Counting Down Prepaid Services

Prepaid wireless is a global growth phenomenon that surmounts service establishment barriers for millions of subscribers. Thirty some-odd prepaid solutions vendors, such as Subscriber Computing (now Corsair Communications - Irvine), Boston Communications Group (BCG), and Vicorp, compete for carrier business. For insurgent U.S. wireless carriers still new to yesterday's duopoly markets, prepaid can approach 50% of total wireless revenues. Prepaid is paying off for insurgent carriers, such as recent PCS entrants, that pursue prepaid segments more ambitiously than do incumbent carriers.

First introduced in Italy back in 1976 to thwart payphone vandalism, the market has not matured fully. The United States may see more than $650 million in service revenues in 2000. Vendors such as Harris and Suma4 provide carriers with prepaid calling card capabilities.

Around 500 prepaid card providers have moved on and off the scene in the U.S., chasing market leaders MCI and Sprint. Is prepaid calling card good business for new entrants? "Embedded carriers have many retail distribution point's stitched up," according to John Pitek, vice president of marketing at US West Long Distance. "And in prepaid, you are operating in the packaged goods market, and it is chiefly about distribution, visibility and shelf space."

While prepaid wireless is expected to outpace prepaid calling card for the lead in the domestic prepaid services market by year end 1998, the prepaid calling card, while available in over a hundred countries, will make questionable strides compared to wireless in regions where wireline infrastructure is lacking.

Through a Customer's Eyes

The entire service delivery process, from purchase to provisioning to billing to exhaustion or expiration of the usage to replenishment, cannot be accurately deployed without first understanding how the service works from a customer's perspective.

It matters little what a customer's reason is for purchasing prepaid wireless services--the end-to-end purchase through usage processes are similar to post-paid.

A compatible wireless handset is first activated or recorded with an assigned number, usually at the point-of-sale (POS). While some carriers allow handsets acquired elsewhere to be used (if compatible), others do not. Either way, a service establishment fee is generally assessed for activation.

Next, the customer purchases a prepaid denomination, often in the form of a card from a retail distributor. In the case of GSM, the data is coded into the subscriber identity module (SIM) card, and the handset meters the usage against the account balance in a stored rate plan. The SIM card can be recharged, just as a car is gassed up. Other handset-based options, coded directly into the phone and functioning much like GSM except without a SIM card, are offered by some carriers, primarily resellers.

Initializing the prepaid service is the next step, and is usually done through an interactive voice response (IVR) interface which gives the customer step by step instructions and options. In many service areas, initialization must be completed within a certain number of days or the denomination purchased expires. In some cases, the carrier's retail distributor also collects another "service activation fee" if the time has elapsed.

Just as with SIM cards, which can be recharged, prepaid wireless services using more predominant billing technologies can be recharged by purchasing another card and following the IVR instructions. Payment options are cash or credit/debit cards, at either POS, or, at some carriers, by calling the customer care group.

Most prepaid services are offered with time-bound constraints, which means that the customer uses or loses the calling functionality within a given amount of time. Although this may be deemed unfair by some, the carrier incurs a real cost from retaining the call data (e.g., the telephone number and the amount of time left) in their systems and, to a lesser degree, the processing costs for decrementing the financial counters based on call type algorithms.

Prepaid calling card shares many of the purchase, activation and usage characteristics with its wireless cousin. Although retail distributors handle POS, as with wireless, the attainment of calling cards by the customer is random and less focused than wireless. In other words, customers often make an impulse purchase of a calling card at a retailer's checkout counter, while the purchase of wireless is usually planned in advance.

As with prepaid wireless service, prepaid calling cards are purchased by denomination, such as "120 Units--$19.95" with MCI's PrePaid rechargeable calling card. (One unit equals one domestic minute in this case, but carriers do not market by the minute as they do with postpaid wireline.) With this type of prepaid calling card, the customer dials a toll-free number, then a personal identification number (PIN), then the number desired. This process is commonly supported by a host IVR tied to the prepaid platform. The customer is greeted with a pre-call or post-call announcement, which generally indicates the balance and expiration date, each time he uses the card.

The Unbilling Machine

With prepaid services, no invoice is produced, at least not a monthly or quarterly bill statement. Sell a denomination, or block of usage, and decrement the counters. (On the wholesale side, a billing and collection process must exist, complete with invoicing, if using 3rd party distributors.) Carriers such as Sprint PCS will produce a statement for an additional fee.

Don't get stuck with the expectation that billing does not play a key role in prepaid services--it does. For prepaid, billing is as crucial as for postpaid in its need for precise, timely accounting. Four types of billing technologies are used in the prepaid wireless segment: handset-based, CDR-based, adjunct switch platform-based, and the next generation WIN-based.

Some resellers deploy handset-based technology, although it is not typically found in the United States. The handset both meters and counts down the usage against a rate plan stored with the carrier. CDR billing is accomplished by transporting the CDRs from the carrier switch off-board to a prepaid billing server. This technology is widely used, and is cost-effective because major changes to the network are unnecessary.

Adjunct switch platforms are exactly that - an adjunct switch hanging off the existing network. BCG's C2C service bureau offering uses this technology, with its pre-call and mid-call functionality. As a call is made, it is identified as prepaid and routed to the adjunct switch. Although widely deployed, incremental costs mount up, because a prepaid call requires two ports on the adjunct switch and up to four on the wireless switch. Plus, high-speed trunks are needed for routing between the network and the adjunct switch. In a service bureau scenario, the provider's investment minimizes the carrier's deployment costs.

WIN-based solutions are the next generation, although not all carriers will hurry to this technology because of the necessary investment in the service control point (SCP). Already offered by Corsair under the PrePay product name, BCG is actively working on its own WIN-based solution. The platform is a SCP that communicates with the network (through SS7/C7 signaling). The SCP interacts throughout the call, allowing the prepaid application to interdict and make real-time call processing decisions, such as: to allow the call, play a message, or deny the call.

"WIN-based solutions allow real-time call control on the existing wireless switch without the need for an additional adjunct switching platform in the call path," says Andres Arteta, product director--prepaid billing, at Corsair Communications. "Plus, only SS7/C7 data links are needed, and the cost for high speed trunks can be mitigated."

Although the engineering differs by technology, most follow a similar functional billing flow. At the POS, an identification number is assigned by the carrier and loaded onto the network (e.g., switches, SCPs) establishing the customer. Next, the customer purchases a prepaid card with an account number. On the first call, the carrier's network notes the prepaid account number and routes the call to a local voice node. If the account and identification numbers are unmatched in the prepaid database then the customer is walked through IVR prompts, and then may place calls.

As calls are placed, they are rated by allowable call type and rate plan and matched to the denomination associated to the identification number and account number. Also, the denomination is counted down, or decreased, until the account balance is exhausted or recharged. In the case of BCG's offering, functional support for national roaming is factored into the processing capabilities.

Functional layers of complexity are building, especially as the states get stickier on taxation. For point-of-usage requirements, a carrier must understand usage originated from the different tax jurisdictions by taking traffic, based on location register (home and visitor location registers) for wireless, and originating ANI for calling card, and applying tax calculations for precise allocations. When considering BCG's service bureau, the data is processed by third-party Atlantax, taxed, and sent back to BCG. The billing vendor then sends advice to its carrier clients so that they may accurately cover their tax liabilities.

It is important to recall that while sales taxes are generally collected at the POS for prepaid, the lengthening list of other "taxes" and charges that grace the pages of postpaid bills are not necessarily collected. So it comes as no surprise that taxes and fees such as universal service fees, relay service fees, pre-subscribed line charges and federal access charges are embedded in the cost of the prepaid product and then allocated by the carrier accordingly. This underscores the need for a solid revenue management mechanism for handling point of usage taxation, and remitting to appropriate tax authorities. Churn, Burn and the Downside

Customer churn is perceived as a serious-enough problem that carriers are grappling with how to factor it into their economic models. Guesses are that prepaid calling card only realizes a recharge rate of around 5 percent. But, as John Pitek, vice president of marketing at US West long distance points out, "In packaged goods, just as with Proctor and Gamble, it is not always so much about identifying actual churn as it is about the quantity of goods moved."

Prepaid wireless may be no better. While carriers may know why customers purchase prepaid services, they don't necessarily know why they quit using them, nor do they know when customers switch to another carrier. Some carriers practice non-discrimination between prepaid and postpaid subscribers, and count them together. Whatever the reason, this practice can be problematic because it is not a representation and can skew financial reporting. Billing clearly serves as the mechanism to properly separate prepaid and postpaid revenues and subscribers.

BCG actively establishes metrics through the use of customer satisfaction surveys and tracks the measures for feedback to its carrier clients. "Given the lack of information gathered at POS," says BCG's Thigpen, "this gives us a chance to learn more about why customers are churning."

Breakage, or minutes not used, is a concern. On the one hand, it is construed as money left "on the table" by the customer. Conservatively, however, this suggests the effect may be inverse when calculating the real cost to produce a minute of usage. Too much under-utilized capacity means idle resources, which means the real cost to produce a minute of usage is greater. Carriers must come to grips with what churn and breakage mean in immediate terms and in extrapolated terms, especially when margins begin to thin out due to competition.

A concern among customers is that they are not getting what they pay for. Rounding methods during rating are usually up to the next minute, just as with postpaid. This means that the same dollar amount (or number of units) purchased from one time to the next likely will not yield the same amount of actual talk time, further compounded by the mix of rates: local airtime, roaming, long distance, payphone surcharges and directory assistance. Burning through $60 worth of prepaid wireless or $30 worth of prepaid calling card faster is all a matter of call duration, cumulatively applied across the purchased denomination, tied to call type with accompanying rates. This will be inconsistent from purchase to purchase.

"Another challenge facing carriers is knowing the subscriber better," says Corsair's Arteta. "In this day of data mining and target marketing, the ability to correspond customers to their demographic data to calling behaviors is critical. Lack of subscriber data captured during POS must be compensated for by following purchase and usage trends." Using retail distribution does not always facilitate adequate gathering of customer data, but more data is gathered for prepaid wireless than for prepaid calling card. However, carriers offering prepaid calling card are learning more about customers by executing mini-surveys through the IVR, and are now looking more closely at the traffic (origination, termination, duration, time of day, etc.) for trending and forecasts.

Another carrier advantage is a customer disadvantage. Prepaid wireless often has an expiration date from the time of purchase, or from first activation. To the customer this is a use-it-or-lose-it situation. For example, Southwestern Bell's Start Talkin' is time-bound. From a systems standpoint, this is additional referential data that must tie product and customer together in the billing system and related systems. Prepaid calling cards have a longer use period for a different reason. "The expiration is for accounting purposes," according to U S WEST's Pitek. "Some states, such as New York, consider unused prepaid capacity left on the books after a certain amount of time to be abandoned, which becomes the state's property."

Perceptions are that rates are high for both prepaid wireless and prepaid calling card. For prepaid wireless they are generally at a 20 to 30 percent premium over postpaid. Wireless does not seem to hover on price point to the degree calling card does. Nevertheless, consumer awareness that prepaid calling card rates are not higher is gaining. Furthermore, just as with postpaid, carriers should ensure consumers are informed that taxation is embedded somewhere in the overall purchase price, whether the retailer collects part at POS, or whether the carrier allocates at point-of-usage. Depending on the state, the combined tax liability could be as high as 12%.

Prepaid calling cards commonly offer a better per minute deal than postpaid cards. Why? On an apples-per-apples basis, it takes less for a carrier to support a 30-unit prepaid card than it does to support a traditional subscriber who uses 30 minutes of calling card service per month. Plus, many postpaid cards carry a per call surcharge.

Lastly, structuring of prepaid wireless rates is important not only to the product margin, but to prevent cannibalization of postpaid wireless revenues. Too great an emphasis on prepaid in Mexico recently resulted in the loss of postpaid roaming revenues because prepaid was introduced with more favorable rates. BCG's Thigpen agrees that carriers need be concerned. "While incentives to prepaid subscribers through campaigns such as discounting purchased denominations on repeat business have merit, carriers must balance their prepaid and postpaid marketing and distribution strategies through segmentation."

A Prepaid Future

Count on prepaid wireless gaining ground globally, especially in developing nations, and count on more carriers going with WIN-based technologies for cost, product development and call control reasons. Convergence, the billing buzzword of the 1990s, may pertain to the prepaid services world, too. Not with the intelligence necessarily loaded onto a "smart card," but with the intelligence resident on networks. Potentially, a prepaid card or denomination can be purchased, then used for a mix of prepaid telecommunications and information services - wireless, calling card, dial tone, Internet access, etc. This may require that prepaid services in general be account-centric, where information is known about the subscriber, rather than card-centric, where the subscriber is relatively anonymous.

Whatever unfolds, billing will always play an integral role, not necessarily as an invoicer, but certainly in the role of an accountant keeping tabs on the customer's balance statement.

Frank Slavick is a telecommunications consultant based in Denver, Colorado, specializing in product development, new business development, and billing and customer care. He can be reached at 303/554-0958, or at fslavick@earthlink.net.