Sprint Nextel bets big on prepaid 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.
Marguerite Reardon has been a CNET News reporter since 2004, covering cell phone services, broadband, citywide Wi-Fi, the Net neutrality debate, as well as the ongoing consolidation of the phone companies. E-mail Maggie. 
that cant be true...
http://www.prepaid-wireless-guide.com/sprint-prepaid-cellular-phones.html
- by justgold79 November 4, 2009 6:48 AM PST
- Yo Dawg! Where You At?
- Like this Reply to this comment
-
(18 Comments)