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Summary:

The gap between AT&T and Verizon Wireless and the rest of the field is growing as budget-conscious users continue to eschew contracts in favor of bargain-basement prepaid services. The behemoths have made hardware the key differentiator, but how long will that strategy continue to work?

The gap between the top two U.S. carriers –- AT&T and Verizon Wireless -– and the rest of the field is beginning to grow, as budget-conscious users continue to eschew contracts in favor of bargain-basement prepaid services. The two postpaid behemoths have made hardware the key differentiator, keeping consumers who are in love with their iPhones and Droids and letting users of lesser phones slum with the prepaid guys.

But how long will that strategy continue to work?

Prepaid service providers are consistently claiming about two-thirds of new mobile subscribers, according to recent figures from the New Millennium Research Council, lured by services that seem to get cheaper by the day. The brutal price war in prepaid continued this week when Sprint launched an effort to capture the bottom tier of the market with plans that include unlimited messaging, data, e-mail and web access for as little as $25 a month for 300 voice minutes. Those kinds of efforts proved effective once again in the first quarter, as MetroPCS and Leap Wireless grew their customer bases substantially.

Meanwhile, the nation’s two biggest network operators can stay above the fray while their smaller counterparts fight ruthlessly for low-end users. While all-you-can-eat voice and data services can be had in the prepaid space for $45 for most handsets, Verizon Wireless seems quite content with the number of users who’ll pay twice that much and accept a contract. AT&T, too, has shown little interest in lowering its price for postpaid service, competing primarily with AT&T and ignoring the rest of the market.

That’s a strategy that makes sense –- for now. Some feature phones can provide an acceptable mobile web experience, but none can offer the multimedia capabilities that iPhone and Android users enjoy. And, as I describe in my weekly column at GigaOM Pro (sub. req’d), there’s a dearth of web-friendly phones to be found among pre-paid providers’ phone portfolios, aside from a handful of BlackBerry handsets. But even BlackBerry, which continues to deliver a superior mobile e-mail service, fails to generate the kind of app consumption and mobile web traffic the iPhone and Android gadgets do.  So while prepaid users are getting what seems to be a rock-bottom price on mobile data, they’re surely consuming a tiny fraction of the data that their counterparts on postpaid plans consume.

But the lines between feature phones and smartphones continue to blur as lower-end handsets become more sophisticated. That trend will surely gain momentum as smartphones overtake feature phones in the U.S. in the coming year or two. What happens when multimedia-centric handsets are increasingly available through prepaid providers at an acceptable price? Or when a less popular but high-powered device like the Palm Pre appears on prepaid shelves? And it certainly will. Case in point: Leap earlier this year announced plans to come to market with a new Android handset.

That will surely force some prepaid service providers to raise their prices to accommodate the all-but-guaranteed increase in traffic, and it will require a restructuring of the network operator/MVNO agreements upon which much of the prepaid service is based. There will still be market opportunities for prepaid outfits that offer unlimited services on the lowest-tech phones, but that market will get smaller as mobile data growth continues. Everybody else — including the big two — will have to find better ways to differentiate than simply phone portfolios and pricing models.

Read the full article.

Photo courtesy Flickr user bchai

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  1. I hope that some of the carriers start offering prepaid or cheap plans that don’t require data but use Wi-Fi since it’s becoming so ubiquitous. I’m rarely in an area that I don’t have Wi-Fi and why not use it when available instead of clocking up 3G/4G network.

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  3. if you goto markets that are served by cricket or metroPCS and avoid the large corporate stores in favor of small mom $ pop cellular dealers you will find that used smartphones already dominate customer choices. in fact high end phones moved from the major carriers(sprint and verizon) are in such high demand that the solutions to flash(or convert) the phones to cricket and/or metropcs can cost as much as $500 – $1000 for phones such as the droid or hero. but phone store owners are happily paying for these solutions so that they can have the offerings there customers want. a motorola droid flashed to cricket is worth as much as $650 and customers are waiting lists for stores to find these phones in the used marketplace. in general the more difficult it is to obtain a flashing solution the higher the demand for a specific model phone. it seems everyone wants to be the only one in town with a certain phone model on cricket.

    what i am particularly interested in seeing is what pricing model cricket uses when they officially launch their own smartphones. currently all smartphones have to be hacked to tunnel all data as through proxies as though it is WAP traffic. the flip side is that you pay the same for data no matter what phone you use($5/month.) i wonder if cricket will charge extra for smartphones when they release there own like the big carriers do. if so there will still be a really big market for flashed/hacked phones that work through the WAP proxy on the cheaper plans.

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  5. Some manufacturer should zag while everyone else zigs and make a feature phone for the no data contract masses who just want to text, make phone calls, take pics/video, and easily sync/backup to computer. Give us an iPhone-like ease of use/interface experience in our next-gen feature phone.

    Keep the price at $100-$200. Unlocked.

    1. I now use a nice little qwerty Samsung on NET10 prepaid and found that it does what I want it to very well without me having to worry about those mandatory data plans. You know, I had an iPhone but found that I just didn’t use all the gizmos and apps after a month of having the phone. At the end of the day I was paying a ridiculous monthly premium on something that I wasn’t actually using for anything other than calls and texts. I see this a lot with the people around me, we want the fancy phone but don’t ACTUALLY use it fully.

      I agree with you, somebody should seize this gap and give us a nice feature phone – not necessarily an uber-smartphone but something that DOESN’T come with the $110+ monthly plan…

  6. “That’s a strategy that makes sense — for now. Some feature phones can provide an acceptable mobile web experience, but none can offer the multimedia capabilities that iPhone and Android users enjoy.”

    Hmmm…

    I have an HTC HD2 on AT&T PayGo, so I’m not quite sure what qualifies as an acceptable “mobile web experience”. I use the phone’s WiFi capability most of time, and MediaNet for those times when I’m not near an access point. Excluding the cost of the unlocked subsidized phone, my costs average less than $45 a month.

    And that’s the point: though my experience may not be typical, if you’re willing to forgo that upfront high interest loan, eh, excuse me, carrier phone subsidy, there’s really no limit to the kind of phone you can put on a carrier’s network, especially AT&T’s and T-Mobile’s GSM networks. As many people are finding out, it can be significant cheaper with fewer billing hassles (as in no monthly bill) than with a contract. All that is required is a honest evalutaion on how you used a cell phone.

    1. but will you be able to continue with AT&T? although the GSM carriers are not enforcing it yet all the major carriers in the US have made smartphone data plans mandatory for owners of smartphones. verizon and sprint will not activate smartphones without the high dollar data plans. AT&T and t-mobile have the same requirements but so far it is possible to put any SIM in any phone. if what you are doing continues to get more popular they may goto to matching the IMEI(electronic serial number) on the phone and block usage of certain phones with prepaid and/or contracts that do not include the smartphone data option.

      the alternate carriers and MVNO’s on the other hand that do not offer higherend smartphones them selves have no reason to do so. that is why i prefer carriers like cricket and metroPCS for using higher end phones on the cheap.

  7. Karen Tenterfield Sunday, May 16, 2010

    Users in the United States are paying much higher rates for mobile data than many other countries in the world. I think that means there’s not enough competition in the market.

    The feature phone will disappear over the next few years. Every phone will be used to access the internet.

    In fact, “phone services”, “phone calls”, and SMSes will become obsolete and disappear. All you will get are a stream of zeros and ones which you can do what you like with.

    1. a very important key to bring down the price of data is too eliminate the distinction between feature phones and smartphones. as long as there is a tie together between a piece of hardware and a certain price plan it dilutes the competitive nature of being able to shop around for the very best plan regardless of how many carriers are competing.

      we also have a lack of affordable data options for people who choose ‘pay by the minute’ prepaid that dominates in places like europe as opposed to a monthly plan that happens to be paid in advance instead of invoiced at the end of the month. these ‘pay by minute’ plan are much more transparent and encourages consumers to look deeper into the available options.

      it would also encourage smartphone ownership by more people when they start to realize they may be able to appreciate a smartphone user strictly within wifi for data requiring zero payment to any carriers in addition to voice and text.

  8. I actually have NET 10 and find it to be the best plan out there right now for the light to moderate users such as myself. For about $15 a month I get 150 minutes. The phone is really great, it’s a Samsung 401 Qwerty keyboard which only cost me. I also get nationwide coverage which is a total plus since my boyfriend lives in another state. At 10 per minute nationwide and texting at 3c per text, it’s definitely the smartest cell phone plan out there.

  9. I agree with Triplex – make a feature phone for the no data contract masses who just want to text, make phone calls, take pics/video, and easily sync/backup to computer. But how many people want even that much if prepaid providers are claiming as much as two-thirds of the new subscriber market? I, for one, am quite happy with a service like Net10 which provides good basic service at a fraction of the cost of most other providers. I’d be interested to know how much of the growing prepaid subscriber base falls into my bare bones bracket.

    1. there is also a large group of people who want high end smartphones and are willing to pay for them, but strictly as a status symbol thing. a lot of the phones sold at cricket and metroPCS stores are second hand high end smartphone that have none of the data features enabled and the customers do not care. they simply want to be seen carrying a blackberry, a droid or whatever is the latest greatest phone. it is really more about jewelry than anything else for these people.

  10. I think at the moment the divide is between people who see their cell phones as a functional piece of equipment and those who want a lifestyle accessory. With providers like Net10 and others offering QWERTY phones, blackberry’s or equivalents, its hard to not choose the more affordable, less restrictive option. I also can’t stand the hidden ‘service fees’ most contracts come with, AT&T drove me away because of how bad theirs were. Now I’m with Net10, using the Samsung R355c (camera, full keyboard and web browsing) and paying less than $30 a month. If a feature phone ever did come out for prepaid, I’d probably get it, but right now I’m very happy with what I’ve got.

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