This article was first published in the second quarter 2016 edition of Personal Finance.

 

A few months ago, I heard a senior executive declaring enthusiastically that he had abandoned his long-held and expensive mobile phone contract in favour of the prepaid option and was saving a fortune. Although prepaid charges used to be much higher than the contract fees, he said, the gap had since closed; he had proved over several months that prepaid call and data plans were much more affordable.

Today, in apparent defiance of logic, prepaid calls actually cost less than conversations on contract, for a variety of reasons. Contract prices incorporate the cost of subsidised handsets, competition in the prepaid sector has led to an overall lowering of prices, and there has been a dramatic reduction in mobile termination or “interconnect” charges, which are the fees mobile networks charge other operators to terminate calls on their networks. Once upon a time, these charges were as high as R1.23/minute, but they have since dropped to 20c/minute and will go down to 10c/minute during 2016.

Partly as a result of all this, increasingly affordable prepaid options – available from all networks, and including bundles of voice, data and text messaging, or separate deals for voice and data – have been adopted with great enthusiasm, initially by budget-conscious users, but increasingly by savvy consumers at the top end.

Some of the latter are quite happy to pay cash upfront for phones such as Apple’s iPhone 6 and Samsung’s Galaxy S6 (and presumably will do the same for the S7 and S7 Edge, which made their debut at the recent Mobile World Congress in Barcelona) because they cannot imagine being without the newest and best. At the same time, many contract users are happy to wait for their network-subsidised handset upgrades, not all of them aware that they will be paying more for calls than prepaid customers. As one tech insider says: “Many people are hooked on upgrades and will readily pay a monthly premium if the standard phone upgrade isn’t good enough.”

Tech guru and award-winning blogger Liron Segev, aka “The Techie Guy” (thetechieguy.com), has no doubt about the advantages of prepaid over contract, and says he hasn’t looked back since making the switch himself. He told Personal Finance: “So many people blindly pay these subscription fees for ‘free minutes’ and a ‘free phone’. If only they did the maths on their actual talk time – as distinct from the number of minutes in their package – they would be horrified by the amount of money they waste every month.”

Segev took the leap of faith in 2015 after a long wait for “that special phone” via a free upgrade that was, he says, nothing of the sort. Even today, a surprising number of contract customers appear unaware that the cost of their upgrade, which could run to several hundred rand for a top-end handset, is added to their monthly bill. Mobile network operators are now required to specify this extra cost in their brochures and other advertising material.

“Let me start by saying that if you don’t have a working phone, or the resources to buy a phone outright, then the contract option that includes a phone might still be the right choice. If you are one of those people whose mobile phone bill is R3 000 a month, take a look at the VIP or ‘unlimited’ packages, which allow you to pay a fixed amount for unlimited calls. This alone can cut your bill in half. However, if you already own a perfectly good phone, I urge you to spend 10 minutes doing a few quick calculations and then decide for yourself whether contract or prepaid would suit you best,” Segev says.

Before switching to prepaid, Segev says he subscribed to a Vodacom Talk 500 contract costing R800 a month. This was a pure voice-data contract that did not include the cost of the phone. “I called Vodacom customer services and asked the very helpful operator to tell me how many minutes of talk time I used in November, December and January. Here are my minutes spent talking on the phone:

 

November: 354 minutes: R800

December: 312 minutes: R800

January: 264 minutes: R800

Total: 930 minutes: R2 400

 

“My calculations show that I used a total of 930 minutes of airtime over three months, costing me R2 400. I then did the calculation again, this time plugging in the R1.20/minute charge as per the Vodacom Pre-Paid Anytime plan, with the same charge across all networks, and got the following result:

 

November: 354 minutes: R424.80

December: 312 minutes: R374.40

January: 264 minutes: R316.80

Total: 930 minutes: R1 116.00

 

“From this I deduced that, in effect, I wasted R1 284 over three months, handing over my money to the network for no return.”

Surely there are catches associated with the prepaid option? Not if you use your head, retorts Segev. “On a prepaid plan, you can make calls as long as you have a positive balance in your account, so the rule is: don’t let the account drop below a certain level. You monitor that level with the official app from the network provider and you even get a voice prompt when you make a call, alerting you to the fact that your balance is low.

“Topping up the account is simple and can be done via the official apps from the various providers, via the call centre or, in my case, via a Standard Bank [banking] app on my phone. I select the amount I want to top up and select airtime or data. I enter my mobile number and, within seconds, I am topped up. There is no need to enter those cumbersome codes that you scratch off the back of a card or read off a till slip. The Standard Bank app even also allows you to select an automatic top-up that’s sent to your phone every month.”

What about data? “My contract featured a 2GB data bundle for which I paid R249 a month. This sum was payable regardless of how much data I actually used. On prepaid, it works in exactly the same way: I top up my account with data at the rate of R249 for 2GB, but the difference is that if I exceeded my data bundle on the contract, I was automatically charged ridiculously high out-of-bundle data rates (think R2 a megabyte). On prepaid, once the data is used up, I get no more data at all until I top up. This puts me in control of my spending.”

Segev’s point about “being in control” is important. Stories abound of cellphone users forgetting to activate wi-fi and incurring huge data charges (at rates of up to R2/MB) by holding long Skype video conversations with family overseas, or watching YouTube videos of cats doing cute things.

And the expiry issue? Not really a problem, maintains Segev. “On prepaid, if you don’t make calls, send text messages or use data for 185 days, your number is deemed dormant and deactivated. However, voice airtime does not expire on prepaid, so if you have R1 000 in your account and you use only R200 worth of airtime (over a month, for example), the balance of R800 is still available. In the case of data bundles, prepaid is no different from contract: that is, if you buy a 30-day data bundle, it will expire at the end of the 30 days, regardless of how much you actually used. There is no carry-over to the following month.

“The advantage of not being locked into the same service provider for 24 months means that if a rival comes out with an incredible deal, or a more efficient service, you are free to migrate and keep your number,” he says.

Segev believes the networks should be focusing their attention on data packages and making these more attractive. “Contract customers used to pay for voice and get free data included; now it should be a case of pay for data and get unlimited calls included. I use more data and make fewer phone calls, and I suspect more and more people are following the same trend. It no longer makes sense to pay for a voice-oriented contract when data is more important.

“We need to review our contracts, spend time going through the invoices, call the customer care centres and ask them to provide historical information, such as minutes used over a three-month period. Armed with this information, create a spreadsheet and make a comparison, as I did, to determine the best approach for your personal circumstances.”

Segev recommends using a phone with dual SIM slots for maximum flexibility. In late 2015, dual-SIM devices accounted for 34.6 percent of smartphones in South Africa, according to the International Data Corporation. They were originally available only at the lower end of the market, but now the network operators are offering deals for very respectable devices, such as Sony’s Xperia M5, Huawei’s Mate S and Samsung’s Galaxy A3 and A5. Dual-SIM phones are sometimes used to keep separate voice and data accounts, and they have proved particularly useful for business people who need to monitor work-related communications costs, as well as users who wish to claim expenses from their employers or the taxman.

 

The operators respond

Larry Annetts, the sales, marketing and distribution executive for MTN, says the company offers diverse packages in prepaid and contract categories that respond to the various needs of its customers. “When a customer approaches us, we discuss the usage behaviour and find an appropriate package that suits their usage patterns. This is simplified across prepaid and postpaid, as most bundles (data, voice, and combinations of these) are available at the same cost regardless of contract type.”

In MTN’s experience, Annetts says, the deciding factor in considering prepaid versus contract is the device and not the price. South African consumers are “demanding and discerning” when it comes to smart devices, he adds. “Customers entering the smart-device market for the first time tend to go for affordable brands to test the experience, or commit to R379 a month (including R170 to finance the phone) for a very basic package that includes a laughably small data allocation,” Annetts says.

Ernst Fonternel, the chief commercial officer at Cell C, says Cell C develops products and services to suit its customers’ specific needs and will always consider this when assisting with product selection on upgrades or new sign-ups. “Should a customer wish to migrate from contract to prepaid, we are also able to assist with a great selection of prepaid packages.”

When approaching mobile networks for a service, consumers should understand their own usage habits and communicate this information to consultants to secure the best-value package or prepaid offering, Fonternel says.

International benchmarks indicate that, by the middle of 2016, global data volumes will exceed traditional voice volumes for the first time, Fonternel says. “This is obviously a fundamental mindshift for mobile providers, whose bread and butter has traditionally been voice. The future of the industry is changing rapidly and the popularity of data-driven devices and so-called over-the-top (OTT) services are growing rapidly,” he says.

OTT services are the likes of Skype, WhatsApp, Facebook and WeChat, which offer voice and text messaging, as well as video-over-data networks, at a cost way below that of traditional telecommunication services (see “The debate about going over the top”, below).

“If we, as mobile network providers, don’t innovate around these services and drive value to our customers, we run a higher risk of being left out of the future entirely,” Fonternel says.

Tshepo Ramodibe, the executive head of corporate affairs at Vodacom, says his company provides “great value” by offering competitive price plans for prepaid, top-up and contract customers. Ramodibe says that the options – over 100 in all – can be structured to suit your individual requirements.

Vodacom’s in-bundle strategy for contract users combines voice, data and SMS in a single package, Ramodibe says. “This has resulted in a spike in usage and reduced voice and data rates. Our quarterly update for the period ending December 2015 showed that prepaid customers are now paying an effective [voice] rate of 36c a minute for promotional bundle offers. Our effective blended price per minute, combining contract and prepaid rates, is 53c – down from 63c a year ago.

“The drop in prepaid voice call rates can be attributed to the take-up of offerings such as Just for You (value bundles offering lower rates that you can buy when you recharge), whereas lower contract voice rates are achieved by moving subscribers to new plans that offer better value. So prices are coming down.”

Vodacom’s price transformation strategy is yielding positive results, Ramodibe says. “We’ve migrated 81 percent of our contract customers to new integrated packages at a better price.

“For our prepaid customers, we’ve firmly established the concept of value bundles, selling an average of 53 million voice bundles a month for the year ended March 2015. The pricing transformation resulted in the average effective price of a megabyte of data reducing by 24.1 percent,” he says.

Is technology (as in handsets) and software obsolescence a potential issue for customers opting for prepaid? In other words, are smartphones and the accompanying software evolving so rapidly that prepaid phone users risk being left behind, and possibly unable to do much with their phones except talk?

Absolutely not, Fonternel says. “The cost of entry-level smartphones is dropping daily, and even those on prepaid are now able to purchase sub-R1 000 smart devices that provide access to the same applications enjoyed by high-end devices. Some of these services, such as WhatsApp and Facebook’s Free Basics, are also available to feature phone users.” (Feature phones are handsets that incorporate features such as internet access and the ability to store music, but lack the advanced functionality of smartphones.)

Another relevant factor is the availability of affordable second-hand smart devices to people in lower-income brackets, Fonternel says.

 

Pros and cons

As the networks are at pains to point out, there is no quick answer to the question of whether you should go with prepaid or opt for a 24-month contract. Both come with certain advantages, so in the final analysis, your specific needs (call frequency, online behaviour, SMS traffic, access to wi-fi and other factors) will determine the best way to go.

If you are one of those cellphone users who prefers the arm’s-length medium of the text message to a voice conversation, you may not realise that – in stark contrast to the low-cost of WhatsApp and the like – the cost of an SMS exchange will often exceed that of a brief cellphone call. And evidence suggests that very few of these conversations are completed in a two-message exchange, simply because one message begets another, and another …

Let’s face it, we love our smartphones, and the major benefit of the 24-month contract is that you get your hands on the best and latest models on the market. Instead of paying a large cash sum upfront, the cost of your device is paid off over the duration of your contract.

Next, you never run out of airtime. If you must be accessible 24/7, a contract ensures that you are never left in a situation where you can’t make a call or go online because you’ve run out of airtime. This is critical for workers on the move who spend a lot of time out of the office.

Get a contract that suits your needs, Vodacom says. “Sometimes it may be tempting to go for a cheaper contract, but it could turn out to be more expensive in the long run if you end up paying out-of-bundle rates once you’ve depleted your monthly allocation.”

Against that, prepaid makes sense if you already own a smartphone and have no desire to possess the latest and greatest handset. This allows you to pay only for the services you need. (If you’re thinking of a phone for offspring enrolled at a private school, where the cellphone pecking order can be brutal, good luck with this.)

 

A PERSONAL CASE STUDY

Inspired by tech blogger Liron Segev’s comments, I explored my own options and came up with some compelling reasons to switch from my Vodacom Smart M plan to prepaid. (I’ve held a Vodacom contract for about 21 years, primarily for business reasons, during which time I passed on many upgrade handsets to my wife and daughter.)

My current subscription offers 120 call minutes, 300 SMSes a day and a modest 300MB of data. It costs R318.99 a month, in addition to which I pay R149 for an extra 1GB of data and R9.50 for a caller identity subscription, bringing the total to R477.49 a month. Other minor charges lift the monthly bill to about R500 – which is hardly extravagant as contracts go, but could still be trimmed significantly by shopping around.

My next move is to give Vodacom a month’s notice (my 24-month contract expired last year, defaulting to a month-to-month contract) and migrate to prepaid. I’ll part with a once-off payment of R899 (equating to about R75 a month) in exchange for 1GB of data every 30 days for a year. This represents very good value when you consider that I’ll be getting the same data allocation at a saving of R889 a year. For voice calls, I’ll probably opt for Vodacom’s 79c/minute prepaid rate (per-second billing).

With judicious use, minimal SMS use and maximum exploitation of over-the-top (OTT) services such as WhatsApp for calls and instant messaging, I believe I could cut my cellphone bill by more than half.

Conclusion: I’m no better than any other cellphone user who hasn’t bothered to do the homework. And yes, I’m quite happy with my mid-range, dual-SIM Acer smartphone, bought from Takealot for a decidedly modest R1 499.

How about overseas travel? Since the prepaid option doesn’t include roaming, am I at risk of losing touch with my family and friends back home? Not at all. In Europe, for instance, I could buy the “Orange holiday”, a prepaid SIM card that costs R750 and is valid for 14 days from first use. This provides 120 minutes of call time from any European country to any international phone number, 1 000 SMSes from any European country to any international phone number, and 1GB of mobile internet connection in Europe. The card also offers you unlimited connection to four million Orange wi-fi hotspots across Europe.

In the United States, it’s worth considering the prepaid Ready SIM, available from Amazon.com for about US$32 (about R500). It delivers 14 days of unlimited talk and text, plus 1GB of “unthrottled” 4G data (data not subject to the intentional slowing of internet service by providers to minimise bandwidth congestion). I had this product shipped to my rented apartment in New York and used it to communicate with my family in Cape Town, book for shows, browse the ’net and navigate New York via Google Maps. Similar SIM cards are available for seven or 30 days, and come in packs of two, five and 10 cards.

 

THE DEBATE ABOUT GOING OVER THE TOP

When it comes to weighing up the merits of prepaid versus contract, much depends on the extent to which you use over-the-top (OTT) services. These are applications, such as WhatsApp, WeChat and Facebook Messenger, that use the internet to relay text messages, pictures, audio and video at low cost, directly challenging the cellphone operators’ traditional revenue sources: voice and messaging.

In early February, Vodacom announced an increase of 27.5 percent in data revenue for the quarter ended December 2015. Tellingly, data accounted for 32 percent of the company’s service revenue. The network provider’s results showed a 2.2-percent drop in voice revenue and a 1.8-percent decline in messaging income.

MTN has recorded a similar trend, with voice revenue dropping from 74 percent of total service revenue in 2014 to 68 percent in 2015. Data revenue for the same period showed a corresponding increase (sources: Vodacom, Research ICT Africa and University of Cape Town).

Parliament’s portfolio committee on telecommunications and postal services is in discussions with MTN and Vodacom about proposals to regulate OTTs. Perhaps not surprisingly, the two mobile networks point out that OTTs piggyback on their services without making a contribution to their operating or infrastructure costs. OTTs should be regulated, they say.

Cell C is the only operator that has showed willingness to work with OTTs. A while back, it teamed up with Facebook to offer free access to the social network service and selected websites. In 2014, it allowed its subscribers free access to WhatsApp, later abandoning the free model for an unlimited WhatsApp bundle costing a nominal R5 a month.

On January 31, technology columnist and World Wide Worx managing director Arthur Goldstuck had an open letter to mobile operators published in the Sunday Times, in which he declared his frustration by proclaiming it was “over between us”. The problem, he said (only partly tongue-in-cheek), was that they had pushed up prices without ever acknowledging his loyalty.

Goldstuck said in his letter: “Naturally, I found solace elsewhere. Instant messaging (IM) came calling, seducing me with the offer to send a text message at a fraction of a cent instead of paying close to a rand for an SMS. Please don’t think I’m a cheap date: it wasn’t just the price. IM allowed me to keep conversations together, add photos, and even send messages composed entirely of smiley faces and hearts. And all the while, your SMS had the same tired look that once seemed so fresh.”

While IM apps all kept getting better, wrote Goldstuck, the operators made no effort to look good. “Now [the IM apps] offer something even more enticing: voice calls over your data service. I really thought you would be able to live with that, as it keeps me coming back for your expensive data, even while I’m in bed with these cheap surrogates. Instead, you’ve gone running to the government, asking it to make them behave …

“In short, the call by mobile networks to limit OTT apps is self-defeating, anti-consumer, anti-business. They must withdraw the call,” Goldstuck said.

He followed up his letter with a series of tweets in which he cited eight so-called “dirty secrets” of mobile network operators, including the fact that OTTs were the biggest drivers of smartphone uptake in the mass market. He also took issue with double data charges for most messages, videos and images: in other words, the sender pays and then so does the recipient. And since the OTT apps make no money from consumers, he added, there was little point in pursuing tax revenue from these services via regulation.

 

RECORD OF CALLS

You can get itemised billing as a prepaid customer on some networks. For example, Vodacom offers its prepaid customers a free “mini-statement”, but charges R10 for a more comprehensive 30-day statement (the fee is deducted from your airtime).

For Vodacom contract customers, the fee for a 30-day statement rises to R17.10, and you are charged each time you view it online. It’s worth noting that contract customers are automatically subscribed to itemised billing but can choose to unsubscribe at any time.

Why opt for this? For starters, you receive an easily accessible report to submit to your company for reimbursement. You can also track dialled numbers, call duration and cost, the date and time of calls made and text messages sent. This enables you to optimise your spending (and perhaps rein in those long and expensive chats to your friends during peak hours).

Then there’s the little matter of calling line identity presentation (Clip), which enables you to manage and screen your calls, and also identifies the caller if the number is saved in your contacts list. This service is free and already active for Vodacom’s prepaid customers, but top-up and contract customers pay a monthly fee of R9.50.

MTN’s caller identity service costs about R9, but is also free to prepaid customers.