PREPAID OUTLOOK

KAREN RAUGUST

Winn-Dixie Stores, Jacksonville, Fla., and Ralph's Grocery Co., Compton, Calif., may be at the vanguard of the next big breakthrough in prepaid telecommunication products by offering a prepaid cellular program from AT&T.

"It's the next big growth wave in prepaid," said Amy Becker, marketing director, AT&T Prepaid Cards, Basking Ridge, N.J. "Groceries are lagging a little behind mass marketers and C-Stores [as destinations for prepaid cellular], but they'll catch up quickly," she stated.

The prepaid category is not limited to long-distance calling cards. Telecom companies and analysts see strong growth prospects for prepaid wireless (including cellular and paging). They also are optimistic about prepaid wireline, also known as prepaid dialtone, which allows credit-challenged consumers to receive home service. Neither has much presence in supermarkets so far, although some chains are starting to carry wireless. Minyard Food Stores, Coppell, Texas, is among the retailers merchandising prepaid wireless. According to Debbie Ellis, Minyard's vice president of public relations, the chain sells Southwest Bell's "Start Talking" prepaid cellular product.

According to the Raritan, New Jersey-based Pelorus Group, long distance calling cards accounted for 53% of total prepaid telecommunications revenues in 1998, followed by prepaid wireless with 42%. The remaining 5% was attributable to prepaid wireline and Internet telephony (IP), which allows consumers to make low-cost calls over the Internet.

That will change by 2003. Pelorus expects prepaid wireline to take over the top spot in market share by then, accounting for 32%, followed by calling cards with 29%, wireless with 25%, and IP with 14%. The market research firm estimates that prepaid wireline is currently growing at a rate of about 30% per month, with monthly revenue per customer pegged at $50.

Within the prepaid calling card portion of the telecom market, Boston-based Atlantic-ACM measured long-distance as having a 55.8% market share in 1999. This was followed by local access with 19.2%, wireless with 13.5%, prepaid local dialtone with 7.7%, and smart cards with 3.8%.

According to Atlantic-ACM analyst Imke Mensah, prepaid dialtone should account for close to 22% of all service by 2002. She explains that recent immigrants face barriers to local access even when they have money to pay for phone service; they have no U.S. credit history and no verification of previous residency, both of which are required for a postpaid account.

Prepaid cellular and paging seem to be emerging fastest in the supermarket channel, although their penetration is still low. Prepaid accounts for a relatively small portion of the entire wireless segment; Atlantic-ACM pegs prepaid's market share at 3.3% of all wireless in 1999 and estimates that it will grow to 3.6% by the end of this year. The organization forecasts a compound annual growth rate of 40% for prepaid wireless from 1998 to 2004. The Yankee Group has estimated that 34.4% of current wireless phone users and 17.3% of postpaid pager users are interested in prepaid paging.

Initial growth in prepaid wireless is expected to come largely from consumers with credit problems, as was the case initially with prepaid long distance; 50% of those applying for wireless in 1998 were rejected due to credit concerns. Yet prepaid wireless also makes budgeting easier and, therefore, is rising in popularity among business travelers and college students.

Vendors have introduced both prepaid cellular and prepaid paging programs within the last year. For example, AT&T launched a $129 prepaid wireless package in September 1999 that allows national roaming and service in 200 countries. Refill cards in 30-, 60-, 120- and 240-minute denominations are available at AT&T Stores and some other retail locations, as well as by phone.

MCI Worldcom, Atlanta, is among the companies offering prepaid paging. It launched the program in January. When service is about to run out, consumers receive a page; they can purchase refill cards of $20 and $30 at various retail locations.

Despite the optimism surrounding prepaid wireless, some barriers to growth exist. "Currently, the vision is more than the reality," said Mark Lees, director of prepaid services at Cable & Wireless, Vienna, Va. He noted that in other regions prepaid is more highly developed. In Europe, for example, prepaid cards are used for a wide range of purposes, such as paying gas bills and using the Internet at cybercafes, as well as for long distance. Prepaid cellular is also better established there than in this country.

One of the main challenges to U.S. growth is that prepaid remains more expensive for typical users than postpaid. Kim Antonaccio, research analyst at Frost & Sullivan, Mountain View, Calif., believes that the cost will limit growth of prepaid cellular in the near future. On the other hand, she views postpaid wireless as a threat to prepaid long distance calling cards, noting that household penetration of cellular is up to 30%. She forecasts that the rise of cellular will lead to a decrease in the number of pay phones, which will threaten sales of calling cards.

The availability of new telecom hardware and services with retail applications emphasizes the importance of the category for supermarkets. Many vendors stress that retailers who become full-service telecom providers will be best-positioned for success in prepaid.