CELLULAR PHONE INDUSTRY.   Term Paper ID:24322 Click to get this paper

Essay Subject: Consumer credit policies & problems, pricing, profit margins, prepaid calling cards.... More...

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Paper Abstract: Consumer credit policies & problems, pricing, profit margins, prepaid calling cards. Paper Introduction: Introduction Cellular phone service has generally been associated with highincome consumers and high-technology professionals who have a need to be in touch while on the road. As with traditional phone service, bills are based on the amount of usage (called airtime) associated with a given account; since cellular phone service is billed in this manner, companies have been careful to issue accounts only to consumers that they consider credit worthy. Because of this, consumers who have filed bankruptcy or who do not have strong credit histories are often denied cellular phone service. Recent developments in technology have, however, increased the amount of flexibility that companies have in issuing accounts, and there is now a move toward using so-called debit cards in the cellular service market. This research examines the reasoning beh Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Because of this,those companies which offer low prices are able to gain customers; byoffering special discounts and limited promotional opportunities, companiescan lure customers away from the competition. During 1996, more than $1 billioncalling cards were sold; that figure is expected to increase to more than$2.5 billion by the year 2 (Gerber, 1996, p. Conclusion Although consumers with questionable credit histories represent asignificant risk to companies such as cellular providers who bill for theirservices after the services are performed, the debit card technology makesit possible to tap into this market by ensuring that the supplier companyreceives its money before the service is used. In thesesituations, customers may find that they must pay higher prices for creditavailability. Americans and Credit Today, consumer credit is a way of life for most Americans.Mortgages, auto loans and credit cards are the typical credit instrumentswith which most Americans are familiar, and the once easy availability ofcredit cards (in particular) has made it easy for consumers to over-extendthemselves. Prepaid calling cardsare purchased and paid for by the consumer prior to their use; each cardcomes with a predetermined dollar amount. In the case of prepaid cellular service, this means thatinformation can be programmed onto the card itself which indicates at whatrate the card should be debited. In the 12 months ended September 3 , 1996,bankruptcy filings were up more than 25.9 percent over the same period ayear before with more than 1.1 million Americans filing for protection fromcreditors (Rehm, 1996, p. Business consumers, on the other hand, will be acutely aware of theprice of the service and may compare one prepaid service with another,choosing the most economical based on their usage patterns. In this way, existing technologies and synergies can bemaintained and market share can quickly be established for the neworganization. For example, luxury items are sometimes priced wellabove their actual cost in order to reinforce the image of the luxury item. Since theservice will target consumers who are interested in the convenience of theprepaid service as well as those with bad credit, different rate scheduleswill be used. If a consumerdoes not pay his bill even after repeated notices from the serviceprovider, the service is canceled and a collection agency is typicallyretained to collect the past due amount. As a result, this particular group of consumers hasbeen eliminated from the telecommunications revolution which offersmobility and flexibility to many American workers. 1).Bankruptcy filings appear on credit reports for up to seven years, whichcan make future creditors wary of lending to these consumers. Some companies have already begun using this strategy, and it makeslittle sense for a new company to try to re-invent this product andservice. Because of this, there is the potential for higher profit margins forthose consumers who have demonstrated an inability to handle credit in thepast. 8). At the same time, many Americansare saving at a lower rate than in years past, with the result that whenworkers become victims of "downsizing" or other cutbacks, they are oftenunable even to service their debt load, let alone pay off the principal. For most consumers, this does not pose a problem. A one-time card fee of $25 will be charged in addition toair time usage. (1996, November 18). (1996, September 9). References Barlas, P. When credit is being extended to customer, the level of risk associatedwith a particular consumer is also taken into account. Using debit card technology and client/server technology, companieshave now created ways to bring debit cards to the cellular market.Although the original target market were business professionals who aretraveling and who may need the flexibility that being able to use anycellular phone would provide, consumers and some companies alike quicklyrecognized the potential for high credit risk consumers. Cellular Service Industry The cellular service industry is actually a combination of variouscompanies which offer airtime to consumers for cellular phone use.Typically, companies in this industry operate in much the same way astraditional phone companies, providing telephones as well as the servicethat supports them. O'Hara, T. There are two types of bankruptcies available to individuals: Chapter13 and Chapter 7. Rehm, B. Instead, a company can use an acquisition strategy to enterthe market and obtain market share in various regions by buying up currentproviders. Chapter 13 offers protection to consumers by giving themup to five years to repay their debt; Chapter 7 liquidates the consumer'sassets and enables them effectively to start over (Barlas, 1997, p. For many Americans,cellular service remains a luxury. 3 . The amount by which the card isdebited each time a call is made depends on the calling pattern of theconsumer: more long distance calls result in faster use of the card. Client/server technology ata centralized location can facilitate updates to the debit cards, andconsumers may be willing to pay extra for the cards given the limitedavailability of cellular service to most consumers who are poor creditrisks. Inaddition, prepaid cellular service can help fight the reported $65 millionin losses due to electronic serial number theft in 1995 (Gerber, 1996, p.T5). Since there are already a number of companies competing in this marketniche, it makes little sense for a company to try to enter the market as anew entrant. T5. Despite this, many consumers still find itdifficult to pay for the utility once it has been used, and cellular phoneservice is not in the same category as land-based telephone service interms of being considered an absolute necessity. Instead, there is considerable opportunity for a company whichacquires another organization already competing in this niche; by doing soin various locations across the country, the acquiring company can gainsizable market share quickly. As stigma fades, bankruptcy inchesup. Prepaid cellular is commonly limited to approximately $3 perpurchase; this service would offer prepaid plans in $1 , $25 and $5 increments. Some cellular providers have recognized the potential of the prepaidcalling card and introduced the service to the cellular market; thisparticular service would use the calling card approach in order to serveits customers. Once the consumer receives the card, he inserts it into any cellularhandset in order to activate the handset; each call decrements the amountremaining on the card until the card expires. T5). The cellular industry has grown increasingly competitive and is nolonger in its introductory phase of the product lifecycle. Introduction Cellular phone service has generally been associated with high-incomeconsumers and high-technology professionals who have a need to be in touchwhile on the road. Because of this,some consumers take on more debt than they know they will be able to handlewith the knowledge that they can file bankruptcy and be relieved of theirdebt. In recent years, prepaid calling cards have become an increasinglypopular means of communication; the Telecommunications Reform Act openedthe market to competition in 1996. These consumers are unlikely to give much thought to the futureconsequences of this action, and instead are interested in the immediategratification that comes from using credit to purchase goods. At that time, the service will be activated and the card sent tothe consumer. The advantage of the prepaid cellular card overtraditional cellular service is that it can be used with any cellularphone. Bankruptcy filings rose 25.9% in 12months ended Sept. At that point, the processbegins again; so long as the consumer returns the current card, no new cardfee will be charged and a new card will be issued in the appropriatedenomination. In recent years, however, new technologies have emerged which maychange this situation. Since cellular phone usage is a combination of a base monthly fee inaddition to airtime, consumers are billed for their usage after that usagehas occurred. In this way, the cellular companies are essentiallyextending credit to their customers and, as a result, they typically runcredit checks in order to determine the credit worthiness of potentialcellular consumers. In this way, the $1 phone card would be worth fewer minutes ofairtime to the high-risk customer than it would be to another customer;technology would handle the actual calculations, and in many cases, theconsumers will not be immediately aware of the higher rates that they arepaying for using the service. With traditional phone service,customers "pay as they go;" each month, a bill is received for the airtimefor the previous month and the consumer pays for the service after it isused. 1, 14. This prevents them from moving to a differentcellular provider in the meantime and helps protect the cellular provider'sinvestment. Those consumers who may be considered to be high-risk are not likelyto be approved for cellular phone service through the traditional carriers(including AirTouch on the West Coast), or the company may requireadditional deposits in order to protect itself. To activate the card, high-risk customers will have toprovide a credit card number and expiration date, or send a check to theservice bureau. As with traditional phone service, bills are based onthe amount of usage (called airtime) associated with a given account; sincecellular phone service is billed in this manner, companies have beencareful to issue accounts only to consumers that they consider creditworthy. Consumers nowconsider one cellular service very similar to another (a commodity) and arelikely to make their purchase decisions based on price. Because of this, consumers who have filed bankruptcy or who do nothave strong credit histories are often denied cellular phone service.Recent developments in technology have, however, increased the amount offlexibility that companies have in issuing accounts, and there is now amove toward using so-called debit cards in the cellular service market.This research examines the reasoning behind such companies and considersthe future of this marketing strategy. Prepaid calling cards have become popular as giftsto college students and to members of the military; these calling cardshave a predetermined monetary amount which is debited each time the card isused. No further action will be taken until the funds have beenverified. Prepaid cellular service provides convenient services to consumerswith bad credit ratings as well as to those consumers who want to usecellular telephones in various locations throughout the world. 8. Telephone companies (and other utility companies) effective giveconsumers credit at low or no interest rate, in part because they areregulated by the government. The recent increase in bankruptcy filings is attributed both to theremoval of the social stigma associated with bankruptcy, and also the easewith which bankruptcy can be filed (O'Hara, 1996, p. In return for the company taking the risk and issuing them prepaidcellular service (or for issuing any type of credit, even prepaid credit)to these consumers, the consumer is typically willing to pay a higherprice. A. This controls potential losses (due to theft of the debitcard) and also has appeal to both consumers with poor credit as well as tobusinesses seeking to give their traveling employees additional options. From this standpoint, theavailability of a good or service (or lack of availability) can drive upthe price of the item. Bye, bye spare change.Computerworld, p. Bankruptcy gets personal. 2). Similarly, consumers who have defaulted on loansmust pay higher interest rates on future loans in order to obtain funds.The reason for this is that these consumers are judged to be higher risksto the credit issuing companies than those consumers who have proven theirability to handle credit. In some cases, the specific characteristics of the consumer can alsoinfluence pricing. Thosecompanies which are not able to compete efficiently are driven from themarket. However, consumers may purchase phones from anyprovider, although they must be programmed at authorized service centers. Over time, as there is an increased level of competition, profit marginsand prices typically erode until only those companies with highlyprofitable cost structures are able to compete in the market. Many cellular companiesinsist that consumers sign contracts (for one or two years, typically) inorder to "lock in" a revenue stream. How the Service Will Operate Because people with bad credit are inherently bad credit risks, thisservice cannot operate in the way that most cellular services (andtraditional phone companies) operate. (1996, December 1 ). The contract helps eliminatethis by ensuring that consumers are committed to a specific pricing planfor a given period of time. Potential Profit Margins Pricing of goods and services can be based on several differentfactors, including the product lifecycle phase, the level of competition inthe market, the supply and demand characteristics of the product or servicein question, and the cost structure of the company providing the service.Products and services which are new or which do not have establishedmarkets can command higher prices as the market adjusts to the new entrant. A customer who has successfully paid off an autoloan or who makes regular mortgage payments has demonstrated an ability tomeet the obligations that these liabilities extract. BusinessJournal, pp. Gerber, C. American Banker, p. Many Americans make only the minimum payments on their creditcard purchases, effectively paying annual interest rates of as high as 18percent. In the same way, consumers who live in remote areas may alsopay more for consumer goods than those who live in areas wheretransportation is readily available. 2. For households with multiple credit cards, this can represent asignificant portion of the family income. American Banker, p. If airtime for a particular call wouldcost good customers 9 cents per minute, the company might choose to add aten or 2 percent surcharge, making the rate $1.1 per minute (forexample). The prepaid cellular service card is approximately the size of acredit card; it contains subscriber information in electrically erasableprogrammable read-only memory (EEPROM), and is inserted into the handset tomake it operational. Customers will call the service bureau to request a prepaid servicecard; a credit check will be conducted and the appropriate rate schedulewill be prepared based on the result of the credit check. (1997, January 13). Lack of Availability Consumers with poor credit, or those who have bankruptcies in theircredit histories, have had difficulty obtaining cellular phone service.Companies are reluctant to extend credit to these consumers because of thecredit risks that they pose and the likelihood that the company will losemoney on the consumer. Despite the prevalence of credit within the American culture, there isa lack of understanding among many individuals as to how credit works, orhow to keep out of trouble. Creditorsassume that consumers who have filed for bankruptcy protection in the pastmay not be adept at managing their money and are, therefore, higher creditrisks. As a result, anumber of companies have begun marketing these cards and ancillary servicesto high risk consumers. There is a paradox in the American economy in that those consumers whoare most in need of credit are often those who must pay the most in orderto obtain credit. In this way, those consumers who have no credit history(and thus cannot prove their credit worthiness) pay higher interest rateson credit cards than those consumers who have a proven track record withcredit card agencies. It is against this backdrop that the cellular service industryoperates. This means that customers do not have to own a particular type ofcellular phone, and that they can use their prepaid card at theirconvenience. 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