Carriers Shift Marketing Battle to Prepaid Plans

T-Mobile Embraces Tried-and-True Tactics, Dumps Established Rules

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T-Mobile CEO John Legere blasts use of credit scores by carriers.
T-Mobile CEO John Legere blasts use of credit scores by carriers.

In the past two years, a war has broken out in the wireless industry over lucrative post-paid customers -- contracts were shred, prices dropped, tit-for-tat promotions launched, barbs thrown.

Now that battle is coming to the industry's low end.

This month T-Mobile, which ignited the post-paid fight, made two key maneuvers in the no-contract, prepaid market. It dropped established purchasing rules and slashed prices on its own offering, as well as those from its subsidiary MetroPCS.

"Smartphone Equality," T-Mobile's plan to scrap credit scores -- a staple of prepaid plans -- is turning heads. "T-Mobile demonstrated a willingness to go where other carriers had not," said Jan Dawson, an analyst with Jackdaw Research. "It should reinforce T-Mobile's appeal among this segment and help drive loyalty among these customers."

In a video blog announcing the news, T-Mobile CEO John Legere blasted credit scores as "one of the wireless industries dirtiest little secrets."

Like other T-Mobile moves, it's intended to upstage rivals, who are increasingly playing in the arena even as investors closely scrutinize post-paid subscribers. AT&T, as well as two Sprint brands -- Boost Mobile and Virgin Mobile -- has already made moves in the space. Even reticent Verizon has waded in.

The prepaid industry has long been a tough market. Its consumers are thrifty and often fickle, leaving dozens of brands to wage retail-heavy promotions in dense, urban markets.

In 2013, the most recent year for which data is available, AT&T, Sprint and T-Mobile combined spent $317 million on prepaid brand marketing, according to the Ad Age DataCenter. That's a pittance of their overall ad spend, but there are indications budgets are on the rise. For one, marketing efforts are stretching beyond the garish retail advertising typical of the market, as prepaid brands expand nationally and the carriers battle for subscribers.

Historically, the large carriers neglected prepaid consumers. They brought riskier credit and less reliable device updates. Prepaid was the "ugly stepchild of the wireless industry," said Mr. Dawson.

That has changed. As smartphones exploded across the nation, first-time users went to prepaid plans and larger carriers gobbled up providers -- mostly for their spectrum but also for their established retail presence. Over the past couple of years, smartphone sales have waned, slowing prepaid growth. But the plans' central traits -- no contracts, emphasis on value -- spilled into post-paid, thanks largely to T-Mobile.

AT&T's prepaid business is accelerating, up 51% in the last year to 11.2 million customers last quarter. Sprint grew last quarter, too. But T-Mobile is leading the pack, with 16 million prepaid customers. More than 10 million come from MetroPCS, said Kevin McLaughlin, T-Mobile's VP-marketing.

MetroPCS has also unveiled its own new unlimited plan. In 2013, the brand was the largest prepaid marketer, spending a little over $100 million.

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