Prepaid Broadband: Some Risk, But Mainly Opportunity
"Internet connectivity is a lot of money for many Americans," said Richard Siber, founder and president of Siber Consulting. "While we like to think we are a connected society, for many, this is a luxury."
Wireless operators for years have had a prepaid option that doesn't involve monthly plans or contracts. As the broadband market matures and the opportunities to organically grow lessen, cable operators are among the broadband providers beginning to explore prepaid opportunities as a means of growth.
Comcast (NASDAQ:CMCSA), for example, has been trialing Xfinity Internet Prepaid in parts of Delaware, Pennsylvania and New Jersey. Customers buy a starter kit for $69.95 and receive a modem, coaxial cable, Ethernet cable, power cord, user guide and an activation code for 30 days of service. After that time period, $15 buys seven days of service, while it costs $45 for another 30 days.
Aside from attracting a market segment they might not otherwise reach, operators could benefit from the economics of prepaid in other ways. The cost of customer acquisition is lower, as are the support costs. No bills need to be printed and mailed, and web-based self-help reduces call center costs, for example.
"Offering a prepaid service is appealing to the customer that is budgeting and price sensitive, but they are still a customer," Siber said. "You can offer the same service, but the overhead costs are going to be considerably lower. The consumer is getting a package with less support, but can predict the bill and can turn the service on and off based on how much money they have (at a given time)."
Another argument in favor of prepaid broadband is that competition is coming, and the new kids on the block do not have legacy systems to support and are subject to limited regulatory oversight. They are offering similar broadband services for "next to free."
"There are companies out there that say, 'I bet I can build a better mousetrap and provide content through some unlicensed spectrum infrastructure with lower cost to service, and I bet I can compete with incumbent broadband (providers) who are regulated, have infrastructure costs, billing support,'" Siber said.
Competition could be from over-the-top (OTT) providers and the Googles (NASDAQ:GOOG) and Apples (NASDAQ:AAPL) of the world, but it also could come from unexpected places. "Imagine if every car had a WiFi (mesh), which ultimately becomes a stronger self-healing network. Imagine if all cars became an unlicensed broadband network," Siber said.
"(Broadband providers) should seriously consider (prepaid), or a lower cost competitor with different economic models will come in and erode their margins," Siber said.
One concern in all this is that prepaid could cannibalize traditional subscription-based postpaid broadband. Wall Street analysts measure carriers on market share, how many new subscribers were added, what it cost to add them, what is the ARPU, and what is churn. If postpaid convert to prepaid, ARPU will drop, along with subscriber numbers. Since there is no contract and prepaid users can be anonymous, they may churn easily to someone else with a lower-priced product.
"They are potentially putting a portion of their customers up for grabs, and that could lower their average revenue," Siber said. "But this is all short-sighted. (Prepaid) will provide growth and appeal to the consumer without any broadband and will lower the cost of delivery. There may be a few potholes or bumps, but nothing that will not allow this to happen."
Comcast declined to comment on its trial, saying that it is too early in the process.
Monta Monaco Hernon is a free-lance writer. She can be reached at [email protected].