Wireless

Sprint Nextel is doubling down on the growing prepaid cell phone market in an effort to better compete with rivals, AT&T, T-Mobile USA and Verizon Wireless.

On Tuesday morning, Sprint, the No. 3 nationwide U.S. wireless operator, announced plans to buy Virgin Mobile USA in a deal that is valued at around $483 million. At first it might seem strange for Sprint, which went into a tailspin after its last big acquisition of wireless competitor Nextel in 2005, to buy another wireless operator. But with a strong cash position and a management team determined to turn the company around, it looks like Sprint sees a big enough opportunity in the prepaid market to risk the pains of consuming another operator.

The strategy shift comes at a time when Sprint is still losing high value "postpaid" customers, who typically sign lengthy contracts and pay for service on a monthly basis. During the first quarter of 2009, Sprint lost nearly 1.25 million of these postpaid subscribers. Sprint reports its second quarter earnings on Wednesday, which should provide a clearer picture on where the company currently stands in terms of subscriber gains or losses.

But given recent second quarter earnings reports from AT&T and Verizon Wireless, the two largest operators in the U.S., it's likely that Sprint lost a substantial number of postpaid subscribers yet again. AT&T said it added 1.4 million new subscribers and Verizon Wireless said it added 1.1 million new subscribers during the second quarter.

The fact that AT&T and Verizon Wireless are still adding new wireless subscribers in a market that is more than 80 percent penetrated likely means they are stealing subscribers from other providers, such as Sprint and T-Mobile USA, which also hasn't reported second quarter earnings yet.

With this in mind, it makes sense for Sprint to go after the prepaid market, since that is where much of the subscriber growth is.

For years, the postpaid business model has dominated the U.S. cell phone market. Meanwhile, the prepaid market in the U.S. has been largely left to consumers who are young, price-sensitive, or considered credit risks.

Now, it looks like the tide is turning. Early financial results this year indicate that consumers have been flocking to new all-you-can-eat prepaid plans instead of the contract-bound postpaid plans. Craig Moffett, an equities analyst with Bernstein Research, said after the first quarter that new subscriber growth for postpaid customers across all major carriers had fallen 58 percent from the first quarter of 2008 to the first quarter of 2009.

During this time, prepaid customers were on the rise with about 80 percent of new cell phone subscribers signing up to prepaid service instead of a traditional postpaid plan. A year ago this figure was about 50 percent.

Sprint Nextel was one of the operators that benefited from this shift. It reported during the first quarter that it had added about 674,000 new prepaid subscriptions in the first quarter, according to Moffett's estimates. Meanwhile, it lost about 1.25 million postpaid subscribers.

Prepaid gets a Boost
The growth in Sprint's prepaid base was largely due to a new promotion from its Boost Mobile brand, which in January started offering a $50-a-month unlimited voice and data plan. The unlimited plan was quickly copied by other prepaid brands including Virgin Mobile, which launched its $50 unlimited service in April this year.

The Boost Mobile service is available anywhere Sprint's iDEN network is available. And the service is largely geared to a young, urban demographic. Virgin Mobile uses Sprint's nationwide CDMA cell phone network, and its service appeals to a slightly different demographic. These are price-sensitive consumers looking for a good deal and no monthly contract.

Combining the Boost Mobile and Virgin Mobile brands means that Sprint will be able to reach more customers. And it also will make Sprint the second largest prepaid wireless provider in the market, with a combined subscriber base of 9.5 million.

Another mobile virtual network operator, Tracfone, which uses other carriers' networks to provide its service, is the largest prepaid operator with 12.5 million customers, according to reported second quarter results. T-Mobile USA holds the No. 2 position with 6.2 million prepaid customers at the end of the first quarter of 2009. And regional operator MetroPCS is in third place with 6.1 million customers at the end of first quarter.

Separately, Virgin Mobile USA and Sprint's Boost service trailed behind these operators and also trailed AT&T and Verizon Wireless, which individually had just over 5 million prepaid, in the second quarter, according to Bernstein's Moffett.

"The acquisition of Virgin Mobile USA positions Sprint for even greater success in the prepaid wireless segment," Sprint CEO Dan Hesse said in a statement. "Prepaid is growing at an unprecedented rate with consumers keenly focused on value. Virgin Mobile is an iconic brand in the marketplace that will complement our Boost Mobile brand."

But focusing so much attention on the prepaid market has its risks. While the prepaid market may be growing faster than the postpaid market, these customers typically spend far less than customers who have monthly contracts.

For example, AT&T reported last week that the average revenue each of its postpaid subscribers generated during the second quarter was $59.21. This was the fifth consecutive quarter that AT&T managed to increase the average amount its users spend each month on its service. The increase in spending, even with an ailing U.S. economy, is largely attributed to more customers buying smartphones, such as the Apple iPhone, which require a $30 a month data plan.

Meanwhile, Virgin Mobile USA reported in May that the average revenue per user for the first quarter of 2009 was $20.08, slightly lower than the $20.14 the operator recorded in the first quarter of 2008. Virgin Mobile's management team said at the time that the company expected to increase the average revenue spend as its new $50 a month unlimited plan attracted more customers.

Customer-base of bargain shoppers
The problem for prepaid providers is that most consumers looking for this kind of plan are looking for a low-cost deal. And most are not yet using phones that require hefty data plans. For example, Virgin Mobile's data ARPU for the first quarter was $4.42 per month, up 33 percent year over year. But the bulk of this was in messaging services and not Web surfing or application downloads.

Virgin Mobile CEO Dan Schulman acknowledged how difficult it is to make money from selling low-cost prepaid services when the company last year bought another MVNO called Helio, which offered a high-end postpaid service. He told the Dow Jones News Service when the acquisition was announced that it would take 700,000 typical Virgin Mobile customers to equal the 170,000 Helio subscribers the company got through its acquisition, because Helio customers spend more per month.

Other executives from prepaid wireless operators have also said that it's difficult to make money in this market. In a recent interview with CNET News Leap Wireless CEO Doug Hutcheson said that generating profits in prepaid is all about servicing high-volumes of customers while keeping costs as low as possible.

"We sell twice the number of voice minutes and two to three times the number of text messages as the large national carriers, which have ARPUs that are $10 to $15 higher than ours," he said during the interview. "And our profit margins fall in the high 30 percent range. In some older markets we are closer to 40 percent...So this means that these providers can't expect to drop prices and lower ARPU and expect to make these same margins. You have to seriously increase volume and control costs."

In the postpaid market, the key to revenue growth and profitability is getting consumers to upgrade to smartphones, which are essentially mini-computers that provide a much richer Internet experience than traditional cell phones. The smartphone market is the fastest growing segment within the mobile handset market. Verizon Wireless said more than 40 percent of the devices it sells today are smartphones. Just a few years ago, smartphones and PDAs only made up about 15 percent of the total number of devices Verizon Wireless sold.

Sprint, which has a high performing 3G wireless network, has been trying to compete in the smartphone postpaid market, as well. The company spent a great deal of money and marketing power on the June launch of the Palm Pre, which is currently offered only on Sprint's network. And it has also been pushing the new BlackBerry Tour, Research in Motion's latest BlackBerry.

It's not known yet what kind of effect the Pre has had on Sprint's sales so far. But when the device launched, analysts estimated the company only sold somewhere between 50,000 and 200,000 devices the first weekend it was available. More accurate sales figures should emerge Wednesday when Sprint reports second quarter earnings.

But it's unlikely that the Palm Pre or the BlackBerry Tour will provide the kind of boost to Sprint that the Apple iPhone has given to AT&T. For one, neither of these phones are considered as "hot" as the iPhone. Apple's CEO said that the company sold over a million iPhone 3GS's around the world the first weekend it was available. Secondly, it looks like Sprint's exclusive on the Palm Pre will end in January 2010 when Verizon Wireless says it will begin offering the device on its network. Meanwhile, the BlackBerry Tour is already available on both Verizon's and Sprint's networks.

Bernstein Research analyst Moffett said in a note to investors that he believes the Virgin Mobile acquisition is a slight positive for Sprint. The acquisition won't necessarily increase Sprint's aggregate customer base, but it will shift Virgin Mobile's 5.2 million subscribers that were counted as wholesale customers as prepaid customers. There won't likely be big operational savings, since Virgin Mobile already uses Sprint's network. But Sprint notes there could be synergies in consolidating corporate functions and management. Still, Moffett warns that Sprint should not take its eye off the postpaid market entirely.

"The acquisition nudges Sprint further along in its metamorphosis into a prepaid and wholesale operator," he said in a research note. "However, this deal and the strategy shift in general does nothing to address the key issue that Sprint faces, namely the continuing meltdown of its much higher value postpaid business. Closing the deal and integrating Virgin may consume management's time and distract them from what should be their primary focus."

Corrected at 4:18 p.m.: The figure for Sprint and Virgin Mobile's combined subscriber base was initially incorrect. It's 9.5 million subscribers.

Sprint Nextel said Tuesday that it will buy Virgin Mobile USA for $5.50 per share in a stock deal valued at $483 million.

Sprint already owns 13.1 percent of the prepaid mobile operator. Virgin Mobile is a mobile virtual network operator, or MVNO, which means it uses another carrier's network to offer its service. The company uses Sprint's CDMA network.

The transaction, which is expected to be finalized in the fourth quarter of 2009 or in early 2010, represents a 31 percent premium over Virgin Mobile's Monday closing share price of $4.21.

Sprint also agreed to retire Virgin's outstanding debt when the deal closes. It doesn't expect Virgin Mobile USA's debt to be more than $205 million net of cash and cash equivalents by September 30.

The third largest nationwide wireless carrier in the U.S behind Verizon Wireless and AT&T, Sprint has struggled the past few years since its acquisition of Nextel. It has been plagued by a poor service reputation, and many customers have left the service. The company's new management team, headed by CEO Dan Hesse, has been trying to turn the company around and rebuild its public image. Earlier this summer, the company launched the highly anticipated Palm Pre smartphone on its network.

Sprint reports second-quarter earnings on Wednesday morning.

The acquisition of Virgin Mobile will help Sprint bulk up its prepaid business. Sprint already owns the nationwide prepaid brand Boost Mobile.

Boost Mobile made waves earlier this year when it introduced a $50 unlimited voice and data plan. Virgin Mobile, which is seen as one of Boost's main competitors in the prepaid market, soon followed suit with an unlimited offering of its own.

Regional prepaid cell phone carrier MetroPCS announced Wednesday a new plan that allows its customers to make unlimited international calls to over 100 different countries for only $5 extra a month.

To be eligible for the $5 unlimited international calling plan, users must already be signed up to an unlimited national calling plan that costs $40, $45, or $50 a month. Making international phone calls from a cell phone has typically been rather expensive with major carriers such as AT&T and Verizon Wireless.

For example, AT&T offers its WorldConnect service for $3.99 extra a month, which gives subscribers lower rates on international calls. This means that a call to France still costs 22 cents a minute even with the $3.99 a month WorldConnect plan. By contrast a call to France using MetroPCS' new $5 unlimited international plan is free.

MetroPCS mainly competes against other prepaid services such as Sprint Nextel's Boost Mobile and Virgin Mobile USA. But recently as the economy has tanked, it has been stealing some customers from traditional carriers. With its unlimited plans and an expanding network, MetroPCS offers mainstream cell phone users an alternative to expensive contract services from the big carriers.

And now for people who make calls to friends and family in other countries, MetroPCS offers an even more compelling reason to switch to its service. Of course, the main drawback of the service is coverage. Even though MetroPCS is expanding its network to cities such as New York and Boston, its footprint is still relatively small compared to the major carriers. Most of the areas it covers are near major cities. But for customers in the MetroPCS markets who don't leave those markets very often, it offers a good deal compared to the post-paid, contract plans of the major carriers.

One other potential drawback is that MetroPCS, like other prepaid operators, doesn't offer the latest and greatest phones. That said, it does offer the BlackBerry Curve.

q&a Leap Wireless is finally in the right place at the right time.

The company, which sells its prepaid service under the Cricket and Jump Mobile brands, has been in the wireless service market since 1998, when it was spun off from mobile chipmaker Qualcomm. It filed for Chapter 11 protection in 2003 and was restructured and emerged from bankruptcy protection a year later.

Doug Hutcheson, CEO of Leap Wireless

(Credit: Leap Wireless)

Now the company is strategically expanding its network into 14 new markets with spectrum it won in two recent Federal Communications Commission auctions. It now operates in 29 states and holds licenses in 35 of the top 50 U.S. markets, including Chicago and Philadelphia, where it recently launched service, and in Washington, D.C. and Baltimore, where it plans to launch soon.

And all of this happening as Americans are getting fed up with lengthy and expensive wireless contracts from national carriers, such as AT&T and Verizon Wireless. And as finances tighten, people are looking to reduce their monthly expenses by finding cheaper options for phone service. Prepaid service plans, which allow customers to pay in advance for service without signing a contract, provide a good alternative. Low-cost unlimited plans, from Leap and others, make it an easy choice even for wireless subscribers who talk and text a lot.

I recently chatted with Leap CEO Doug Hutcheson to get his take on the prepaid wireless market and get his thoughts on the future of the industry. Below is an edited version of our conversation.

Q: Prepaid cell phone plans are getting a lot of attention lately. Why do you think that is?
Hutcheson: The prepaid cell phone market is in its third or fourth phase of development right now in the U.S. And it's at the same phase that the European market entered about five or six years ago. Prepaid really started to take off in Europe as wireless penetration started to reach 100 percent. And of course the economic realities of today are also a factor. For a number of people, prepaid wireless is the best value.

Do you think prepaid carriers, such as Leap Wireless, are in a position to threaten the nationwide incumbents, such as AT&T or Verizon Wireless?
Hutcheson: I don't think we are a material threat to either AT&T or Verizon Wireless. They have built great, broad franchises with 80 million customers. What we are trying to do is focus on our customer base, which tends to be younger and more ethnically diverse with people at the median to below median household income level. We serve this market really well. And this is a customer base that others aren't as interested in serving or aren't able to focus on. These operators have their own prepaid products, but I think AT&T's primary focus is on selling iPhones and two-year contracts. And Verizon is focused on its 4G rollout and combining those services with its Fios fiber network.

Virgin Mobile USA is launching a new pay-as-you-go mobile broadband service called Broadband2Go.

Novatel USB broadband modem

(Credit: Virgin Mobile USA )

The service uses Sprint's EV-DO Rev. A network. It will not require a monthly subscription nor will it require an activation fee. To use the service, people need to buy a Novatel USB broadband modem that costs about $149 from Best Buy.

The device and service will be available in late June, the company said. The service is sold in megabyte and gigabyte packages. For $10 a month, users can get 100MB of data usage for 10 days. For $20 they can get 250MB of data, and for $40 they get 600MB. The most expensive pack costs $60 and provides 1GB of data usage. These buckets of data usage are available for 30 days before they expire.

Users will be able to monitor their data usage when they connect to the wireless network, and they'll be reminded to top up their account as they near their data limit. And users can add more data to their account as often as they'd like by using a credit card or a Virgin Mobile Top-Up card.

Prepaid services for cell phones have long been popular in Europe and other parts of the world, but in the U.S. these services have traditionally served only niche markets. With the economy in a deep recession, however, prepaid is gaining steam in the United States. Consumers of all stripes are looking for good deals with no service contracts.

Regional prepaid provider Cricket, which is a subsidiary of Leap Wireless, also offers a pay-as-you-go wireless broadband service. Like the Virgin Mobile wireless broadband service, Cricket's service also doesn't require a contract. And users can get unlimited wireless broadband for $40 a month using the company's 3G wireless network.

The big nationwide wireless carriers, such as AT&T, Verizon Wireless, and Sprint Nextel, have traditionally gone after business users with their broadband wireless services. As a result, the pricing of their service is usually pretty high--around $60 to $65 a month for an unlimited plan that typically offers up to 5GB of data per month.

But the wireless data services offered with pay-as-you-go plans and no contract seem to be geared more toward consumers.

"We have seen a big opportunity to provide this service to our consumer customers who can't afford a similar service from Verizon and AT&T," said Greg Lund, senior manager of corporate communications for Cricket Communications. "A lot of these customers were on dial-up, who want broadband service. And because they're very mobile, the wireless broadband service is good fit for them."

Corrected on June 12 at 7:24 a.m. PDT: Virgin Mobile USA's 100MB data plan costs $10 and expires after 10 days. The company's 600MB offering, which expires after 30 days, costs $40. A previous version of this story misstated the expiration time of the 100MB plan and the amount of the 600MB plan.

After the economic meltdown over this past year, many Americans are looking for ways to cut back their monthly expenses. And prepaid wireless plans offer a great alternative to expensive contract plans.

Traditional prepaid services or pay as you go services allow people to buy their own phone at full retail price and then put a certain amount of money in an account that is deducted based on usage. Some plans offer buckets of minutes for a set price, and some allow people to just put however much money they want in their prepaid phone accounts. These plans allow people to know exactly how much they are spending each month, and if they run out of minutes or money in their accounts, they simply add more online, over the phone, or at a retail location.

These plans differ from post-paid plans, which offer buckets of minutes for a set price, and then bill customers at the end of each month, sometimes resulting in surprisingly high phone bills or excess charges for services that were never used.

Prepaid services have long been popular in Europe and other parts of the world, but in the U.S. these services have traditionally served only niche markets. But now prepaid is gaining steam in the U.S. And consumers of all stripes looking for good deals with no service contracts are considering canceling their post-paid services and going to prepaid.

Ideal candidates for prepaid services include people who use their phones rarely to call friends or family when they are out and about or who only own a cell phone because they think they may need it for an emergency. My 66-year-old, retired father falls into this category. Teenagers are also prime candidates for prepaid services, especially for plans specific to text messaging, such as Virgin Mobile's Texter's Delight or T-Mobile's Sidekick plan. These plans offer loads of free texting and cheap per-minute voice charges.

And now a new category of prepaid services has emerged that will likely appeal to traditional post-paid customers, who talk, text, and access the mobile Web a fair amount each month. Several carriers including Virgin Mobile, Boost Mobile, MetroPCS, and Leap Wireless' Cricket offer low-cost unlimited plans that include voice calling, messaging, and unlimited Web surfing. And the beauty of these all-you-can-eat plans is that customers aren't required to agree to a pesky one-year or two-year contract and risk paying expensive early termination fees.

Correction: Virgin Mobile began selling its $50 unlimited plan in April after the first quarter had ended.

Competition in the prepaid cell phone market is heating up, making it more difficult for companies, like Virgin Mobile USA, to hold onto subscribers in an increasingly crowded market.

Virgin Mobile USA, a longtime player in the prepaid cell phone market, reported Monday it had lost a total of 133,292 net customers during the quarter to end the period with 5.2 million subscribers. Even though subscribers were up 2.8 percent compared with last year, the company's losses during the quarter point to growing competition in the prepaid market.

The market appears to be especially competitive when it comes to flat-rate, contract-free wireless services. Regional players Leap Wireless International and MetroPCS, which have long offered cheap flat-rate services, reported strong subscriber growth during the first quarter, as they each expanded into new markets. And Sprint Nextel's Boost Mobile, which began offering its $50 unlimited plan in January, also added about 764,000 new subscribers in the first quarter.

Virgin Mobile, which had been successful in the past selling pay-as-you-go service in the U.S. market, lowered the price of its all-you-can-eat plan in April to $50 a month, as well. The company also launched the Pink Slip Protection program, which offers customers who have lost their jobs free service for three months.

Virgin Mobile has managed to improve its churn rate, or the rate at which subscribers leave its service. The company reported that its churn fell to 4.8 percent from 5.1 percent during the same period a year ago.

The company sees the $50 flat-rate plans and other "hybrid" plans, which offer a set number of minutes at a standard price without a contract, as its growth engine for the future. Chief Executive Dan Schulman said that 55 percent of the gross customer additions during the quarter came from "hybrid" plans, according to the Wall Street Journal.

This makes sense given that consumers say they are considering prepaid cell phone services as a way to reduce costs and avoid lengthy carrier contracts.

Prepaid wireless providers are scooping up subscribers as cash strapped consumers downgrade to lower cost cell phone service.

First quarter earnings reports from MetroPCS Communications and Leap Wireless on Thursday provided further evidence that consumers are flocking toward no-contract, unlimited prepaid services. These carriers, which operate primarily in smaller urban areas, each reported they had nearly doubled their subscription rate compared to a year ago.

MetroPCS said its new subscriber additions increase 51 percent compared to the same quarter a year earlier. In total it added 684,000 new subscribers, bringing its customer base to 6 million. This was the third quarter in a row in which the company had a record breaking increase in subscribers.

Leap Wireless, which sells its service under the Cricket brand, also had a big quarter, increasing subscribership by 40 percent compared to the same quarter a year earlier. In total, the company added 493,000 new customers, ending the quarter with 4.3 million wireless subscribers. A year ago, Leap ended the first quarter with 3.1 million customers.

MetroPCS increased revenue 20 percent to $795.3 million and posted earnings of $44 million.

Leap actually posted a wider first quarter loss, mostly due to the company's expansion into new markets, such as Chicago and Philadelphia. The company lost $47.4 million, or 74 cents a share, compared a loss of $16.9 million, or 28 cents a share, in the first quarter of 2008. Revenue increased 25 percent to $587 million.

All of this news comes just days after Sprint Nextel reported huge subscriber gains in its prepaid service from its subsidiary Boost Mobile. Boost added about 764,000 customers to its service.

What all three services have in common is that they offer low-cost, prepaid plans with all-you-can-eat voice, text messaging, and Web browsing. The Boost Unlimited service, which launched in January, costs only $50 a month. And MetroPCs's and Leap's services are in the same neighborhood.

Based on these strong subscriber numbers, it appears that consumers are looking for more affordable cell phone plans. This is likely a direct result of the ailing economy, which has resulted in high unemployment throughout the country.

While it's true that cell phone service has become essential for most Americans, that doesn't mean consumers are willing to pay a lot of money for it. And as finances tighten, people are looking to reduce their monthly expenses by finding cheaper options for phone service. Prepaid service plans, which allow customers to pay in advance for service without signing a contract, provide a good alternative. And now the low-cost unlimited plans make it an easy choice even for wireless subscribers that talk and text a lot.

MetroPCS and Leap Wireless have each been offering their low-cost prepaid unlimited plans for quite some time, but as these carriers move into bigger markets, such as Chicago, Philadelphia, and New York, they are putting pressure on other wireless operators to match or beat their prices.

Sprint's Boost was the first to answer that challenge with its $50 unlimited plan. Virgin Mobile followed with its own all-you-can-eat plan for $50 a month. And T-Mobile USA, owned by Deutsche Telekom, is also getting more aggressive with its prepaid cell phone plans.

The question now is whether the two biggest cell phone companies, AT&T and Verizon Wireless, which make millions of dollars in profits from postpaid subscribers, will also go after the prepaid market. And if they don't, will they slash prices on their postpaid contract service plans? AT&T is already rumored to be considering lowering the price of its iPhone service plan by $10 when the new iPhone comes out this summer.

The prepaid cell phone market has finally hit the U.S. in a big way as economically strapped consumers flock to inexpensive pay-as-you-go services. The result will likely mean that big cell phone providers may be forced to slash prices on contract service plans to keep consumers from defecting.

This is good news for consumers, who could see lower prices on both prepaid and post-paid service plans. But it is very bad news for cell phone operators, which make more money from their post-paid customers than they do from prepaid customers.

Prepaid cell phone plans, which have been very popular in Europe and other parts of the world for several years, allow consumers to buy a phone at full retail price, without committing to a contract, and pay for service in advance. By contrast, post-paid services require consumers to sign a one- to two-year service contract, and their usage is billed on a monthly basis. In exchange for signing a contract, wireless operators often subsidize the cost of the phone.

For years, the post-paid business model has dominated the U.S. cell phone market, providing strong growth for U.S. wireless operators. Meanwhile, the prepaid market in the U.S. has been largely left to consumers who are young, price-sensitive, or considered credit risks. While all of the major cell phone operators offer prepaid services, smaller operators, such as Leap Wireless, MetroPCS, and Virgin Mobile USA, have largely dominated this market.

Now, it looks like the tide is turning. First-quarter earnings from all of the major cell phone operators indicate that consumers are flocking to new all-you-can-eat prepaid plans instead of the contract-bound post-paid plans.

"Post-paid (wireless service) growth is arguably over," Craig Moffett, a Sanford Bernstein equities analyst, said in a research note published this week.

Post-paid subscriber growth came to a "virtual halt" in the first quarter of 2009, Moffett noted. He estimates that net additions of post-paid customers across all major carriers fell 58 percent from the first quarter of 2008 to the first quarter of 2009.

Meanwhile, prepaid customers are on the rise. A year ago about 50 percent of new cell phone users signed up for prepaid cell phone service, Moffett said in his note. But in the first quarter of 2009, about 80 percent of cell phone subscriber growth came from prepaid plans.

Sprint Nextel, which reported results on Monday, is the most obvious example of how things appear to be shaking out in the wireless industry. Sprint added about 674,000 new prepaid subscriptions in the first quarter, according to Moffett's estimates. But the company lost nearly 1.25 million post-paid subscribers.

Driven by bad economy
The boom in prepaid cell phone service is likely being driven by the sour economy, and by the fact that providers, such as Sprint and Virgin Mobile USA, have recently introduced $50 unlimited voice services. Sprint's Boost Unlimited service also includes unlimited text messaging and unlimited wireless Web access. Leap Wireless and MetroPCS also offer similar all-you-can-eat plans.

Sprint's service, offered through its subsidiary Boost Mobile, uses excess capacity on the former Nextel iDEN network. So the low-cost service didn't require an expensive network upgrade. The service launched in January, and it was deemed a huge success. Sprint executives said Monday the initial uptake of the service was more than the company had expected.

It seems the $50 price tag could be too good for some consumers to pass up. Comparable post-paid service plans offered by AT&T and Verizon Wireless cost $99.99 a month. And Sprint's own "Simply Everything" plan, which includes unlimited Web surfing and e-mail in addition to unlimited voice and messaging service, costs $99.99 a month.

Sprint's CEO Dan Hesse said during the conference call with analysts and investors that there "is no question that there is a movement toward prepaid." But he was careful to point out that he doesn't see the prepaid market cannibalizing the more lucrative post-paid business model. In fact, he said that the prepaid market is actually expanding the entire wireless market.

"Some of these prepaid customers are people using cell phones for the first time," he said. "So I think overall, as an industry, we will see more revenue growth than we would have seen without prepaid services."

But with more than 80 percent of the U.S. population already using a cell phone service, it's getting harder to sell wireless service to people who don't already own a cell phone. That means that wireless operators are already trying to steal each other's existing customers.

The problem for wireless carriers is that not all cell phone customers are equal. Moffett's analysis indicates that prepaid customers typically generate less than half the value of post-paid subscribers over time. And the reason is simple. On average, prepaid customers generate less revenue per month than post-paid customers. They are more likely to switch back and forth between service providers. And they typically use more network resources, averaging around 2,000 voice minutes per month compared to about 1,000 minutes per month, than post-paid customers.

As a result, carriers, such as Sprint, that are growing their prepaid subscriber base at the expense of their post-paid customers, will, over time, make less money, Moffett reasons.

But regardless of whether carriers want to offer more prepaid services, the troubled economy is likely accelerating the trend. As more Americans lose their jobs and household budgets get tighter, some cell phone subscribers are starting to opt for cheaper prepaid cell phone plans when their current post-paid contracts run out.

A recent study conducted by Opinion Research Corporation (ORC) for the New Millennium Research Council (NMRC) suggests that many people are already canceling their cell phone plans and getting prepaid cell phones as a reaction to the financial crisis.

It is clear that the current trend is probably bad for wireless operators. But if more wireless operators match Boost with their own $50 all-you-can-eat prepaid service plans, a pricing war could emerge, which will likely benefit consumers. And it's very likely the price drops won't stop at the prepaid plans. If carriers start losing even more post-paid customers, they may also be forced to reduce the price of their contract-based all-you-can-eat plans.

But because most prepaid services only offer basic phones, the price war may not immediately affect more advanced smartphone sales and service plans. Still, as the cell phone market reaches saturation, wireless operators can't afford to lose any subscribers.