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New ideas for tariffing – the third way

18 April 2016

For CSPs looking to generate strong sources of revenue in the future, then they should look no further than the way in which subscribers pay for their services. As subscribers move from prepaid to postpaid, it seems that the prepaid model will soon bite the dust. But there might be a third way, one that will offer the best of both worlds to both subscribers and digital service providers.

The rise of the postpaid subscriber

In 2012, the number of postpaid subscribers finally passed their pay-as-you-go counterparts when, for the first time since 1999, the percentage of prepaid subscribers dipped below 50%. Since then, the percentage of prepaid has continued to decline. In February this year, the latest edition of Ofcom’s Communications Market Report put the proportion of UK mobile subscribers on prepaid plans at less than 40%. It also put forward suppositions as to why this change in mobile subscriptions is taking place. The first was that postpaid plans help the public to buy expensive smartphones by spreading the high cost of their handsets over lengthy fixed-term contracts. However, the steadiness of the decline in prepaid 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 would seem a little more likely – particularly when you consider that smartphones are now our primary device for getting online.

The smartphone society

It's telling that we now heavily use our handsets for Internet access, instead of to regularly make calls or send text messages. Consumer habits are changing and the requirements of the modern mobile subscriber don't really encompass these things. Instead, it’s all about a voracious appetite for data. This is more than backed up by the latest figures on the size of the UK's 4G customer base which, during 2014, grew almost ninefold from 2.7 to 23.6 million. For these consumers, mobile data is central to daily life; 55% use their LTE connections to shop and bank online, 63% use IM apps like WhatsApp, 57% view online TV and video, and 28% even make voice and video calls. This is in stark contrast to the time when prepaid dominated, when 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 effectively fulfilled by today’s postpaid plans.

Prepaid v postpaid v the third way

So, is it logical to assume that prepaid is on the road to extinction as a new generation of consumers favour the larger data allowances of postpaid plans? Maybe, but maybe not. It’s possible that a third way will develop, and we'll finally move beyond the prepaid versus postpaid model instead because, at the end of the day, contract plans aren't actually that great for the consumer – nor, by extension, for the telco. For one thing, the risk of bill shock rises. According to research in the US, 4G adoption in the postpaid world has seen as many as one in four subscribers 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 – can’t keep up with consumers' usage patterns. For the telcos, the benefit of having customers in long-term contracts is being gradually eroded. In the UK, tough new regulations have been introduced that allow consumers to leave their contracts penalty-free if the operator increases the cost. Whilst subscribers are moving towards postpaid, they're also gaining back some of the freedom and control traditionally associated with the PAYG model. In the future, we’d like to see the most common way of paying for mobile subscriptions to be neither prepaid nor postpaid. We’d like to see another model that makes the distinction redundant and instead offers the best of both worlds to telcos and their customers. Why shouldn't subscribers have the flexibility and choice to buy add-on data bundles or trial new data services 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.