Prepaid Cellphone Wars Heat Up. Should You Bite?

If you haven't already considered switching to a prepaid cellphone plan, here's some news: the option is growing as alternative to traditional plans -- and now it's getting a major boost from a retail giant.

Prepaid cellphone plans, which allow users to pay for service as needed and without signing a contract, have been growing rapidly and supplanting other mobile services. The plans are attracting new users and luring many cost-conscious consumers with traditional plans to opt out of their contracts, many of which were signed during better economic times.

Wireless providers are not celebrating. Some are losing traditional, or post-paid, customers in droves. Others curbed those losses by offering their own prepaid plans, which are typically less expensive and include fewer ancillary services.

Now, a battle for prepaid customers is underway, and a new price war is brewing among the major players.

Prepaid is here to stay, says Chris Watts, an analyst with London-based Atlantic Equities. Although the recession has spurred growth in prepaid offerings and subscribers, both big-name and start-up carriers already had been exploring the category to penetrate the lower end of the market. “The carriers would have you believe they can segment these markets quite clearly,” Watts says.

Still, big carriers aren’t worried about losing the bulk of their business to the prepaid market yet. “Despite the value [of prepaid] for consumers, there are inherent limitations,” Watts says. The allure of new, multifunctional handsets like the iPhone -- which aren’t available to prepaid users -- will keep many consumers on contract. Prepaid plans also have more limitations on location with local calling plans and larger roaming areas, which could put off even occasional travelers. And convenience of contract plans, which don’t require monthly (or more frequent) subscription action, could also keep many subscribers loyal.

Who will profit most from the growing prepaid market is unclear, says Watts. AT&T (T), T-Mobile and Sprint (S) all have prepaid offerings, while Verizon (VZ) is playing the market by reselling its network to smaller prepaid providers like Tracfone. But the large companies’ profit margins from prepaid are slim because they’re already paying to build and maintain those networks. Smaller carriers like Metro PCS and Leap have more room to profit, but they face competitive pricing pressure from big carriers and newcomers to the market. “They’re worried they’re going to get crowded out,” Watts says.

With so many options in such a new space, prepaid plans can be complex for consumers, so success is likely to go to the companies who can simplify their offerings (like unlimited plans) at a low enough price point to appeal to bargain-minded consumers who want to avoid a contract, Watts says.

In January, Boost Mobile, a division of Sprint, launched a $50 prepaid plan with unlimited calling, texting, data and walkie-talkie use. Leap Wireless (LEAP), which markets its service as Cricket, and Metro PCS countered with $45 unlimited talk, text and data plans.

The latest player: Wal-Mart (WMT). The retail giant’s plans, which will be available Oct. 18, are on the cheap end of the more inclusive prepaid offers. Shoppers have a choice of two prepaid cellphone plans through the retailer’s Straight Talk service, a partnership with prepaid provider Tracfone Wireless. A $30, 30-day plan includes 1,000 minutes, 1,000 text messages and 30MB of mobile web access. A $45 plan offers unlimited minutes, text and data for 30 days. Both include free 411 dialing, which can cost up to $2 on other prepaid and contract plans.

Although Wal-Mart is the first retailer to offer its own brand of prepaid wireless plans, it’s not a surprising move. Partner retailers who sell airtime cards or serve as a payment point for users welcome prepaid service because it encourages store traffic, says says Samir Kothari, a co-founder of BillShrink.com, a comparison site that tracks cellphone plans. By creating its own brand of phone service, Wal-Mart is drawing more users to its stores while pulling them away from a competitor’s. (Tracfone also offers its own plans, which allow users to buy service cards at a host of retailers, including CVS (CVS), RadioShack (RSH), Safeway (SWY) and Target (TGT), as well as Wal-Mart.)

Prepaid service is good for you if...

(1) You’re looking to cut your monthly bill now. The plans can be significantly cheaper than the average $70 monthly contract bill. For as little as $10, users can find monthly plans with a limited minute allowance or pay-as-you-go bundles of minutes that expire after a set period. The cost structures favor people who talk 200 minutes or fewer each month, but new unlimited and high-minute offerings are worth looking into, even for users who talk for as many as 1,000 minutes a month.

(2) You need flexibility in your plan. The monthly and pay-as-you-go plans require minimal commitment from the user and offer the opportunity to chase better deals as they come along.

Prepaid service is bad for you if...

(1) Your phone usage fluctuates significantly from month to month. Per-minute rates are typically higher than with a contract plan, so charges for roaming, long distance and just talking add up faster once you go beyond your prepaid plan limits.

(2) Your handset or smartphone is important to you. Don’t expect to bring your trendy phone over with you when you switch providers to go prepaid. “You do have to pay for a phone,” Kothari says. Because there’s no guarantee of long-term service without a contract, carriers don’t offer free handsets either. At Metro PCS, the cheapest phone is $69. Wal-Mart’s seven models range from $30 to $145, but only one has a full QWERTY keyboard. Another offers Internet browsing, and four have a camera.

(3) You use a lot of extra features. Bare-bones wireless plans don’t always include features consumers typically associate with cellphones, like voicemail or caller ID. A basic $30 Cricket plan includes unlimited local talk and caller ID. If users want call waiting or voicemail they’ll need to trade up for the $40 a month plan, which includes both, as well as unlimited long distance and texting. Consumers should check that the features they want are included when comparing plan costs among providers. If you buy a limited plan, keep in mind that checking voicemail and sending texts eat up precious minutes or data allotments.

(4) You move around a lot. Most prepaid providers use a major contract carrier’s network to keep their overhead low. For example, Wal-Mart’s Straight Talk uses Verizon Wireless. In some cases, that deal extends only to the native network of the carrier, which could mean roaming charges or dead zones, depending on your plan. Ask the prepaid provider whose network it’s using, and check that carrier’s site to see coverage in your area. Here are the coverage maps for the T-Mobile, Cricket, Tracfone, Boost Mobile and Metro PCS plans. If you’ll be traveling through uncovered patches, make sure there are no roaming fees in your plan.