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Is prepaid a light at the end of Sprint's tunnel?
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Sprint Nextel does not have a good track record when it comes to acquisitions. The company last year was forced to write down virtually the whole value--$31 billion--of its blockbuster 2005 acquisition of Nextel. And over the past few years it has doled out billions to collect affiliates such as US Unwired ($1.4 billion) and Nextel Partners ($7.5 billion).
So it's no surprise that investors appear hesitant on Sprint's latest acquisition gambit, the $483 million bid for Virgin Mobile USA. Indeed, Sprint's stock has lost almost a dollar in value during the past week, though to be fair that drop is concurrent with the carrier's continued financial troubles.
There are definitely concerns when it comes to the Sprint-Virgin tie-up. First and foremost, how will Virgin work alongside Sprint's established Boost Mobile prepaid play? For all intents and purposes, the two offer the same thing, albeit on different networks.
In his interview with my colleague Phil Goldstein, Sprint CEO Dan Hesse attempted an answer: "We see the prepaid segment as one that's growing. Boost [Mobile] has had a couple of very good quarters, and we want to be in a position to take advantage of the segments of the industry that are growing, like prepaid. So actually, this is an acquisition of new additional resources in the purchase of Virgin Mobile. It's not a shifting of resources away from postpaid." (Click here for the full interview.)
Nonetheless, industry watchers are right to be wary of a wireless gambit that involves not one, not two, but three separate brands. (Not to mention two separate networks!) After all, Verizon Wireless and AT&T Mobility have each enjoyed notable postpaid successes quarter after quarter thanks in large part to their established brands and deep, widespread marketing efforts.
But there are clear advantages to the deal too. In fact, Sprint's acquisition of Virgin earned a "positive stance" from the smartypants at research and consulting firm Current Analysis.
"Many of Virgin's issues come from the intense competition driven primarily by Boost Mobile (owned by Sprint) and so the acquisition of Virgin Mobile can be considered the ‘victor's spoils' for Sprint having successfully battled against Virgin Mobile with the Boost brand, which three or four years ago was itself a struggling entity," wrote Current Analysis' William Ho and Eddie Hold in a detailed report on the transaction. "Sprint gains 5 million subscribers for less than half a billion dollars, which is an excellent outcome for Sprint. Further, by adding the Virgin Mobile brand to Sprint's portfolio, Sprint gains a second known prepaid brand, a company that has a reputation for innovation and--most importantly--a prepaid brand based on CDMA which can leverage the Sprint 3G network for data innovation."
The analysts point out that prepaid is where the action is in wireless. Indeed, according to Strategy Analytics, over one-third of the total net additions in North America in the first quarter were prepaid--the highest level the firm has seen so far this decade. That's bad news for Sprint's Tier 1 rivals: Current Analysis' Ho and Hold write that Verizon and AT&T have relatively negligible prepaid efforts, and T-Mobile USA's prepaid business simply won't be able to stand against the unlimited-at-$50 offerings from the likes of Boost, Leap and others.
(Interestingly, the analysts also point out that Sprint's acquisition of Virgin should hasten a merger between Leap and MetroPCS.)
Of course, the Virgin acquisition isn't a panacea for Sprint. Current Analysis recommends the carrier immediately bring the offerings of Boost and Virgin into alignment, and protect against the cannibalization of its 3G, postpaid data services by ensuring Virgin's unlimited offerings only operate on its slower-speed CDMA 1x network. The firm also recommends Sprint promote PTT on its CDMA network, thereby potentially setting the scene for a sale of its iDEN network (a move Sprint executives have indicated remains on the table).
And all this prepaid action remains separate from Sprint's troubled postpaid activities. On that front, it seems the carrier at least understands the market's move toward smartphones--and could potentially benefit from it--based on its embrace of BlackBerry, Windows Mobile, webOS and, soon, Android. By my count that's everything but Symbian and iPhone.
If Sprint is able to quickly and clearly handle the integration of Virgin, it may well be able to stamp out a commanding position in the prepaid market--which would give the industry's longtime underdog a chance to crow. --Mike
More stories about Virgin Mobile Verizon Wireless Sprint Phil Goldstein Nextel Partners Dan Hesse Current Analysis Boost Mobile
Comments
Posted by INsano | July 30, 2009 - 10:24am
Well-informed article, thanks for the piece. I watch Sprint closely and was blown away they didn't have net additions in the 2nd Quarter when they reported earnings yesterday. If prepaid continues with momentum and Sprint can start siphoning off competitions' post-paid subs, we could see a more established Sprint. As it is, pre-paid is the "dirty-but-necessary". The next year should bring some very interesting changes to the market: A possible multi-carrier Iphone scenario, Palm releasing more devices on its nascent yet maturing platform, Android will finally make its presence felt, dual-mode 3g-4g phones...
Posted by Anonymous | July 30, 2009 - 6:16pm
We are seeing a rather good trend towards pre-paid wireless service. For the consumer, there is nothing dirty about pre-paid. In fact, it is far cleaner than the fees and extra garbage that the post-paids throw at you. This has been a long time coming. I don't care about 3X CDMA. I just want text, voice, and maybe access to email. These are good changes which will hold carriers accountable for quality. Now, you won't be bound to a contract if the service or its handset quality is no good. It ups the quality ante for service providers. Service providers no longer can hide behind a contract.
Posted by Anonymous | August 1, 2009 - 5:18pm
Sprint doing a full buyout of Virgin Mobile leaves open many possibilities. Plainly put, this looks better for Virgin Mobile then it might be for Sprint.
VM will be able to gain the following advantages because of Sprint now being its new parent: Wider, better selection of handsets (I bet we'll see more of them on VM contract side/EX Helio brand first...and then maybe a trickle down to VM prepaid...hopefully a fast trickledown).
Better customer service. VM CS has been dumped to overseas completely as of April. Sprint realized that their past strategy on CS was costing them customers and business so have implemented major changes to improve the CS experience. If they are smart, they will apply said improvements to VM CS too. If VM CS is already a 3rd party company, like I believe it is, Sprint will probably buy out their contract and just do it inhouse to save costs.
Mobile to mobile being added. When Sprint bought out Nextel/Boost, they integrated mobile to mobile between all 3 brands. I see m2m becoming a big edge to VM if they allow it between all VM, Sprint, Boost, and Nextel customers. I can see a plan like Boost's Daily chat that offers unlimited m2m, nights , weekends and text for a $1 a day or similar. They could differentiate it by making it 99 cents, and having 7pm night minutes like they do with current VM plans that have it , unlike Boost's 9pm. They could leave out the unlimited text as not to compete with their own Unlimited Texter's Delight plan (a very popular standalone text plan at 19.99). With 50 million instead of 5 million users in VM's m2m base, it would make m2m a much more desirable factor then in the past (which was only on one of VM's old plans before being eliminated in April).
Better prices overall. Even w/o being directly being owned by Sprint , VM was able to muster up a $49.99 unlimited talk plan (by slashing $30 off their old unltd plan) to try and counter Boost's $50 plan. True , it offered less, but at least they were trying to stay in the game. With operating costs cut by being directly a division of Sprint rather then an reseller, VM is in a position to more closely match the total package offer. Not including PTT, VM might be able to match the $50 price point of Boost's Unlimited Everything plan w/ something like unlimited talk/text/50 megs of web (their biggest data package so far) or maybe even offer a plan matching rival prepaid carrier Straight Talk's $45 deal mentioned below with something like a unltd talk/text/20 megs web as web is the most expensive component of wireless services.
Metro Pcs , Cricket and Straight Talk from Tracfone (On Verizon's network)are the ones that Sprint sees as their biggest competition in the hot and rapidly growing prepaid unlimited flatrate arena.
Straight Talk fired a unltd talk/text/30 meg web offer for $45 in early July and Metro just responded with a price cut so that now it offers their unltd talk/text/web deal for $40. Of course, ST has the weakpoint of no unltd data and only 3 phones, Metro and Cricket both have limited nationwide coverage. Both VM and Boost have the undeniable advantage of two nationwide networks vs. Metro/Cricket. And Boost already offers unlimited data (albeit , 2G iden data) and VM has the potential to. (ST only offers 1xRTT, a slower standard of data then Verizon's postpaid premium offerings do.) Also, Boost and VM will have way more a handset selection then ST will ever have (Tracfone/ST is constrained by Verizon in a reseller agreement that only allows older model phones, something VZ does so that the hand it feeds won't bite it.) Being in house, neither Boost nor VM has any such disadvantages except that which Sprint decides to impose to prevent cannibalizing its core postpaid side.
Hopeflly, Sprint will help build a better , stronger VM which in turn will help Sprint itself.
But Sprint should really work harder on the Postpaid segment. That's where they need it the most. Their prepaid is doing great.
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