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Prepaid Phone Service Moves Into the Mainstream

Cheap, reliable plans threaten to knock major carriers off their perch

10 Minute Read

Billions of people looking for reliable, unlimited data at reasonable rates are expected to help the prepaid phone business grow by 4% a year through 2026. It might not sound like huge growth, but consider the market:

  • More than two-thirds of the world’s 7.6B people have a mobile phone, the majority of which carry data plans.
  • And there are roughly 2.5B people without a mobile phone that form an equally enticing market.

Until now, prepaid, or pay-as-you-go plans, have mostly appealed to lower-income consumers, or people who have trouble obtaining credit. 

MetroPCS, a T-Mobile subsidiary, built its brand around younger, urban crowds that prefer to pay month-to-month at lower prices, rather than getting locked into an annual contract. There’s a MetroPCS down the street from me, and it shares the same building as a check-cashing store and a vape shop. That paints a vivid picture of the customer base the company targets — but that demographic may change.

In fact, many prepaid plans offer a significant cost savings over those offered by traditional carriers — and the service is almost indistinguishable. For those reasons, we expect prepaid plans will begin appealing to middle- and upper-middle class customers as well.

The market has expanded rapidly in recent years, with hundreds of businesses establishing significant revenue off prepaid customers. Analysts say the market has room for more players, as the global prepaid industry is expected to climb to more than $650B in annual revenue within a decade.

KEY TAKEAWAYS

Prepaid phone service is poised to move into the mainstream, providing consumers with a significant cost savings over the major carriers’ plans while offering similar-quality service. 

The prepaid phone business is expected to grow 4% a year through 2026, buoyed by a shift away from major carriers’ postpaid plans.

Low startup costs have helped hundreds of entrepreneurs start prepaid companies.

01 A Prepaid Shift

The leaps in cell phone innovation used to be paradigm-shifting (i.e., Nokia to Razr to Blackberry to iPhone 3GS, etc.). And while advances in smartphones are still impressive, they aren’t market movers. In fact, even mighty Apple has seen a recent decline in smartphone sales.

Many people appear to be perfectly content using a slightly older device instead of coughing up $1,000 for a new device they’ll likely drop and crack in the first week (me.) There is also a huge market around used devices (another Trend I’m looking forward to exploring.)

02 The Lay of the Wireless Land

As the world becomes increasingly connected and tethered to smart devices, the demand for affordable and flexible data and voice plans is only going to increase.

Right now, the vast majority of the market runs through AT&T, Sprint, Verizon, and T-Mobile, which operate their own physical cellular networks.

But more than 100 other carriers — the MVNOs — are ready for their breakout.  

Estimates for those smaller operators to get into the business by piggybacking on the big carriers’ towers range between $15,000 to $60,000 to establish a direct relationship, a process that can be relatively costly and complicated.

Alternatively, many entrepreneurs ultimately partner with a mobile virtual network aggregator (MVNA), which takes the lead in the mass buying and reselling of the mobile network operators’ (MNO) products.

MVNAs negotiate directly with the mobile network operators, which include companies like AT&T and Verizon, and provide MNVOs access to the big carriers’ networks and a platform for managing operations. Many MVNOs have made such a positive impression in the business that they’ve presented lucrative acquisition targets.

Here are a handful of the notable players that have entered the market in recent years, along with their corporate parents:

These ventures aren’t your typical bootstrapped startups with a dollar and a dream, fighting over the last Soylent in the fridge. The MVNO market has drawn the attention of some of the world’s most successful entrepreneurs:

  • Carlos Slim, a Mexican business magnate whom Forbes once ranked as the world’s richest person. One of his companies, América Móvil, saw its net profit rise to $542m in its most recent Q4 (Feb 2019). América Móvil owns MVNOs TracFone, Straight Talk, and SafeLink, making it the largest MVNO in the United States with over 22m customers.
  • Billionaire Patrón Tequila founder, John Paul Dejoria, who co-founded ROK Mobile in the early 2000s. ROK Mobile differentiated itself as the “music” MNVO, giving its users free access to unlimited music streaming on its platform. (The ROK Mobile site is no longer online.)
  • Billionaire Richard Branson, whose Virgin Group founded Virgin Mobile in 2001 as a  joint venture with Sprint. Sprint Nextel later bought Virgin Group for $483m. 

There are also several other notable players in the market:

  • Cricket Mobile, founded in 1999, was sold to AT&T on July 12, 2013, for $1.2B, along with its parent company, Leap Wireless.
  • MetroPCS, established in 1994, launched its service in 2002. By 2005, it had around 1.5m subscribers throughout the US. MetroPCS IPO’d on April 19, 2007, and created a market cap of $8B. In 2012, MetroPCS merged with its carrier, T-Mobile. 

The large number of acquisitions might make you think that the big carriers couldn’t tolerate the competition. In reality, many appear to welcome it.

So, what’s in it for someone like T-Mobile or AT&T to let some scrappy startup use their infrastructure?

  1. They get someone to sell their service for them.
  2. They don’t have to pay contractors or unions, which can be a thorn in their sides. 
  3. It doesn’t cost the big players  anything, other than maybe losing out on full-pay customers that might buy from them directly. 

MVNOs are common in lower-income suburban areas, in part because there’s a higher amount of network availability. AT&T doesn’t mind allowing the smaller operators to use its cell towers because it knows the MVNOs won’t slow down its service. 

Another benefit for the big players? The small operators also deal with the customer-service headaches. For example, prepaid carrier, h2o Wireless, uses AT&T’s GSM 4G LTE network. If h2o customers have a problem with the company’s service, they must take it up with h2o, not AT&T.

For its part, AT&T is fine having a third party provider like h2o Wireless use its towers, even if h2o is basically undercutting AT&T on price. At the end of the day, AT&T is still getting paid, and so is h2o.

03 Getting Your Hands Dirty: MVNO Entrepreneurship

Let’s rewind to 2010: this writer was a spry 18-year-old saving up for a car and pricey dates to Chipotle and Chick-fil-A. My bank account was running on E and my waiter salary wasn’t helping. It was about time to renew my contract with T-Mobile and I saw a commercial for Straight Talk. I wondered if I really had to be tethered to an expensive monthly plan, or if I could roam free, paying month-to-month.

I crunched the numbers and ventured out to my local Walmart and purchased a pre-loaded Unlimited* SIM card for $45. I slapped that baby in my cracked-screen iPhone 3GS and continued with my high-rolling teenage existence. 

It was smooth sailing for a few months until I realized that my apps were loading significantly slower than they did under my T-Mobile plan. I tried to contact Straight Talk customer support, barely escaping its digital labyrinth with my sanity intact. I finally got ahold of someone who spoke in halting English. His solution? Buy another month of Unlimited* data to hold me over. 

I later found out if there are too many people on a network, the third party MVNOs end up having to “throttle” their customers’ data speeds. I wasn’t the only one suffering. In 2013, Straight Talk and its parent company, Tracfone, along with their big retail partner, Walmart, faced a consumer fraud class-action lawsuit, alleging the companies falsely advertised “Unlimited*” data, when they were actually throttling many of the customers on their plans. The companies settled the lawsuit in 2016, with Tracfone agreeing to set aside $40m in a settlement fund. TracFone and Walmart denied the claims.

Today, Straight Talk offers 25GB data and unlimited talk and text for $45 per month. That’s more data than almost anyone uses; the average cell phone user only eats up about 2GB to 5GB of data per month. Although Straight Talk’s customer service hasn’t improved much over the years, I still use them. And I can’t help but think what a terrific opportunity exists for a small operator that actually pays attention to its customers.

04 How to Get Started

To understand how this business works, I spoke to Artem Mashkov, who owns 12 Paging Zone Verizon Authorized Retailer locations in Brooklyn, Manhattan, and Staten Island, N.Y. He’s been in business for a decade. .

Let’s say you want to go into business yourself. Maybe you want to start a HustleMobile prepaid phone brand. You might purchase 1,000 unlimited 1-month SIM cards from T-Mobile at a bulk discount of $30 each, for a total of $30k. Based on general market rates, you could probably flip those cards for $55 each, earning a $25,000 profit before expenses.

Although this example might seem a bit simplistic, that’s basically what MVNO resellers do. For example, Miami-based T-Mobile MVNO reseller, Simple Mobile, bought data and minutes from T-Mobile in bulk, then purchased T-Mobile SIM cards, selling them under the Simple Mobile name. 

Simple Mobile was ultimately bought out by América Móvil (Carlos Slim) in 2012 for an estimated $100m.

Selling SIM cards is basically selling a subscription service that is renewed monthly and usually automatically. Although people aren’t making phone calls as much anymore, they still need data coursing through their phones to use things like Google Maps, Uber, and Facebook (at least when not connected to wifi.) Unless you completely fail to service your accounts, most people will keep using your service — which will keep the money flowing.

But if there’s one thing you better have, it’s fast downloading speeds. A study supervised by Lund University and Ericcson “Modeling Customer Lifetime Value in the Telecom Industry”,  found that by far the highest “Customer Lifetime Value” increase came from increasing network performance satisfaction.

Chart showing provider customer service relationship with customer retention

Despite being wronged by Straight Talk a few times, I still use the service because, frankly, it’s not causing me any issues anymore and I’m too lazy to change it. But, would I change providers if there were something cheaper on the market with better features, such as unlimited international data or a refund on the data I don’t use, and was frictionless to change? Probably. 

Wing, for example, is an MVNO that refunds its users for the data they don’t use. And it has an easy-to-use app that makes it easy to manage your data. If Straight Talk drops the ball again, it could be a pretty good next option.  

Entrepreneurs would just have to find what that magic value proposition is to either get people to switch from their carrier, or get people without a device or carrier to use their network.  

05 Making Money as an MVNO

Business models in the MVNO industry aren’t only limited to direct sales. There are a few different monetization routes MVNOs tend to go: sales, acquisition, or through government subsidies.  

  1. Direct Sales.This is fairly straightforward — just think of the pre-paid SIM card example from above. 
  2. Acquisition. From a bird’s eye view, the MVNO industry appears to be an acquisition free-for-all, where the most profitable ones end up getting bought out by bigger fish.
  3. Government Mula. MVNOs can also apply to become a provider under the Lifeline Program, a government program that aims to provide qualifying low-income consumers subsidized phone service. As of December 1st, 2019, the government subsidizes monthly voice support of $9.25 per month and broadband support of $9.25 per month. Qualified carriers must meet the requirements laid out by the FCC. 

The first step is to apply to become an eligible telecommunications carrier (ETC) with your respective state regulatory commission or the FCC. After you’ve received approval to become an ETC, you’ll have to meet all of the Lifeline program requirements.

06 Thinking of Setting up Shop? Learn to Differentiate

Starting your own MVNO seems simple, right? It is, which is why the MVNO market has become incredibly crowded. 

It also does take a fair bit of time to launch; McKinsey estimates launching an MVNO can take up to a year from idea to launch due to the negotiation with the host company 

Here’s the catch: you can’t provide higher quality service than that of the company’s infrastructure you’re using, so you would need to find other ways to differentiate your business in an already highly saturated market. 

Many cell phone service companies have attempted to attract users with intangibles, such as free music and video streaming. 

Artem, the New York-based entrepreneur, compliments the intangibles T-Mobile has sold.

“You can access Pandora and Netflix for free. T-Mobile Tuesdays was a brilliant marketing campaign that awarded customers with free stuff and deals every Tuesday,” he says. “T-Mobile has been pretty consistent with leveraging intangibles as their bread and butter to help them stand out.”

New entrants that figure out how to solve some of these puzzles will likely have a high chance of success: Among the ways you can do that:

  • leveraging a big brand with a pre-existing user-base;
  • mastering distribution channels and strategic partnerships (i.e., Straight Talk/WalMart partnership);
  • enhancing the user experience (most MVNO customer service is abhorrent);
  • providing out-of-the-box connectivity and frictionless transfer from the competition;
  • creating retention programs (think T-Mobile Tuesday), non-gimmicky social responsibility (big in 2019), and global connectivity (with unprecedented levels of remote workers, this could be big).

Finally, here are a handful of ideas I thought of to help you brainstorm opportunities. Instead of thinking about the traditional ways of entering this market, consider these different approaches:

  • UpWork, a leading freelancer platform, could offer its freelancers discounted wireless phone service plans with unlimited global data and 5GB of hotspots. 
  • WeWork, the popular co-working company, could connect all of its 250k+ customers with a prepaid wireless service built into its monthly or annual billing, offering unlimited global data. 
  • Amazon, a small little company that sells books, could launch its own cell phone service and offer its 100m+ Prime members unlimited plans that tap into strategic products under the Amazon umbrella, such as a free monthly Audible subscription. 

If you were to launch your own cell phone service, what strategic advantages could you leverage to give you a creative leg up over the competition?

How about an influencer marketing campaign? Getting consumers to switch phone service providers through social influencers poses some challenges, but it’s not hard to imagine a well-executed influencer campaign taking off as it has for countless direct-to-consumer brands.

Or, maybe you want to jump into international markets. The Asia-Pacific region represented more than 50% of the market in 2017, with dense population centers like China, India, Japan, and Indonesia offering continued opportunities. Hundreds of companies have proven that successful replication of American-incubated business models can work very well in international markets.

07 Final Thoughts

Most consumers view their wireless phone service providers with a dispassion a notch above how they feel about their utility company, and there’s room for a new brand to change this. 

Prepaid phone service providers may seem saturated from an initial glance, but the forecasted market growth, combined with various creative penetration opportunities, paint an interesting opportunity for those entrepreneurs ready to take the plunge.

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