The Apple of the U.S. Prison System

Aug. 14 (Bloomberg BusinessWeek) -- The United States incarcerates more of its population than any other country. From 1990 to 2010, the number of people serving time in state and federal prisons more than doubled and is now nearly 2.3 million, according to a recent report (PDF) by the Pew Center on the States. Earlier this year, the New Yorker’s arresting article, “The Caging of America,” chronicled reasons for the accelerating incarceration rate.

The surge has been good for a constellation of corrections contractors, including JPay, which handles money transfers, e-mail communications, and video visitations for more than 1.4 million inmates in hundreds of prisons across about 35 states. So good that the decade-old business last year expanded into selling inmates its own line of “prison-proof” MP3 players—what it dubs the JP3. “We’re looking for products that an inmate would want to buy and a corrections facility would accept,” says founder and Chief Executive Officer Ryan Shapiro, 35. “Music was a no-brainer because inmates don’t have enough music and they all love music.”

Shapiro is aiming to make JPay, a 200-employee Miami business that became profitable in 2006, the Apple of the U.S. penal system. To understand why he thinks Apple or another tech behemoth can’t easily snuff him out, here’s a quick review of prison rules: Corrections facilities generally forbid devices that can be turned into weapons, be used to communicate freely with the outside, or conceal contraband. Hand a violent prisoner an iPad and the risks become fairly clear.

Shapiro says JPay’s player, which retails for around $40 at kiosks the company installs in common areas inside prisons, is virtually indestructible. Inmates use it to browse a library of more than 10 million songs, “just like on iTunes,” and download them for $1.99 a pop. The three most popular artists are Usher, Tre Songz, and Kenny Chesney. “We take outside applications, redevelop them for prisons specifically, and then deploy them,” Shapiro explains. “The prison doesn’t pay for any of [our services]; it’s the end user who pays.”

JPay didn’t pioneer its new line of business. Keefe Group, a St. Louis-based supplier of food and personal-care products to prison commissaries, launched its own music download service for prisoners in 2009. While the 37-year-old company didn’t respond to interview requests, a press release posted on the company’s website says it sold more than 1 million downloads in just over a year. On its own website, a rival correctional facilities supplier, Union Supply Group, headquartered in Rancho Dominguez, Calif., says it started selling digital music to offenders in 2003 and has available more than 5 million tracks “approved” by correctional partners. Shapiro won’t say what JPay has sold or how much it scores in annual revenue but asserts that the company is “way in front of [Keefe] when it comes to money transfer or the media business.”

Shapiro, who holds a bachelor’s degree in economics from the University of Colorado, Boulder, learned about the inconveniences of transferring money to a prisoner’s account when a friend’s mother was sentenced for embezzling. He says inmates “understand you have to charge in order to be able provide a service … Look at our Facebookpage. Look at how many times someone says: ‘I love JPay.’”

Next up for the business: a mini tablet it plans to start selling by yearend called the JP4. “It’s got an e-mail application, music, e-books—it’s got anything you can imagine,” says Shapiro. “Think about education, think about games; it’s endless where we could go. We think it’s as big, if not bigger, than the money-transfer business.”

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