Is prepaid a light at the end of Sprint's tunnel?

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