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    Prepaid Phone Card Sales Hot

    Demand expected to rise 26 percent to 44 billion in 2002.

    NEW YORK -- Prepaid calling cards are bucking the downtrend in the struggling telecom industry with sales growing at double-digit rates, according to a new report.

    As the prepaid card industry began to get off the ground in the mid-1990s, it primarily targeted people without regular phone service and recent immigrants. Now the cards are appealing to just about anyone who uses a telephone.

    With increasing competition between the big carriers and upstarts, calling rates have fallen to mere pennies per minute. Analysts say prepaid cards, historically a big moneymaker, are still one of the most profitable segments of the telecom industry, Reuters reported.

    About 55 percent of the highest income households have used the 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 Inc., allows 400 calling minutes to Germany, 300 minutes to Brazil, or 500 minutes to Singapore. The cards are often sold at a discount to their retail face value, at $9 or even $8, the report said.

    Technology developments have greatly reduced echoes and delays that often accompany calls made with cheap phone cards. The whole industry is also benefiting from the expansion of telecom networks in the last decade, which enabled small companies to jump into the prepaid card business. Smaller companies can lease lines from big ones at a low cost instead of building up their own networks.

    Prepaid cards have become an extremely strong promotional item for marketers looking to get and keep customers in these tight economic times. For small companies, 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.

    "The prepaid price is dropping, but there is enough demand to keep profits coming," Victor De La Cruz, program leader for research company Frost & Sullivan, told Reuters.

    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.

    However, some analysts don't think that will have a big impact 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 told Reuters. "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 in 2002, according to Frost analyst De La Cruz.

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