ushering in the new year. PREPAID PROJECTIONS 2004
These individuals are leaders in their fields, and have significantly contributed to the direction and policy of The Prepaid Press over the last year.
PAUL AMICKexecutive vice president, ComWest
BILL KELLYdirector of marketing, Excel Switching Corporation
RONALD CONTRADOpresident, Homisco, Inc.
RICHARD HARDINGchief operating officer, 9278 Communications Inc.
IMKE LOUIS-MENSAHproduct manager, Global Access and IP CallCard, iBasis
ED MALDONADOpresident, Regnum Group
HOWARD SEGERMARKexecutive director, IPCA
RAY VALMÉmanaging director, Dial World Network
MARK WAGNERCEO, ALLSwitch
1. What do you think was the most significant event for prepaid in 2003?
From a software developer standpoint, many solutions providers went out of business, or ceased to provide services, in 2003. Because profit margins on platform solutions are significantly less than they were just a year or so ago, today there is a much smaller subset of the providers that used to exist. There are fewer experienced vendors and lots of new guys — new guys that might not be around next week. Today, you might have to pick a vendor that would have been third or fourth on your list, regardless of their reputation for reliability or support.
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Long term, the effective requirement of CATV to be ILEC-like in terms of resale + COLO. This opens up the only other local loop option for prepaid resale.
I think the most significant event of 03 was the introduction of Prepaid Cellular in a way that the people who buy prepaid and know prepaid will have access. I think the products offered by STI Mobile and 9278 Mobile will make a significant impact on the prepaid wireless marketplace and help to create a newfound revenue source.
There wasn’t any significant event — this is the issue. We saw some consolidation and continued price pressure on the wireline/IP carriers, some trials of next gen softswitch/media gateway/media server architectures, but there was no grand exodus or migration to next gen platforms, wireless services, or stored value services. From our perspective, operators focused on increasing their volumes where possible and purchased equipment conservatively, only when and where subscriber growth justified the purchase.
The recent FCC ruling on DAC. I think this impacts most prepaid providers in a fundamental way because it complicates their billing.
FCC DAC Order for Switch Based-Resellers (SBRs): The recent DAC order expanded the reporting requirements for the class of carriers considered to be Switch Based Resellers (SBRs) that are obligated to compensate Payphone Providers. This includes the “Intermediate Carrier” which is a provider that owns or leases a switch, or facilities, and are in the call path and transfer payphone originated calls. This category constitutes the majority of small-sized prepaid providers currently operating in the industry today. While the FCC claims that small-sized providers will not be unduly burdened by the reporting and requirement to compensate, the expansion of the regulatory definition makes it clear that prepaid providers are in the minds of the regulators. The balancing of interests in Dial Around Compensation is not a new topic between payphone and prepaid providers. The FCC has sat on the fence, sometime now, as to who should pay in the arena of prepaid. The recent push of the FCC to resolve this matter boiled down to strong organized lobbying in DC between the various providers with an interest at stake. The prepaid industry was a soft-target in this process primarily because the industry functions much like a loose confederation of businesses as opposed to a consolidated industry lobby in the field of telecommunications. If prepaid interests on the regulatory side are to prevail in DC, something will have to change, and this is why I believe it to be the most significant event in prepaid for 2003.
The most significant event in 2003 for prepaid was the FCC order to revamp the way dial-around compensation (DAC) is paid to payphones. It will mean less use of payphones by phone card customers and it makes it more practical for phone card users to switch to prepaid wireless.
Although not a single event, I believe that the growth in prepaid wireless has been the greatest catalyst for increasing revenue opportunities. In a sense we are following the footsteps of our counterparts in Europe and Asia where prepaid mobile voice services represent over 50% of monthly subscribers. Wireless number portability will certainly play a significant role in influencing market changes in both the post paid and pre paid segments of the wireless market.
This year was the year of truly integrated products. All the major cards suppliers and service bureaus added “usable” features for their consumers, for example, cash cards, money transfer and POSA. The value added features offered in the industry seem to be increasing and improving, and we are actually beginning to add additional features the consumers want and need.
2. What trend or trends do you think will have the most impact on the future of prepaid?
In general, the robust rebound of the ILEC, CLEC, IXC wireless carriers back to reasonable health.
I think the most significant trend will be diversity in prepaid. Coming up with other products besides calling cards that will attract the calling card buyer to spend money on other prepaid-type products. The person who is comfortable prepaying is a unique person, and one that is willing to buy more diversely if options are available and attractive.
We see the gradual migration to wireless along with the convergence of IP. Revenue will shift gradually from Wireline to Wireless – there will be no “big bang.” Also, the addition of value-added services to augment the voice call, possibly tied to SME’s and to subscribers regarding POS promotions, will begin to take place in ‘04. Operators cannot continue to sustain their margins on the voice call alone. Eventually, prepaid customers will be treated more like high-value customers, not like “credit-challenged” customers.
Regulations. Although the prepaid industry needs regulations to keep it in line, I feel as if we are moving towards an over regulated situation.
Another trend worth noting is the increase in prepaid wireless acceptance. You now frequently hear radio ads for prepaid wireless and even see television ads as well. This shows that it really is becoming “mainstream”.
You will also continue to see more prepaid providers using VoIP as a solution. The lower cost and continuously improving quality are luring more and more providers. Additionally, the tight margins are pushing providers to find new ways to cut costs.
Intellectual Property Issues and the lack of Uniform Commercial Standards: Hidden Dragons such as Intellectual Property Royalties and the lack of Uniform Commercial Standards stand to impact the prepaid industry the most over the next several years. While others in the industry may think current regulatory issues are the biggest defining factor from the perspective of legal or regulatory, I think that some long-standing legal issues will come to pass in the next few years that will actively be in the minds of those who own or run prepaid businesses. Intellectual Property Royalties fit clearly into this scenario. A number of business and technological methods commonly used in the prepaid industry are now clearing their final Patent approvals that date back in submission to before the year 2000. Since the life of a Patent Right is limited to a select number of years, the motivation to actively enforce their legal rights to royalties will be at the forefront of the owner’s priorities. Depending upon whom they target, and how much they ask for, participants throughout the prepaid industry may be making some serious business or technology maneuvers to avoid the enforcement of royalties, or to minimize their potential liability.
Another major concern that will likely come to pass is the lack of uniform standards in our commercial relations. Currently, there are no guidelines in the industry that clearly indicate what may or may not be acceptable commercial behavior in prepaid telecommunications. Most, if not all, standards are found in regulations carved out by Congress, the FCC, or individual states. But these regulations tell us little about what to do should a carrier maliciously point your 800 toll services to nowhere because of a billing dispute, or because you are changing carriers. They do not speak of what conduct is unreasonable when winding down a card or a prepaid business. And, they have no concept of how to handle first-use commercial transactions and the failure to provide services. This lack of uniform commercial standards has left room for many in the industry to hurt one another, with little thought of retribution in the courts. The problem is that in the end it is the small providers, distributors, and the actual consumers that eat the losses — and there is an economic impact in everything. If left unchecked and unaddressed in the next coming years, prepaid as an industry may lose consumer confidence, or may open itself to be regulated to the core of its commercial dealings. Neither of these scenarios is in the best interest of continued industry growth, from my perspective.
From a tax perspective, it is probably the movement to “multi-purpose” or “multi-use” cards. Most state and local tax statutes imposing tax on a “point-of-sale” basis only apply if the prepaid card is used exclusively for the purchase of telephone service. As a result of the multi-purpose nature of most new generation cards, usage based taxation would again appear to be the proper mechanism for applying state and local taxes based on what product or service is consumed, where the product is purchased or consumed, and only if and when it is in fact consumed. Although it is less clear, a good case can be made that the Federal Excise Tax should also be calculated on a usage basis in a multi-use environment. It should also be noted that many of the new products and services being offered on a prepaid basis are, in fact, taxable products or services in their own right.
Most important will be cost structures and how government affects them: federal and state governments may start to tax VoIP transmission (bad), while the costs of switching and transmission remain very soft (good – at least for consumers).Prepaid wireless will continue to boom as prices equilibrate and it goes mainstream. The phone card market will continue to grow as more people make more international calls, and households abandon traditional long distance service for practical phone cards.
First and foremost, the continued drop in wholesale international rates, coinciding with growth in international wireless market — in particular throughout developing countries — continues to spur unprecedented growth. The expanded use of prepaid services, i.e. conferencing services, internet access, towing, magazine subscriptions, prescription and health coverage, online purchases such as downloadable music and soon video, etc., will allow wholesalers and retailers the ability to further leverage their distribution channels and create new revenue streams and increased profit. This expansion will continue to legitimize the prepaid industry.
I also see a number of traditional wholesale carriers entering the retail market. With the continued downward spiral in cost per minute and margins at the wholesale level, these carriers are eyeing or entering the retail market to stay alive and grow.
The continued intregration between prepaid cards, prepaid phone products, and cell phones is a growing trend. The future prepaid cellular market is huge, and the more providers can offer prepaid minutes without plastic cards, the better the overall distribution of prepaid products.
3. What technological issues are the most significant for prepaid in the future?
Mainstream use of VoIP technology. VoIP will continually deliver more features, and become increasingly accessible to end users. You can see that starting now with the Time Warner, Sprint/MCI partnership that enables the cable giant to sell phone service. Everyone has a cable connection, regardless of financial status. Once this new technology is perfected, prepaid will have even tougher competition.
IP and IN. IP for obvious reasons (cost reduction), IN means the end of circuit based switches.
POS is making it easier to enroll and subscribe users and can be located in area’s that target specific clientele (college students, hospitals, travelers). Also, the convergence of wireless and data (internet access, concierge services) into the prepaid market should see significant growth. New IP technologies, most importantly SIP, is beginning to be deployed and will play a major role in new features and functions offered to prepaid users.
Integration of all systems (billing, IVR's, call records etc).
VoIP and SIP: VoIP has definitely established the trend of how providers are transporting their calls in the prepaid industry. Whether they are utilizing large-scale gateways for carrier operations, or individual mini-gateways for SME (Small to Medium Enterprise) or even home applications, VoIP is clearly driving the market. Even several large-sized companies such as Qwest, SBC and others have publicly announced plans to offer VoIP services to be able to compete with the upstart companies. The Large-sized companies also want to take advantage of the tax and regulatory ambiguities between the FCC and individual states in the current regulatory definition of VoIP.
For providers, VoIP is a cost-effective mode of transport that offers good quality and is reliable. Most VoIP platforms began as H.323 and now are actively migrating to SIP. This is significant. While many platforms are able to run other protocols, such as MGCP, SIP is in high enough demand that technology manufacturers are taking notice and producing more products geared to this demand. The real question on the prepaid side of the industry is what will be developed by manufacturers next — prepaid video applications?
Again from a tax perspective, I believe provision of service via the Internet, and the determination of whether that constitutes a telecommunication or an Internet service, is very significant for the prepaid industry. (And, certainly, for the state and local tax jurisdictions.) What is important to note today is the fact that most commentary and most decisions related to this subject revolve around “regulatory” authority and not “tax” authority. Regulatory authority has seldom driven tax authority and even if regulators decide not to regulate VOIP, it is highly unlikely that tax administrators will follow suit.
Moore’s law. Still. (Every 18 months the capacity of chips doubles and the cost of processing drops in half.) That means that the cost of switching will continue to drop, and that means the cost of entry into the phone card industry drops, and competition remains harsh.
The internet (whether H.323 or the growing SIP standard) has and will continue to revolutionize the telecommunications industry. Not too far in the future will it cost the same (at the wholesale level) to call from any one country to any other country. The internet is the great equalizer in telecom.
A growing trend in this area will be for foreign origination of calls back to the US for (possibly validation &) worldwide termination. The access method will come in a variety of flavors including local DID access, 800 access, or VoIP telephones. This is somewhat analogous to international callback of the early 90’s that created tremendous opportunities for niche players, and undoubtedly played a role in accelerating deregulation in certain countries.
The continued integration between TDM switches and VoIP based softswitch products. The switch manufacturers are working hard to add VoIP capabilities to their switches, and the VoIP manufactures are working on adding switch-like features to their routers. We should continue to see better converged systems from Nortel, Excel, Cisco, Versatel, NACT, and others. These companies have touched on what can be built, but future generation switch and softswitch solutions will become even better.
4.How do you think the regulatory environment is going to change in 2004?
I believe we will become more regulated. Providers are not being honest with their products (which is partially consumer-driven dishonesty), and this means that the government will begin to regulate more. Prepaid is becoming more and more mainstream, which will force a lot more companies out of business. The honest providers who don’t deceive, will inevitably earn more marketshare over the long haul.
Depends on who you believe. Powell’s position is the most important one to watch and he appears to be less “Pro RBOC.”
I am sure the Government will try to regulate something they know nothing about and mess it up as usual. God bless those people on Medicare who just got screwed royally, and some people think it is good. Not only are drugs in Canada regulated so they are affordable, but telecom is not messed with because the government does not want to destroy something they don't understand. So the answer is do business in Canada.
Here again, no “big-bang.” Gradual opening of what greenfield markets are left overseas, especially in Asia-Pacific and Middle East. The FCC is beginning to take a serious look at VoIP and will be something to watch very closely on how it will affect its roll out in 2004.
I'm afraid we will end up with more and more regulation, (some necessary, some not).
Defining VoIP for regulatory purposes: For several months now, a back and forth tug-of-war has been unfolding between various state utility commissions on how to handle the question of VoIP. Some states such as Florida have “deregulated” VoIP carrier services that do not directly touch consumers. The Minnesota PUC has been ordered by the federal courts not to regulate or make rules regarding VoIP services — which is an issue still being appealed. The ambiguity stems from the lack of a clear, and central, definition of VoIP being issued by US Congress or the FCC for all regulatory purposes. The result is a patchwork of different regulatory definitions being promulgated and applied by the states in the interim. While there are some regulatory and state tax advantages for VoIP providers that exist at this time, the question remains as to how long it will last. Clearly there are some basic questions in the current regulatory schema that do not square-up when asked across the spectrum of telecommunications providers. For example, are you a common carrier and an interexchange carrier up and until the point you use VoIP, or do the regulatory classifications still apply for the totality of your services? It’s a fair question without a concise answer. However, the debate is still wide open and likely to be addressed soon. Dependant upon how the final definition is drafted we will see the regulatory environment change. Need for USF (Universal Service Fund) Appeals Process for Small-sized Prepaid Providers: Over the past several years, the FCC, through USAC, has tightened the enforcement of USF contributions from all providers. The penalty now for non-payment can result in forfeiture rulings and administrative actions against providers as common carriers from the FCC. However, there are gaping questions regarding the treatment of small-sized providers who may have discrepancies with their assessed contributions. As they are not companies of economic scale, every tax and contribution paid out affects their potential survival and the USAC application of future credits for over-contributions may not be an adequate remedy for this class. A clear and structured appeals process needs to be in place for those small-sized providers. While the Congressional mandate of USF is clear, so is the Regulatory Flexibility Act, USF is about equal contributions from all providers (large and small) and mechanisms need to be put in place to ensure this. As the closest telecommunications provider to the end-users, prepaid providers are currently on the front-line for USF contributions. In 2004, USCA and the FCC need to address these concerns or they will stifle the small-sized providers.
Nothing is in concrete, but: There is an effort to double DAC. There the possibility of charging access fees for VoIP-carried calls. Look for states with large Mexican-American populations to look at more phone card regulations (starting with Illinois).
I am still waiting to see how much longer international carriers will be able to “milk” the public with the exorbitant costs of termination to wireless networks. Why can we purchase termination to London for 1 cent but must pay 15 cents when terminating to a wireless carrier? I know that on GSM it is calling party that pays – but hey, I think we’ve paid for the network development several times over. Regulatory needs to step in…
I believe the trend of more open markets and less regulatory issues will continue. We are moving to a true open market environment.
Will all these predictions pan out? Only time will tell. Let us know what you think about these predictions, or send us a few of your own. Contact us firstname.lastname@example.org.
HAPPY NEW YEAR!