SIM-Only Deals Batter the Prepaid Market

It’s struck me in the last month or so that the prepaid phone market in Europe is undergoing a big change — and it’s not a positive one. It was widely assumed the prepaid segment would benefit from an economic downturn as people watched their monthly spending and downgraded to lower-priced handsets. However, the recession seems to be hitting everyone harder than expected, from manufacturers to distributors, from network operators and retailers right down to the buyer on the high street, hitting demand for prepaid phones across Europe.

Perhaps unsurprisingly, a big factor seems to be the operators’ favourite product: the SIM-only deal, which is being positioned ahead of new connections with subsidised handsets. A SIM-only deal (like mobile broadband) is attractive to operators because it has no significant upfront cost and generates profits quickly. In October the front cover of Orange’s monthly retail brochure featured a picture of a SIM card, rather than a mobile phone. That’s unheard of, given the premium operators and retailers command from manufacturers for space in their glossy sales catalogues.

It all comes back to one factor: budgets. In a year that has seen severe economic conditions and rising subscriber acquisition costs, handset subsidy is the first candidate when it comes to cost cutting. We’re seeing operators tempting people to postpone upgrading their contract phones until 2009 by offering discounted tariffs. Similarly, some operators are limiting the number of connections retailers can sell in conjunction with a prepaid handset.

The result is a bigger decline in demand as consumers are discouraged from replacing their phones by higher costs. Of course, this is affecting manufacturers, but the real victims are likely to be distributors and retailers. Falling demand and a shift to lower-tier products dent profit margins, while nervous financial markets mean credit for buying and insuring stock is now far harder to get hold of.

In short, it seems very unlikely that the prepaid market will offset the slowdown in mid- and high-tier segments. Increased liquidity in the financial markets would certainly improve prospects in 2009, but much will depend on whether operators shift focus from short-term scrutiny of costs. If they want to retain control of the customer in the face of increased competition from the likes of Google and Nokia, subsidy is still the answer. The same goes for SIM-only. It’s fine in the short term but it doesn’t help operators’ plans to get more people using applications and services if a growing number of them opt for a SIM-only deal and stick with a five-year-old handset.