The vending industry is feeling the continuing effects of the decline of cigarette sales.  This sizeable chunk of the vending revenue needs a replacement and needs it now.
The replacement is here: prepaid phone cards.

The prepaid phone card is actually very similar to cigarettes in the way they are handled by vending operators.  Cigarettes usually are sold through dedicated machines on specialized routes, because the need for high security and the disparity in price between them and other vended merchandise tends to make them an imperfect fit as part of a broader product mix.  There were also federal and state regulations that have to be followed for cigarettes and not for other vended products.

Prepaid phone cards are very similar.  Prepaid phone cards are most often sold in denominations of  $10 , $20, $30 and $50 each or even $100 each, much higher than typical vending fare.  So the machine vending a phone card needs to provide higher security, in most locations.  There are also federal and/or state regulations for phone cards that must be complied with, primarily dealing with prominent posting of disclosure information on the machine for consumer inspection prior to purchase.

So anyone who mastered vending cigarettes is already up to speed on complexities similar to those involved in vending phone cards.  In fact, according to Joe Clark, a telecommunications consultant with Sun Technology Solutions, if it came to swapping out a cigarette machine for a phone card vending machine, the cigarette machines tended to be placed near telephone stations, anyway.  “The location would be excellent, and location is everything in vending,” he said.

Prepaid phone cards also offer a vast and growing market.  The phone card industry has generated billions of dollars in revenue over the past eight years.  Boston-based market research firm Atlantic ACM estimated prepaid phone card annual revenues of $350 million in 1994, nearly doubling each year until reaching $2.6 billion in 1998.  The prepaid phone card industry’s trade organization, International Telecard Association (ITA), estimated even higher 1998 revenues of $3.4 billion. 

There is definitely a market but, for many, how a prepaid phone card works is still a mystery.  Here are some basics for the uninitiated.  

Opportunity Knocks

The phone card industry was born in Europe and made its way into the United States in the early 1990s.  Callers dial a toll-free number (e.g., 800, 888, 877, etc.), which connects them to a computer-controlled “switch” that completes the call.  The card is validated by the personal identification number (PIN), which is usually covered by a scratch-off label.  The number is the value that the consumer purchases.  Without that PIN, the call will not be routed by the switch.

“There is certainly money to be made vending phone cards,” said Dan Whitaker, manager of distribution sales at J D Services, Inc. (JDS), a Salt Lake City-based prepaid phone card company.  He said vending machines have already established a strong presence in truck stops, but there is still plenty to go around.

“We have distributors nationwide who sell phone cards through vending machines,” Whitaker said.  “But most of them place vending machines here and there.  It’s not their main business.  Vending machine operators can take part as easily as any of our other distributors without competing directly, because their market niches are different.”

Clark agreed.  He predicted that the vending industry will develop its own niche markets, just as the typical phone card distributor has.  Many distributors hit the college bookstores, for instance, but the vending operator can hit the college union buildings, he said.  “The union building could be just as good or even better than the bookstore for vending phone cards,” he said.

Some vending operators feel they have been overlooked by phone card companies.  As a result, the successes of the phone card industry are rumored, but have not been expressed to vending operators directly.  This has not always been the case, however.  For instance, JDS has had its feet in the vending industry to varying degrees since 1992, placing over 4,000 phone card vending machines either directly or through its nationwide distribution network.

“In a way, the vending machine operator has a wider market than a typical distributor,” Whitaker said.  “The typical phone card distributor works with retail locations, placing vending machines or over-the-counter displays.  The vending machine operator can hit non-retail locations, such as airports or bus depots ? places that the typical distributor might not even consider, even though they’re good target markets for phone cards.  When you look at it that way, the operator and typical distributor really don’t compete.  I’m not saying you can just waltz in and make a million, but the competition is certainly not as stiff as elsewhere.”

One advantage JDS has over other prepaid phone card companies is that it provides a truly turnkey operation for the vending operator.  JDS prints and sells prepaid phone cards, and also supplies Card Master vending machines manufactured by Technik.  JDS produces about 2 million cards a month, and can provide vending operators with JDS house-brand cards with competitive rates per minute when calling within the United States, from the U.S. to Mexico, or from the U.S. to other countries worldwide.  JDS can also produce cards brand-named for the location housing the vending machine(s), if desired.

Track Record

According to Whitaker, there is one location using two JDS vending machines that is earning $15,000 a month.  There is money to be made, “but only if the card being vended is a quality product,” he said. 

So how do you choose a good phone card?

One of the key things to look for is a phone card company that provides full disclosure of all maintenance fees, applicable taxes and fees, connection fees, and expiration dates.  If full disclosures are not being provided, then the card can be prohibited for sale in a state by the state’s attorney general.  “It’s already happening,” said Ingrid Ricks, co-chair of ITA Standards Committee, which is currently drafting industry guidelines regarding disclosures.  For example, Colorado’s deputy attorney general for consumer protection has pledged to investigate deceptive practices in prepaid phone cards in his state.  In California, five new full-time positions were opened in the Public Utilities Commission to enforce phone card consumer laws that went into effect in 1999.

“Companies often offer unrealistically low rates, like one to two cents a minute, which is below cost,” Ricks said.  “A rate that low may be a warning flag in itself.  Not always, but it happens.  Low rates are often offered in exchange for high surcharges or connection fees.  The consumer simply needs to be aware of them.  

“A lot of these companies are not necessarily trying to mislead the consumer,” she explained.  “They’re doing it for market share, hoping to make the loss on per-minute rates up with connection fees and other surcharges.  With consumer education coming through experience, most consumers are getting tired of it.”

As a result, when consumers realize that a card has undisclosed charges, they will stop buying it, leaving the vending operator with cards that are difficult to sell.  “Consumers are smart,” Ricks said.  “They’ve been educating themselves on the industry for close to 10 years now.  It doesn’t take long for them to spot a bad card.  Then they avoid it.”

Product Quality Questions

The only thing worse than a phone card that does not provide full disclosure is a card that frequently rings busy or does not work at all.  The number of cards being sold that do not work, ring busy, or complete calls that suffer from poor sound quality can be surprising. 

Clark said the quality of card being vended is extremely important.  “If the card doesn’t work well and the customer comes back angry, he’s very likely to take out that frustration on the vending machine, if not the location as well,” he said.  “No one wants that.”

Whitaker said, “Sadly, one of the real dangers in the prepaid phone card industry is worrying if the company you’re working with will be around six weeks from now.  It’s a very real worry.  JDS is a pioneer of the industry and has proven that it’s here to stay.  In 1992, we were little more than a dot on the map.  In 1999, we were named fourth fastest growing company in Utah.  We might cost a penny or two more per minute, but that’s why we’re still here, and so many of the others are filing Chapter 11.”

Other things to look for in a phone card company is multilingual customer service and switch capacity.  One of the largest markets for phone cards is the ethnic market, composed of people who have emigrated to the United States and want to call friends and family in their home countries.  Since the Mexico market is such a large piece of the ethnic market, a viable phone card company should have at least customer service support for Spanish-speaking customers.  The Asian market is becoming more prominent every day, as well as many European countries.

Clark said that the ethnicity of a specific location is too often overlooked.  “The most important things in vending are the location and its customers.  So why put in an English card and signage if the clientele speaks primarily Spanish?”

Switch capacity refers to how many calls can actually be handled by a specific phone card company.  Whitaker said, “JDS owns 68 of its own switches housed in switching centers in Los Angeles and New York City, and buys new ones whenever switch capacity reaches 70 percent.”  Just as important as capacity is the type of technical expertise the company has to troubleshoot problems, should a switch go down.  If the company has to outsource troubleshooting, then it likely can’t be as responsive as a company with in-house expertise, he said.

Try Before You Buy

Another test is simply to pick up some phone cards and give them a try.  If the number rings busy, give it a few more tries.  “Everyone rings busy once in a while,” Whitaker said.  “But if it’s ringing busy every time you try, no matter what time of day, there’s a problem.  The switch is probably full and can’t handle any more calls.  That card and its manufacturer are probably good ones to steer away from.”

The other thing to watch for when “test driving” a phone card is the sound quality.  “Getting connected is the first step,” Whitaker said.  “If it sounds staticky when you’re talking, then you’d almost be better off not connecting at all.  A bad connection just makes you feel like you’ve wasted money.”

Reputation

There are many things to consider when entering the prepaid phone card market.  Education is the key.  By choosing a company with long experience in prepaid telecom, with turnkey programs and a sound reputation, vending operators are more likely to have a positive experience and a positive impact on the bottom line.

“The phone card industry is an amazing ride,” Whitaker said.  “It’s been very good to a lot of us, and there is certainly room for vending operators to join in.”  And operators skilled in handling small, high-value, regulated items in on-street venues should have little difficulty in accommodating this new vendible product category.