Watching market developments over recent weeks I can't help thinking that the prepaid segment will be the one that makes or breaks the fortunes of mobile device manufacturers and network operators in Western Europe in 2008.
We saw a similar turn of events last year, with the prepaid market seeing renewed impetus as growth in the contract market slowed. Many consumers turned their backs on lengthening contract terms, while attractive tariffs, high-spec handsets and low prices all worked to reinvigorate sales of prepaid phones.
The postpaid segment has had a rough ride over the last couple of months as Western Europe takes the brunt of worsening economic conditions. Consumer electronics can of course remain insulated from wider economic conditions. Other markets, such as cosmetics and home improvements, often see the same trend. The difference is that a mobile phone contract means a lengthy financial commitment — something that's far from a priority when finances and job security are uncertain.
It's this that will drive operators and handset manufacturers to pay more attention to the prepaid market in the coming months. Holding on to prepaid customers is always a problem, but this segment is the best way to attract new subscribers and increase your share of the market. Lower handset subsidies also mean that acquisition costs are lower. A prepaid subscriber can be profitable for a network operator in weeks, compared with eight to 10 months or more for a contract customer with a high-end phone.
Although operators have largely focused elsewhere in the first half of this year (USB dongles and SIM-only deals spring to mind), I'm expecting the prepaid market to really heat up during the second half, thanks to developments like cheaper tariffs, low prices, the prepaid iPhone and the launch of Comes With Music on a prepaid phone.
Vodafone's prepaid tariffs in the UK now include unlimited texts, making them much more attractive. I'm certain that other operators will be quick to follow suit, making such tariffs the most competitive we've ever seen.
Vodafone also recently announced its 527 Rainbow phone (shown right), which is manufactured by Sagem. Available in a variety of colours for less than £30 in the UK, it underlines just how low the prices of prepaid phones have fallen. At this level, I expect we'll see intense competition in the run-up to Christmas. Manufacturers with a strong range of mid-tier phones that cater to the prepaid market will be best placed to do well.
O2 confirmed last week that Apple's iPhone will be available on a prepaid tariff, and Nokia finally announced its first Comes With Music phone. It too is a prepaid model: the 5310 XpressMusic. Other commentators have expressed surprise and disappointment at the use of a prepaid phone, but I think it's a shrewd move that puts Nokia in an exceptionally strong position. It's redefining the mid-tier of the prepaid market and moving it beyond mere price and tariff. Some of Nokia's rivals will have to slash the price of phones that compete with the Comes With Music handset as they resort to price as the only way to differentiate their products.
The prepaid market is very different from the one of two years ago. Manufacturers and operators that still think prepay equals "can't pay" do so at their peril.