BusWeek. Cell Phones for All Europeans (int'l edition)
BUSINESSWEEK ONLINE : JULY 12, 1999 ISSUE
INTERNATIONAL -- EUROPEAN BUSINESS
Cell Phones for All Europeans (int'l edition)
No-contract ''prepaids'' are driving explosive growth in Europe
Not long ago, only a billionaire or a fool would give a kid a cellular phone. With
rates often topping $1 a minute, a teenager could yak away a good chunk of the
monthly mortgage in a weekend. But stroll down the Champs Elysees in Paris
and you'll see hordes of teens gathered outside music shops and ice cream
parlors, most of them sporting colorful cell phones. Jessica Levy, 14, says hers
was a gift from her mother six months ago. It was a way to keep in touch, Jessica
says, and she does--but mostly with her friends.
The Levys aren't billionaires--and they're no fools either. Jessica and millions of
other new cell-phone users in Europe, Asia, and Latin America are buying
prepaid cards that give them $10 to $50 of phone calls. A computer chip in the
phones, which sell for as little as $50, keeps track of the balance. In Europe,
users add credit by purchasing a card at a news kiosk or a cafe. When they call
the phone company and punch in the card's code numbers, the company sends a
wireless message to the phone restocking the chip with time.
The concept is as simple as debit cards and has an equally simple appeal: Free of
contracts or monthly bills, users can walk out of the store with a working
phone--and keep it on a tight budget. Since local incoming calls are free in
Europe, prepaid users can stay on the phone for hours if they want--as long as
the calls they make are short and sweet.
Introduced in Portugal and Italy three years ago, prepaid phone cards are driving
explosive growth in Europe. With 115 million users, it's the world's largest
cell-phone market. According to Dataquest Inc., half of the region's 67% growth
last year came from prepaids, and they account for two-thirds of this year's
growth so far. Spain's Telefonica has added 1.2 million prepaid customers in the
past six months--which brings prepaid users to 3 million, half the company's
cellular market.
Riding the wave, mobile phones are reaching beyond their original business
market to pensioners, housewives, and students. France Telecom has started
marketing a prepaid cell-phone service designed for 7- and 8-year-old children.
''The prepaid concept has revolutionized the market,'' says Dirk Bout, a senior
analyst at Dataquest in Amsterdam.
IMPULSE BUY. The goal, clearly, is to put phones in the pockets, purses, and
lunch boxes of everyone who can talk. It's plausible, analysts say. But to get
there, Europe's phone companies must adapt to a new way of selling. Where
they used to focus on business services, they're now waging battles in
supermarkets and reaching out to customers with colorful phones, zippy
packages, and TV ads. Market leaders, such as Italy's Omnitel and Germany's
Mannesmann, are hiring new sales forces and learning to sell phones as if they
were soap. ''It's a fast-moving consumer product,'' says Marcel Rafart of
Cluster, a Barcelona consultancy. ''You want it packaged so people will pick up
a phone when they're buying milk.''
The prepaid market extends far beyond Europe, of course. Phone companies
from Asia to Latin America use prepaids to reach out to credit-poor customers.
In India, prepaids--which leave no paper trail for police or tax inspectors--grew
so popular among smugglers and thieves that the government has cracked down.
(They're also favored by execs carrying on love affairs.) Now, Indians must fill
out forms and pay a surcharge before buying a prepaid service. Telefonos de
Mexico's $92 ''Amigo'' kit, which includes a phone loaded with $10 worth of
calls, has boosted prepaid service to 70% of its 2.5 million subscribers.
One notable laggard: the U.S. While the Federal Communications Commission is
moving toward Europe's caller-pays scheme, today, American cell-phone users
still pay for calls they receive, which dampens the entire market. Some U.S.
companies, such as Omnipoint Corp., have made a go of prepaid cards, but the
prepaid market remains marginal. Even so, Britain's Vodafone Group PLC,
which bought San Francisco-based Airtouch Communications Inc. in a $62
billion deal in January, is searching for schemes to market prepaids in the U.S.
American rivals, from AT&T to Sprint, keenly aware of Europe's growth, are
preparing prepaid promotions, too.
When prepaid phones hit the shelves in Europe, the idea was simply to round out
the market by tapping cash-poor customers. Companies offered them cheap
rates at night and on weekends--when core business users weren't talking. But
the prepaid market took off--first in Italy and Portugal, where wired service is
often backward and costly. Phone execs soon discovered that huge sectors of
society were eager to go mobile if they could skip contracts and safeguard their
bank accounts. Suddenly, Southern Europeans who had to wait months for
phone lines simply picked up a cell phone. And with barely any prodding from
marketers, customers were giving phones on Christmas and Mother's Day. Italy's
prepaid surge has turned it into Europe's largest wireless market: 20 million users,
of which almost two-thirds are prepaid customers.
It's a boon for phone companies--but it's not without complications. To
encourage people to make calls, Portugal's TMN is offering free time to those
who get a lot of calls. Suddenly, phone companies are serving a vast crowd of
users --many of them young people--who are eager to scrimp. ''They're thinking
they'll get calls for free on their cellulars,'' gripes a Spanish telco exec.
TOO SWEET? Providers give prepaid services brand names, from Telefonica's
Activa in Spain to Mannesmann's CallYa, so teens won't associate the service
with the staid subscription business. They are also working with manufacturers to
produce colorful, low-cost phones. But without contracts and credit checks, the
companies know virtually nothing about their customers--not even their
addresses. That makes marketing doubly hard. The only line of
communication--you guessed it--is the phone.
The risk is that by making prepaid deals too sweet, companies will lure
customers away from more profitable contracts. To beat this problem, most
companies keep prepaid rates punishingly high during business hours. In Spain,
they can be six to seven times higher than off-peak rates. Still, all this
competition, even from their own prepaids, forces them to keep lowering
contract rates, at a pace of 15% per year. That lowers margins, and the only way
to battle back is with customer growth.
How long can providers sustain the prepaid trend? Maybe too long. Many phone
companies, eager to know their customers--and to bill them--hope to graduate
prepaid customers to contracts. But if Europe's raging prepaid market tells them
anything, it's that the growing hordes of prepaid customers are thrilled to avoid
contracts and monthly bills. Sign up? Many would just as soon wire their cell
phones to the wall.
By Stephen Baker and Inka Resch in Paris, with bureau reports
_
Copyright 1999, by The McGraw-Hill Companies Inc. All rights reserved.
Terms of Use Privacy Policy
|
