds. Even the good prepaid customers have often given phone companies fits by failing to stick around long enough for the telco to recoup the cost of the phone, let alone post a profit.
Some investors caution that while the prepaid market may help telcos pad their subscriber growth numbers, the damage these efforts do on the cost and margin side makes the whole exercise a charade.
Yet analysts like Watts say new approaches to the market have helped eliminate much of the risk.
For one, phone prices have dropped. Now, the telcos are offering their prepaid customers no-frills phones that don't need to be subsidized. And while some companies -- like
, a joint venture between
-- still rely heavily on in-store renewals that can tie up sales reps, AT&T Wireless has taken another tack. The company has adopted what amounts to the EZ-Pass method, automatically tapping a user's bank account to periodically replenish the plan with a new allotment of minutes.
And if adults pose a challenge on payments and loyalty, Virgin and Nextel are out to discover whether teens are any better.
Virgin Mobile, which resells
service under its own brand, has managed to sign up 1.3 million users since it started marketing to youths this year. And though Nextel's Boost Mobile has had disappointing delays in the rollout of its prepaid offer in the U.S., analysts are still optimistic about the company's prospects.
Nextel's stock has nearly doubled this year, and it hit a 52-week high Wednesday as investors continue to see it as one of the few winners under the new number portability rules.
Nextel is hoping efforts like Boost will help continue the momentum. The company has been under pressure to find new growth after having turned profitable this year, driven by the highest customer retention rates and average user revenues in the industry. Boost offers service in California and Nevada and has signed on 250,000 customers so far this year.
Investors had expected the service to be available in several states by now. A company rep said the business isn't necessarily behind schedule, but new markets will be added when the margins "are as good as Nextel's or better."
Meanwhile, there have been some troubles. Boost's president, Peter Adderton,
quit earlier this week over strategic differences with Nextel. In a press release, Adderton complained that Nextel's corporate approach didn't work with young wireless customers. Both Nextel and Adderton have since agreed to refrain from any further public comment.
While youth marketing is no trivial matter, another one of the Boost hiccups has been high phone prices. But Nextel CEO Tim Donahue told investors at a recent conference that he was sure
, the company's handset maker, would lower the prices soon. Donahue also said Boost would be in four or five new markets in January.
Like Nextel, Boost features a walkie-talkie feature that has become sort of the wireless equivalent of instant messenger. That signature feature has helped Nextel differentiate itself from the five other national brands. Teens presumably covet the two-way radio feature, an attraction that could add a lucrative $30-a-month revenue stream to the 25-cent-a-minute calling service.
But Verizon and Sprint PCS have introduced two-way radio services this year, and the other players are expected to have their own offerings next year, all aimed at duplicating Nextel's most defining feature.
One thing seems certain: As wireless leader Nextel goes downtown, you can be sure the rest of the industry will follow.