Now that carriers have moved away from two-year contracts and phone subsidies, there's very little difference between the prepaid market and postpaid market for wireless-service customers. During the last few years, the average revenue per prepaid customer increased, while the average revenue per postpaid customer decreased.
AT&T (NYSE: T) and T-Mobile (NASDAQ:TMUS) each have dedicated prepaid brands, Cricket Wireless and MetroPCS, respectively, that have been growing their share of prepaid customers rapidly. AT&T uses Cricket to compete with lower-cost carriers Sprint and T-Mobile, while T-Mobile uses MetroPCS to compete with Sprint. The results show the strategy is working: Cricket added 500,000 customers last quarter, and MetroPCS added more than 800,000.
Verizon (NYSE: VZ), meanwhile, largely ignores the prepaid market, and defers to MVNO provider Tracfone -- a subsidiary of America Movil (NYSE:AMX). With the success of its competitors, it might be time for Verizon to start taking the prepaid market more seriously.
Why Verizon doesn't promote its own prepaid plan
During Verizon's first-quarter earnings call, CFO Fran Shammo told analysts some of the reasoning behind its lack of promotion for prepaid plans: "Our retail prepaid is above market. We're really not competitive in that environment for a whole host of reasons and it's because we have to make sure that we don't migrate our high-quality postpaid base over to a prepaid product."
In other words, Verizon is afraid of cannibalization. It doesn't want its low-churn high-value customers moving to a higher-churn, lower-value product.
As such, it views its contract with Tracfone as its foray into the prepaid market. But Verizon then cedes all control over its prepaid success to another company, and Tracfone hasn't been doing too well lately.
Tracfone lost 58,000 subscribers last year, leaving it with 25.7 million at the end of 2015. Last quarter, America Movil lost 458,000 subscribers in the United States, mostly coming from Tracfone.
Shammo told investors, "Tracfone has been extremely successful for us." Still, he declined to give any details about its business with the MVNO, which also works with the other major U.S. wireless-network providers.
Verizon's own prepaid business, meanwhile, has been bleeding subscribers every quarter. It lost 177,000 connections in the first quarter. During the last 12 months, it's lost 543,000 customers, leaving it with 5.4 million total.
Why prepaid is worth paying attention to
Verizon has been able to continue adding postpaid subscribers across all device categories despite fierce competition from the rest of the industry. Still, the opportunity in prepaid connections is very good as evidenced by the success of AT&T and T-Mobile in the space.
Verizon's high-end service can't compete on price against other postpaid service options. Verizon's prepaid offers, however, are more in line with options available from T-Mobile's value-priced postpaid service.
This is the strategy AT&T is using with Cricket. While T-Mobile continues to steal away postpaid feature-phone customers from AT&T, AT&T is offsetting those losses by pulling customers from lower-priced carriers to Cricket. At the same time, average billing per Cricket subscriber now sits around $41 per month, higher than the average $35 per postpaid feature-phone subscriber.
Verizon is also losing its feature-phone customers to lower-priced carriers. Last quarter, T-Mobile's porting ratio with Verizon was 1.34. That's still significantly lower than the 1.75 customers T-Mobile adds from AT&T to every 1 it loses; but it shows that even Verizon isn't immune from the competition. Creating a prepaid brand to compete directly with the lower-cost carriers could help it grow its total subscriber base.
While Verizon added more-than-enough postpaid phone subscribers to offset its prepaid-subscriber losses last year, most of the market growth in postpaid additions is coming from connected devices, or customers switching from feature phones to a lower-priced carrier. That trend is only going to grow going forward, with the smartphone market nearing saturation. Verizon could do well to invest in its own prepaid brand, and compete for those phone subscribers.
Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.