Prepaid Wireless Takes Off

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Smartphone users typically pay $70 to $200 a month for wireless service. As they reduce spending, U.S. wireless data revenue may grow only 15% this year, vs. 38% in 2008, Sharma estimates.

Carriers that specialize in prepaid calling may be among the few beneficiaries of cutbacks. Now, only about 15% of Americans use prepaid wireless plans, which can cost 50% to 75% less than contract-based plans. In contrast, 68% of Britons already use prepaid plans. "There's clearly a lot of additional movement that could take place," says Allen Hepner, a scholar at the NMRC. "Thanks to the recession, the U.S. marketplace is undergoing fundamental changes." Indeed, prepaid may grow to 20% of the market by yearend, Sharma estimates. In the fourth quarter, prepaid customers accounted for 57% of new subscribers at T-Mobile USA, up from 23% a year earlier.

Widespread Defections

Some consumers are leaving the four largest carriers—AT&T, Verizon Wireless, Sprint, and T-Mobile—for smaller, prepaid carriers. In the fourth quarter, MetroPCS (PCS) saw net subscriber additions surge 74%, to 519,519, from a year earlier. In the same quarter, Sprint Nextel lost 1.3 million customers, most of them postpaid. Sprint executives are hopeful that the industry will nevertheless fare better than other areas of the economy. "We believe wireless has become so important in people's lives, we won't see as much impact as other industries."

Providers of prepaid calling, typically considered the domain of younger callers or those with bad credit, are taking steps to make their plans more alluring by adding features and better phones. Such services as MetroPCS and Leap (LEAP) are available in more markets. On Mar. 9, Leap expanded into Philadelphia. Nowadays, users can purchase not only voice but also data plans that permit texting and e-mail.

And prepaid phones have turned from clunky to cool. On Mar. 10, MetroPCS introduced Research In Motion's (RIMM) BlackBerry Curve 8330 smartphone, which features a Qwerty keyboard and rich multimedia capabilities, in many of its markets. For only $50 a month, without a contract, users of the device can talk, text, browse the Web, and send multimedia messages and e-mail. Steps like that are helping foster loyalty. Leap's monthly subscriber turnover declined to 3.8% in the fourth quarter, from 4.2% a year earlier.

Developing War in Price Cutting?

Contract carriers are responding by updating and rolling out new prepaid plans and lowering prices. This year, T-Mobile USA began offering a $50-a-month unlimited voice plan to longtime subscribers to prevent them from leaving.

But the recent flurry of cheaper, unlimited plans from T-Mobile, Boost Mobile, Alltel, and Zer01 Mobile raises a red flag for Sanford C. Bernstein analyst Craig Moffett. "As growth slows, pricing [war] risk rises," he wrote in a recent report. As more carriers start offering unlimited voice calling and data plans, they increasingly will have to compete on price.

The hope for some within the industry is that when economic prospects improve, "people will go back to postpaid" calling plans, Sharma says. But the more attractive prepaid plans become, the harder they will be to shake.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.