Wall Street always gets into a tizzy when it hears that prepaid is accounting for a large chunk of subscriber adds. So there is concern brewing over Sprint Nextel's adds, which reached 1.3 million in the first quarter, 502,000 coming from its prepaid subsidiary Boost Mobile.
It's no wonder analysts get nervous. Remember Sprint's big debacle with prepaid in 2002 when it reported negative net additions because the churn associated with the ClearPay prepaid plan? It took several quarters and a new president for the company to turn it around. Sprint's Len Lauer has been trying for the past several months to convince Wall Street that it needs to shift its perception about the value of prepaid vs. postpaid subscribers, arguing that the operator's youth-oriented Boost Mobile brand's value has not be well understood. Boost Mobile may be a prepaid product, but it doesn't equate to low margins or marginal values because Boost subscribers have low acquisition costs, customer service costs and incremental network investment as their monthly minutes of use are much lower than a post-paid customer, he says.
Churn rate and ARPU, however, are the gaiting factors for any successful prepaid strategy. Boost is a unique offering since no one on the prepaid side offers push-to-talk capability, resulting in better customer stickiness. ClearPay was simply cheaper pricing. Yet, the churn and ARPU trends for Boost worsened in the first quarter. Churn was decent for a prepaid service at 5.4 percent, compared with 4.6 percent in the fourth quarter, which was then a sequential improvement from the previous quarter in 2005. ARPU fell from $37 in the fourth quarter to $36 in first three months of 2006. Of course, all of these metrics pale in comparison to postpaid churn and ARPU, which came in at 2.1 percent and $62, respectively. Certainly, Wall Street would just love it if operators could put up big numbers every quarter in prepaid, but a market with this much penetration won't allow it. Analysts will have to continue to bite their nails as operators like Sprint have to look at more risky ways, albeit with smarter strategies, to tap into new customers. - Lynnette