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Digital impact to end the reign of pre-paid, post-paid dinosaurs

03 February 2016

Back in 2012, the UK mobile market passed something of a milestone: the number of subscribers on postpaid plans finally outnumbered their pay-as-you-go counterparts.

According to Ofcom’s Communications Market Report for that year, the balance tipped a whole four percentage points in postpaid’s favour between 2011 and 2012, rising from 49 per cent to 53 per cent as prepaid dipped below the 50 per cent mark for the first time since 1999 – pretty much the point at which pay-as-you-go SIM cards ushered in the modern age of mobile phone ubiquity in Britain.

Prepaid's downward trajectory, which was already beginning to manifest long before the release of the 2012 figures, has continued steadily ever since. At the time of writing, the latest edition of Ofcom’s annual study pegs the proportion of UK mobile subscribers on postpaid plans at 61.8 per cent; pay-as-you-go has sunk past even the two-fifths mark.

So, what's the reason for this sea change in the way we pay for our mobile subscriptions? The 2015 Communications Market Report made a couple of guesses.

One was the very sound observation that postpaid plans are helping the public to buy flashy smartphones by spreading the high cost of their handsets over lengthy fixed-term contracts. However, while it's true that flagship devices generally come with hefty price tags, the steadiness of the decline in prepaid over the past few years doesn't appear much to reflect trends like market saturation or the emergence of budget smartphones.

Ofcom also observed that postpaid may be on the rise simply because telcos have made their pay-monthly tariffs more attractive than their pay-as-you-go ones. This strikes me as a little more likely - particularly when you consider that we use smartphones very differently now than we did in the past.

Life in a smartphone society

A key theme of the 2015 Communications Market Report, and one that we talked about in an article back in August, was that Britain is now a "smartphone society". According to Ofcom, we've earned this distinction on the basis that smartphones have overtaken laptops as our favourite device for getting online.

It's telling that the mark of a smartphone society should be how heavily we use our handsets for internet access, not how regularly we make calls or send text messages. As consumer habits change, the wants and needs of the modern mobile subscriber don't really encompass these things - they can be summed up as little more than a voracious appetite for data.

The latest figures on the size of the UK's 4G customer base are testament to this. Over the course of 2014, it grew almost ninefold from 2.7 to 23.6 million. For these consumers, mobile data is pretty much central to daily life; 55 per cent of them use their LTE connections to shop and bank online, 63 per cent use IM apps like WhatsApp, 57 per cent view online TV and video, and 28 per cent even make voice and video calls.

Things couldn't be more different from when pay-as-you-go was king. Back then, consumers were happy to treat a mobile subscription as part of their discretionary spending, and it made more financial sense to have a hard credit limit and no long-term commitment to a single telco. By contrast, the modern mobile subscriber demands constant connectivity and near enough all-you-can-eat data - needs that are more readily fulfilled by postpaid plans.

Moving beyond prepaid v postpaid

So, is the logical conclusion that prepaid is set to be driven to extinction as a new generation of consumers favour the larger data allowances of postpaid plans?

Well, maybe. But maybe something different will happen, and we'll finally move beyond the prepaid versus postpaid model instead. Because, at the end of the day, postpaid plans aren't actually that great for the consumer - nor, by extension, for the telco and its churn rate.

For one thing, they introduce the risk of bill shock. According to figures from the US, the dark side of 4G adoption in the postpaid world is that as many as one in four subscribers now find themselves having to pay overage charges on their data; the number is continually rising, because operators' allowances - which have been sold at low margins since day one - simply aren't keeping up with consumers' usage patterns.

On the telco side, meanwhile, the benefit of having customers tied into long-term contracts is being eroded over time. In the UK, for example, the recent introduction of new, tougher regulations mean that consumers can now exit their contracts free of charge if the operator increases the cost. Subscribers may be migrating towards postpaid, but they're also clawing back some of the freedom and control traditionally associated with the pay-as-you-go model.

Hopefully, in the future, the most common way to pay for mobile subscriptions will neither be prepaid or postpaid, but another model that makes the distinction redundant and instead offers the best of both worlds to telcos and their customers. Why, for example, shouldn't subscribers have the flexibility and choice to buy add-on data bundles mid-month regardless of the nature of their plan? And wouldn't it be better for operators to break down the arbitrary silos that currently separate their prepaid and postpaid customers?

Postpaid plans may be number one right now, but that's not to say the balance won't shift again - and it might be sooner rather than later.