CURRENT TRENDS BODE WELL FOR PHONE CARD SALES

KAREN RAUGUST

A broad demographic demand, falling price points and industry consolidation are positive trends pushing prepaid telecommunications products to multibillion-dollar levels.

When prepaid calling cards first emerged as a product line in supermarkets in the '90s, the main target customers were credit-challenged and ethnic consumers making a lot of long-distance calls, primarily to Latin America. While these are still key markets, the average consumer for prepaid calling cards has become the mainstream shopper. Primary targets now include college students, travelers, people who move around frequently during the day, children (for emergency use), and businesses. Convenience and budgetary concerns are main purchase drivers.

The CPR Group, Westfield, N.J., reports that of consumers 18 to 34 years old, 40% have used a prepaid calling card, making that the primary demographic group for the category. Teens are next, with 30% of consumers ages 13 to 17 having purchased a card, followed by 27% of those ages 35 to 54 and 11% of seniors age 55 and older. Thirty-four percent of suburban households use cards, a rate higher than for urban or rural consumers.

Although most retailers and suppliers view prepaid cards as primarily impulse purchases, the CPR study on prepaid phone card users purchasing habits reveals that 44% of respondents go to the store with the intent to purchase a card. Twenty-two percent say it is strictly an impulse purchase, while 26% vary between impulse and intent. In general, consumers prefer $10 and $20 cards and are not brand-loyal, with only 16% regularly buying the same brand, according to the survey.

One of the most visible trends in the prepaid industry, and the telecommunications industry in general, is the great number of high-profile mergers and acquisitions. Recent examples include the pending mergers of Qwest Communications International, and U.S. West Communications, both based in Denver and of MCI Worldcom, Clinton, Miss., and Sprint Corp. Westwood, Kan. The latter is expected to close in the second half of 2000, with the merged company called Worldcom.

Most industry observers believe that there will be little impact of these mergers on the prepaid industry, at least initially, especially at the store level. Executives at both Sprint and MCI Worldcom say they are proceeding with business as usual in the prepaid sector until further notice.

Fred Voit, an analyst with The Yankee Group, Boston, points out that the merged Worldcom will undoubtedly be the biggest player by far in prepaid cards, especially considering that MCI Worldcom already holds number-one position. "No one will ever beat them," he said. But will there be ramifications for the consumer? "None whatsoever," answered Voit.

"What's the brand going to be? That's the question," Voit continued. "They both have strong brands." Many observers believe that both the MCI Worldcom and Sprint brands will remain on the market, at least in the short term. Both have significant brand recognition; it also would cost more to rebrand than to maintain separate programs. In 1999, Sprint rebranded its Spree phone card program under the Sprint name.

Falling prices represent another industry trend. According to Atlantic-ACM, Boston, 1999 witnessed a drop in average revenue per minute, with the average domestic per-minute retail rate valued at 11 cents that year, compared to 21 cents in 1998. International rates declined even more spectacularly, dropping from 64 cents in 1998 to 28 cents in 1999. Voit of the Yankee Group points out that the domestic retail rate when the industry was emerging in 1994 was around 50 cents a minute.

The industry's reputation has improved significantly since those early days, which will serve it well as retail sales continue to grow. "Prepaid cards continue to be viable," said Voit.