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Customers lured by cheaper calls
17 July 2002

Traditionally, gaining access to any communications network requires paying a monthly subscription to a service provider. But this does not suit everyone. For those who travel a lot, make international phone calls, do not use credit cards or surf the web only occasionally, paying more than $20 a month for internet access or $2 for a 30-second international phone call is a problem.

Leading ISPs and telcos might still dominate the communications market, but pre-paid internet and internet-based phone (VoIP) services are becoming a popular alternative.

New studies by research companies In-Stat/MDR and Frost & Sullivan reveal a surge in the uptake of pre-paid internet and VoIP offerings.

Frost & Sullivan's study shows that the world pre-paid VoIP calling card market was worth $1.27bn in 2000 and is projected to increase to $21.9bn by 2007. Meanwhile, In-Stat predicts the market for pre-paid internet services will reach hundreds of millions of dollars annually in the US alone within the next few years.

The idea of pre-paid communications is not new. Pre-paid phone cards, which have been around since the 1970s, are still the mainstay of the industry.

According to research by Atlantic-ACM, a Boston-based consulting firm, pre-paid calling cards generated 50 per cent of the US pre-paid industry's $6bn total revenues in 2001.

But increased awareness of newer services, such as pre-paid internet and VoIP, is threatening the hold of traditional calling cards. Judy Reed Smith, chief executive of Atlantic-ACM, predicts that by 2006, pre-paid cards will decline in revenue share to 35 per cent.

"Most companies are seeking to diversify their pre-paid portfolio to incorporate such services as pre-paid internet," she says.

Pre-paid internet has been available in the US since 1997, but has gained popularity only in the last 18 months.

"Pre-paid is about providing a purchase solution to the problem of selling network services to a customer that you do not have a billing relationship with," says Keith Kegley, chief executive of Slingshot Communications, a Seattle-based pre-paid ISP.

Potential users of pre-paid internet access fall into several groups: children and low-income households that do not use credit cards; highly mobile, casual and budget-conscious users who only want to pay for what they use; and gift-givers who want to buy access for someone else.

For Mr Kegley, the raison-d'°tre of pre-paid service providers is, "to tap into this psychographic and demographic of the market that a purely subscription based purchase model cannot reach."

The demand for such services is clearly there. Henry Goldberg, senior analyst at In-Stat, says 19 per cent of dial-up internet users spend less than eight hours a month online, making the average monthly ISP subscription uneconomical.

"The average internet user would save around $120 a year using a Slingshot pre-paid access plan," says Mr Kegley.

Pre-paid internet access operates in a similar way to its phonecard counterparts. Pine Creek Systems, a pre-paid communications company, bulk-sells pre-paid internet accounts to resellers in the US and Canada. The company also licenses its platform to major ISPs and telcos around the world.

Roger Shulz, the company's general manager, says that just like phone cards, all accounts are anonymous and automatic.

In addition, they are compatible with any type of internet access device, not just PCs. The product is sold to end-users as a card or receipt, imprinted with a username and password.

The market for pre-paid VoIP is also growing fast. Service providers are attracting customers such as students, travellers, expatriates and immigrants with low-cost long-distance phone-calls.

VoIP technology facilitates cheap telephony by converting the call into packets of data and transferring them across the internet and phone networks. With fleeting customer loyalty, service providers have to offer the lowest prices or most compelling services.

For Phoneserve, a VoIP division of British pre-paid vendor Callserve Communications, the biggest growth opportunity lies within emerging markets such as the Middle East and India, where credit cards are not so popular and VoIP calls are substantially cheaper than the price of a standard call.

In Europe, the profit margins are less attractive. "Europe already has a competitive telephony market," says Glenn Williams, Callserve's chief operating officer. "Pre-paid cards are not particularly cheap compared to other ways of making calls."

Mr Williams says that partnering with major phone networks, which receive roughly 40 per cent of call revenues, is key to Phoneserve's success.

"A lot of people say that VoIP call-quality isn't good, but it's changed greatly over the last year," says Mr Williams."We only partner with major international carriers, so the quality of our service is high."

Despite the surge in interest in pre-paid VoIP and internet services, operators will experience numerous challenges ahead. In a price-conscious market, VoIP may struggle to remain profitable. The UK-based internet caf³ chain, easyinternetCafe, recently dropped its telephony service because of a lack of demand and the drive to keep tariffs low. "The vast majority of our customers are extremely price sensitive," says James Rothnie, director of corporate affairs at parent company, easyGroup. "We have stripped our costs wherever possible."

"VoIP calling cards will eventually lose their price advantage to other telephony solutions," says Frost & Sullivan analyst Elka Popova. "It's unlikely that service providers will be able to offer enhanced services that will allow them to charge premium prices and expand their customer base."

In the pre-paid internet arena, one of the biggest problems facing providers is the lack of consumer awareness. "Consumer awareness is still fairly low at this point," says In-Stat's Mr Goldberg. But with the arrival of major players such as Sprint and AT&T into the market, awareness is growing.

The recent partnership between Sprint and the Seven-Eleven retail chain is an example of how pre-paid providers can create brand-leverage, with Sprint pre-paid internet CDs being offered in Seven-Eleven stores.

The pre-paid market will experience both diversification and consolidation. While companies such as Phoneserve are beginning to think about packaging other services such as ring-tones with their VoIP phone cards, small, pre-paid ISPs are falling under the influence of bigger firms.

"If the market evolves like pre-paid long-distance and pre-paid cellular, then small companies will take early leads in distribution until larger players step in," says Slingshot's Mr Kegley. "The smaller companies that survive will become technology or private label suppliers into the market place."