Those colorful prepaid calling cards that can be found anywhere from convenience stores to the Web are bucking the downtrend in the struggling telecom industry as sales growing at double-digit rates.
Yijun Mao, a Columbia University student of law, said he talks to his parents in Shanghai, China, every day for 3 cents per minute. "When my father studied at Columbia 15 years ago, he only called us once, as the price was prohibitively high," Mao said.
In its infancy, the prepaid phone card industry targeted poor people without regular phone service and recent immigrants. Now just about anyone who uses a telephone--students and small business owners, for example--is embracing those cheap minutes.
With increasing competition between the big carriers and upstarts, calling rates have fallen to mere pennies per minute. Analysts say prepaid calling cards, historically a big moneymaker, are still one of the most profitable segments of the telecom industry.
One big company, IDT said sales of prepaid phone cards, which account for 70 percent of its revenue, are growing at 30 percent to 40 percent annually and it sold a record 18 million prepaid calling cards in July.
IDT shares recently traded at about $17, at the higher end of its 52-week range of $9.85 to $23.32, while the North American Telecommunications Index fell about 60 percent in the recent year.
"For the immigrant population in America, phone cards have been the next best thing to Green Cards," Jim Courter, IDT's chief executive officer said, referring to the visas that allow foreigners to live and work in the United States permanently.
But calling cards also are attracting mainstream customers, even several big-company CEOs are asking for them.
About 55 percent of the highest income households have used the calling cards, as well as 50 percent of the lowest income households, according to a report by market research company the CPR Group.
For example, a $10 JMD phone card from Nivatel Communications allows 400 calling minutes to Germany, 300 minutes to Brazil or 500 minutes to Singapore. The phone cards are often sold at a discount to their retail face value, at $9 or even $8.
Small businesses like the calling cards, too.
"We asked our staff to use phone cards for long-distance calls after receiving a $900 phone bill," said Ellen Yang, chief operating officer of upstart TV production company, Wall Street Multimedia. "Now monthly communications cost is reduced to less than $100."
Technology developments have greatly reduced echoes and delays that often accompany calls made with cheap phone cards.
The industry is also benefiting from the expansion of telecom networks in the last decade, which enabled small companies to jump into the prepaid phone card business. Smaller companies can lease lines from big ones at a low cost instead of building up their own networks.
"Rates are down every month, every year," said Toni Kumar, president of Roslyn Heights, New York-based Nivatel, who started as a phone card peddler. "Everybody is giving crazy minutes in the market; I don't know how they can afford it."
Big companies also feel the heat
Makkyla said prepaid calling cards have become an extremely strong promotional item for marketers looking to get and keep customers in these tight economic times.
For small companies like Nivatel, the margin is now as low as 2 percent to 3 percent because their price is steeply discounted compared with major carriers, but the volume is high; he sells about 300,000 cards a month.
"The prepaid price is dropping, but there is enough demand to keep profits coming," said Victor De La Cruz, program leader for research company Frost & Sullivan.
While the accounting scandals have hit the telecom industry hard, the small, prepaid business also suffered from irregularities and gimmicks. Some cheaper phone cards have poor sound quality, high connection fees and various hidden surcharges, such as weekly service fees. Many cards will automatically expire in three months--and some companies' toll-free customer service numbers are of no use because the phone numbers are fakes.
Some companies also recently came under fire for not being upfront in disclosing those fees, De La Cruz said. For example, some calling cards aimed at Hispanic customers are printed in both English and Spanish, but only the low rates are printed in Spanish; the disclaimers are printed in English.
However, some analysts don't think that will have a big influence on the whole industry.
"It's an opportunity that is almost bullet proof, unless there are some scandals that hit the major players," Atlanta-based independent telecom industry analyst Jeff Kagan said. "Because there are very few alternatives. You cannot make calls at prices lower than that anyway."
Last year, U.S. consumers used prepaid phone cards to place nearly 35 billion minutes in calls, and the number is expected to rise 26 percent to 44 billion this year, according to Frost analyst De La Cruz.
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