U.S. pre-paid mobile growing, but to remain small

Rick Franklin, a financial analyst at Edward Jones, said with up to 85% of Americans carrying a mobile phone, pre-paid would inevitably have to play a bigger part in a continued penetration.

But Franklin said that Sprint's buying Virgin is a reversal of the strong tradition in the U.S. of carriers pushing customers to post-paid. "U.S. wireless carriers would like to see us predominantly post-paid, although Sprint is making a strong attempt to reverse that with this acquisition," Franklin said.

But he warned that Sprint will be acquiring customers who spend $20 a month on average -- less than half the national average per wireless customer. "That's pretty low and represents a niche market," he said.

Carriers prefer post-paid customers to build in predictability to their balance sheets, analysts noted, and that is the main reason they will continue to push post-paid.

The smartphone factor

In Europe, with so many users favoring pre-paid plans, some analysts are predicting that as smartphones come down in price, they will be snatched up by Europeans.

Qualcomm has predicted prices for smartphones will drop below $150 in coming years, while others have said phones based on Google's Android OS will cost below $100 in a year.

Those cheaper smartphones will also be important to U.S.-based pre-paid customers, for sure, but Franklin and other analysts said they don't believe cheaper smartphones alone are going to drive pre-paid growth in the U.S. by much.

"I don't think [cheaper] smartphones are need to grow this pre-paid market," Gartner analyst Phillip Redman said. The biggest growth in pre-paid is probably due to a surge in young users, he said.

But despite Gartner's prediction of annual growth for pre-paid users, some are not as sure. "It's not clear to me that pre-paid will stay around that long in the U.S., partly because the customer churn rate is so high," said Jack Gold, an analyst at J. gold Associates.

However, Gold said pre-paid growth in the U.S. has something do with longtime concerns over rising cellular costs, if not the recession.

"People are starting to look at value and what they are getting for their $60 or $70 a month in a post-paid plan," Gold said. If a customer is not using the minutes for a post-paid plan, then a pre-paid plan that costs less for fewer minutes might make more sense.

Behind the numbers

The reason that pre-paid accounts for about 65% of the market in Europe, primarily, is that customers there bought into such plans in great numbers in the 1990s because Europeans use a billing system known as "calling party pays," Franklin said.

With that approach, a customer would keep a cell phone on hand to get a call from a wired phone at no cost, and the trend caught on in great numbers. In contrast, U.S. carriers have billed for calls and data in a variety of ways, without the same incentive as Europe.

"There's so much talk now of growth in pre-paid, but at best it's only 20% in the U.S.," said Richard Murphy, an analyst at IDC. He puts the annual growth rate at about 8%, below that predicted by Gartner.

"Yes, there's definite growth in pre-paid, but the U.S. market will be significantly driven by post-paid in coming years," Murphy said.