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Sprint Nextel, the struggling number-three US mobile operator, is set to transform the US prepaid mobile market via its acquisition of the country’s largest MVNO, Virgin Mobile USA. Last month, in a move that took many in the industry by surprise, Sprint said it would buy Virgin Mobile in a deal worth US$483 million, and could complete the transaction by year-end. The move instantly establishes Sprint as a major player in the US prepaid market. By combining Virgin Mobile with its own prepaid subsidiary, Boost Mobile, Sprint will roughly double its prepaid subscriber base to around 10 million, which would make it the second-largest US prepaid operator after AT&T.
Boost Mobile’s success in prepaid has been a key growth area for Sprint in recent quarters, helping it offset ongoing churn in its contract customer base. According to Sprint’s 2Q09 results, Boost Mobile (which runs on Sprint’s iDEN network) added 938,000 new prepaid customers in the quarter, while its parent company lost 991,000 contract customers. Sprint said it will retain both the Virgin Mobile and Boost Mobile brands in order to target different customer demographics in the prepaid market; Boost Mobile is likely to continue to target the cost-conscious low-end sector – a segment that is deemed to be thriving due to fears over the US economy – while Virgin Mobile is youth-focused.
The success at Boost Mobile in the first half of 2009 can be attributed to the introduction of a US$50 monthly plan in January that included unlimited voice calling, text messaging and Internet access on a prepaid (non-contract) basis. The plan has since been replicated by a number of its prepaid rivals and has led to a fierce price war in the prepaid low-end segment.
Sprint’s success with Boost Mobile and its impending acquisition of Virgin Mobile represents a serious threat to MetroPCS and Leap Wireless, the two large regional prepaid mobile operators in the US. Both were responsible for pioneering the ‘hybrid’ mobile subscription model, a combination of a contract and prepaid plan that offers a monthly allowance of voice and data (like a postpaid account) but is paid for upfront and without a contract (like a prepaid account). However, recent evidence suggests that they are under pressure due to the discount pricing strategies being deployed by Boost Mobile and other prepaid rivals. In June, for example, TracFone (an MVNO owned by America Movil hosted on Verizon Wireless’ network) launched a US$45 per month unlimited prepaid offer via its Straight Talk brand, which is being promoted at Wal-Mart stores. MetroPCS and Leap Wireless (the latter using its Cricket brand) separately announced US$40 per month flat plans earlier this month.
As we discussed in an earlier edition of Snapshot, MetroPCS and Leap Wireless both reported annual double-digit connections growth in 1Q09 and in some geographic areas were claiming a greater share of net additions than the big four US mobile operators (AT&T, Verizon Wireless, Sprint, T-Mobile). However, by 2Q09 connections growth at both MetroPCS and Leap Wireless was below expectations and well below the prepaid net additions at Sprint/Boost, which took a 40.5 percent share of prepaid net additions in the quarter according to our data. Leap added 203,000 net customers in the quarter (down from 493,000 in 1Q09), while MetroPCS gained 206,000 (down from 684,000). The two operators took a combined 22 percent share of prepaid net additions in 2Q09, according to our figures, down from 37 percent in the previous quarter.
The situation has reignited long-standing speculation that MetroPCS and Leap could merge. A combination of the two regional operators – which already have a roaming agreement in place – would create an operator with almost 11 million connections and near-nationwide coverage. However, an earlier attempt to merge the two operators in 2007 failed after Leap rejected a buyout proposal from MetroPCS. Leap has more recently been linked with a possible takeover by AT&T.
According to our 2Q09 data, AT&T leads the US prepaid market with 17.5 million connections, giving it a 37 percent market share. However, the operator has reported negative net additions for its own prepaid service for the last four quarters and took just a 12.4 percent share of net additions in 2Q09, behind both Sprint (40.5 percent) and T-Mobile USA (24 percent). However, AT&T’s prepaid connections base is boosted by the various prepaid MVNOs on its network, including several TracFone Wireless MVNO brands (Net10, SafeLink Wireless etc.). Prepaid connections at Verizon Wireless, the largest mobile operator in the US by total connections, account for less than 6 percent of its total, the lowest proportion among the four large operators.
Will Croft, Analyst, Wireless Intelligence
“With the US prepaid market growing seven times faster than contract over the past 12 months, Sprint’s timely acquisition of Virgin Mobile USA is an attempt to tap into a fast-growing segment created by an increasingly value-focused economy. While the move captures significant market share for Sprint, investors will remain wary of its bottom line given the shift from selling wholesale capacity to Virgin to gaining responsibility for those same customers, with new overheads in areas such as retention and marketing. For Virgin, the acquisition is more attractive – garnering purchasing power within the Sprint ecosystem and removing the costs of both leasing Sprint’s network and staff synergies across the two businesses. For Sprint, the move will significantly contribute to prepaid growth and net additions, which continue to offset their ailing contract base.