Is Government Program Hurting Prepaid Phone Industry?

Recent statistics suggest that a government program, Lifeline Assistance, has been taking sales away from the prepaid cell phone industry. While the market for Prepaid Cell Phones has never been as successful in North America as it is in European and Asian countries, the increased use of cell phones among senior citizens and younger children boosted the industry in recent years. But sales are down this year, and major players in the industry such as Tracfone and Leap Wireless reported a disappointing second quarter.

In an industry that had been weathering the recession well, the news came as a surprise. While there are several factors that could explain this downturn, one likely candidate is the government program, Lifeline Assistance. The program started long before cell phone use as a way to provide landline telephones to poor Americans.

In 2008, though, Lifeline Assistance was expanded to cover cell phones, and around 8 million people have free phones through the program. Lifeline phones are usually low-end and equipped with 250 minutes per month, and individuals can qualify by having an income that is 135-150 percent below the federal poverty level. Virgin Mobile, Tracfone, and Nexus Communication all participate in the program.

In the prepaid cell phone world, industry experts and insiders are concerned that this program cannibalizes on their sales. After all, low income Americans are major users of prepaid plans, and many of the 8 million currently enrolled with Lifeline would likely be searching out a cheap, prepaid deal if they did not have government assistance.

In light of this, the prepaid industry has reacted warily to signs that the Lifeline program is poised to grow; currently offered in only 37 states, Lifeline plans to soon expand to all 50 and contract with regional prepaid providers in some of these areas. It is expected that some people will switch away from prepaid plans when this happens, especially if their current provider takes part in the program.  For smaller providers who target low-income demographic, this may reflect a new trend: join Lifeline rather than compete with a program that offers free phones.

Photo by : Karl Baron