November 02, 2004

Prepaid Product Rollcall

In the prepaid arena, there are several contenders for most popular

by: Frank Squilla

As a distributor of many prepaid products, I am always looking for that next big item that will create consumer demand and increase revenues and profits for my customers. Finding this product has been easier said than done.

Lately, however, the latest hot development is stored value products. MasterCard, Visa and American Express, as well as debit cards and the ever-popular gift cards, are the spike that many retailers are looking for. But many will be disappointed by the percentages earned on the sales. We will talk about this later.

Prepaid internet and digital content

The search for the next big thing has always been the quest in the prepaid industry. In the late stages of 2001, prepaid dialtone was considered the savior. Then, if you recall in early 2002, prepaid internet became the darling product. AT&T, Sprint and Slingshot, may it rest in peace, started spending aggressively to market this exciting new segment of the prepaid industry.

Unfortunately, this too has not lived up to expectations. I actually believe that prepaid internet will be a product to reckon with in the future as the internet becomes more and more of the way we live our lives. Stay tuned on that one.

Lately, music downloads, ring tones and games are hot. In the music arena, iTunes has approximately 70 percent of the music download market. Currently, Target is the only retailer where one can purchase prepaid iTunes cards. The buzz is that they may soon expand the offering to other retailers, but nothing as of yet.

Napster, Rhapsody and MusicMatch have also entered the arena, but sales have been less than stellar despite a lot of early push on the product. In my discussions with industry insiders, music could be one of those products that really takes off, but there is still ample free music online. Although extremely popular with the youth, music downloads have failed to catch on in the prepaid arena as of yet.

The same can be said with ring tones. Moviso and Mobile Craze are two of the providers in this arena. This, too, has not lived up to its early billing, although given the popularity of prepaid wireless, you would think these types of support products would eventually catch on.

One of the issues regarding the acceptance of these products is making sure that the ring tones can be downloaded to all types of phones. Currently, this is not the case. In addition, many of the carriers are providing options for their customers to download tones at the carriers' websites. As more consumers upgrade their phones and become increasingly familiar with these new offerings, expect the popularity of these types of products to expand.

Prepaid online games are also set to gain attention as Game Spy, Xbox Live, Microsoft Games, Funcom and many others go prepaid. I understand that there are hundreds of thousands of youth that play games over the internet on a regular basis, and the popularity of game playing is growing every day. But as Mom and Dad get tired of funding this habit, you'll find Junior buying a prepaid gaming card at the corner store.

There are many others looking to take over the very limited space that retailers have to promote prepaid. You will see prepaid diet products such as Atkins, prepaid satellite radio, prepaid flowers, prepaid roadside assistance, and the list goes on. The retailer has a choice to make. He has limited space to market prepaid, so let's make sure we do not waste the space we have while continuing to grow our sales.

MVNO action

An MVNO, or mobile virtual network operator, buys airtime in bulk from carriers such as Sprint, Verizon or AT&T and then repackages the minutes and sells this program under its own private-label brand.

Virgin Mobile, utilizing Sprint's network, and Boost Mobile, utilizing Nextel's network, are two of the newest MVNOs that have been introduced to the United States. Both of these companies are doing well, and their success has paved the way for entrepreneurs to get involved.

MVNOs are becoming popular because retailers can offer these types of programs and earn significantly more profit dollars per sale. Margin dollars in wireless have declined; Alltel, Boost, T-Mobile, Verizon and i Wireless have significantly reduced their margins to distributors. Many feel this trend will continue.

Typically, retailers can earn 5 percent to 8 percent more selling a product offered on the Verizon network than they can earn selling Verizon's prepaid program. That's why companies such as Omni, Call Plus, Page Plus, EZ Link Plus, STi Mobile, Diamond Mobile, Locus and many others are now operating in this space. Many of these carriers are watching their businesses grow at a significant rate.

Prepaid wireless

You still have to be careful, though, in the prepaid wireless segment. As in the early stages of prepaid phone card growth, there will be many companies that get started with good intentions and fail. Unfortunately, there also are those who enter the business without the best of intentions. So do your homework, work with reliable distributors and make sure they have a track record of servicing your specific industry.

Stored value

Let's look at the stored value side of the business. We have been selling prepaid MasterCard programs for a few years, and it has shown steady growth from month to month. Next Estate Communications is the clear leader in this space with its Truth, i-Gen and many other brands. This year, it introduced Green Dot, which is the universal reload product for all of its brands. The Green Dot network will also be available for other product reloads. Next Estate's success has opened the door for many others to join the mix.

To take advantage of the money transfer industry, Citibank is now on a major plan to market credit and debit products to the Hispanic consumer. Companies like Secured Cash Network have launched Pronto Banco, which is targeted to the Hispanic market for debit card services, payroll services, money transfer and bill payment. What makes this product unique is that it has partnered with Estafeta, which is the UPS of Mexico. The company has figured out a way to get these financial service products delivered to any area of Mexico.

Add gift cards to the mix, which I believe are even more popular, and you can see that stored value is here to stay.

Gift cards

Walk into almost any retail location and you can purchase a Blockbuster, Home Depot, Lowe's, Barnes & Noble or Sears gift card. Retailers are selling gift cards with other retailers' names on them. Right now, you can find these types of cards in many grocery locations around the country, and retailers now will be able to participate. Sales of gift cards are already in the billions of dollars.

This product offering does have a catch the retailers will have to approve where their cards are sold. Nevertheless, gift cards alone will add millions to the retail marketplace. If you think wireless margins are low, get ready for more shock. Retailers can expect margins in the area of 5 percent on these products, and you will have to take up valuable space merchandising gift cards as they must be activated at the point of sale. Yes, it is a low margin, but it can be extremely high volume.

The author is director of sales for GTS Prepaid Inc. He can be reached at 856.797.3434.

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Posted by Craig at November 2, 2004 02:15 PM