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Pre-Paid Broadband Doesn't Have to Eat Margins

Jeff Baumgartner
LR Cable News Analysis
Jeff Baumgartner
9/21/2012
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Fine young cannibals -- and old ones, and cash-strapped ones -- represent the biggest threats facing cable operators and other U.S. ISPs that consider developing pre-paid services.

Cannibalizing the existing product line "would be the A-number-one concern I'd have as a marketer," admitted Novation Broadband co-founder and former Charter Communications Inc. Executive VP of Operations and Marketing Ted Schremp, a panelist on Thursday's Light Reading webinar on the topic.

(A replay of the webinar is available here.)

Pre-paid broadband is common in many parts of the world and has been a key component of the mobile services for years, but U.S. cable operators are giving the category a closer look as they consider how to develop low-risk ways to offer broadband to lower-income households, including those that don't have bank accounts or don't qualify for post-paid services because they've been disconnected for non-payment. (See Pre-Paid Opens New Frontier for US Broadband.)

Heavy Reading senior analyst and session moderator Alan Breznick cited research that $20 to $25 per month is the ideal price for a pre-paid broadband service. Schremp acknowledged that the risk of having post-paid customers move to a much cheaper option is a "significant concern."

One remedy would be to make the post-paid options superior to pre-paid ones. That could be done by keeping the speeds of a pre-paid product low and teaming them with relatively strict monthly data usage allowances, Schremp said. The right combination of factors, he stressed, could help cable operators maintain profit margins in a pre-paid world.

ISPs can learn a lot from the mobile service providers that have turned pre-paid into a thriving business, said Richard Siber, founder and president of Siber Consulting LLC. After starting pre-paid services with what was considered the least desirable type of customer -- those with no credit or bad credit -- mobile carriers around the world have developed solid pre-paid brands that have evolved beyond flip phones to coveted, higher-end smartphones.

"Just because you are offering pre-paid services, [the notion] that it's a low margin game is absolutely not the case," Siber said.

One company that wants to help U.S. operators develop pre-paid brands for broadband and hit desirable margins is Wipro Ltd. (NYSE: WIT), which is pitching Accelerate, a managed service that handles billing and cash management, customer care, and technical and operational support via call centers and online self-help.

Cable operators' OSS and IT systems aren't typically equipped for pre-paid, but Wipro thinks it can fill that gap. Wipro is already having these discussions with domestic cable operators, said Stephen Snyder, the global head of business innovation for Wipro's Global Media and Telecom unit.

What's at stake?
Even if it's possible to make pre-paid broadband profitable, is the market big enough to make it worthwhile for U.S. broadband providers? According to Schremp, the potential market is worth about $7 billion when factoring in the subscribers at stake that could be willing to pay $26 for a month of service:



The hardware side
And what about the modem that makes a pre-paid service run?

Shremp said Docsis 2.0 modems can be had for $20 at wholesale, and could be used for kits that could fetch $30 to $40 at retail -- enough to cover the equipment costs and eliminate the need to retrieve the equipment.

And this sort of model could be applied to video products as well, Schremp said, noting that many operators have gone all-digital and can power a pre-paid service using simple Digital Terminal Adapter (DTA) devices that cost about $35 each. (See Pondering Pre-Paid Cable TV.)

— Jeff Baumgartner, Site Editor, Light Reading Cable

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