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Nov. 25, 2009

Sprint Nextel continues to lose cashflow and mobile customers. Instead of turning to the low-churn, high-end wireless users that have brought success to the likes of AT&T and Verizon Wireless, Sprint has instead placed its hopes on prepaid plans.

Some say this is a mistake but Sprint is going ahead with its acquisition of Virgin Mobile nevertheless.

Dan Hesse, Sprint CEO says “with continued growth in the U.S. prepaid segment, Sprint is further positioning itself as a leader. With Boost’s continued success and the iconic Virgin Mobile brand under one umbrella, Sprint will offer customers value and flexibility with great devices running on a dependable network with great coverage.”

In an earlier call with analysts, Hesse called prepaid a “potential growth engine.”

So yesterday Sprint closed its $483 million acquisition of Virgin Mobile USA, which was announced last July. What Virgin Mobile offers that a postpaid wireless carrier can’t is growth. At least that's what Sprint hopes.

“Industry growth is more on the prepaid side, which is another reason that we are doubling down on the prepaid market,” Hesse said. “We think there will be more growth there generally than in the postpaid market.”

There’s also a lot of competition out there, and Virgin Mobile is battling many of the same problems Sprint has been unable to resolve: customer defections and slumping sales.

Like Sprint, Virgin has battled subscriber defections and a high churn rate. The prepaid carrier recently lost about 270,000 customers and its churn rate continues to hover over 5 percent. For its part, Sprint fell almost $480 million into the red and lost 135,000 net retail customers to other carriers in its most recent quarter.

It will be some time before the effects of the Virgin Mobile acquisition become clear. So far in 2009, Sprint has had both successes and a few mishaps. For example, its launch of the Palm Pre rapidly fizzled out to just another smartphone release.

On the other hand, Sprint’s $50 unlimited plan for Boost customers was a major game-changer for the prepaid industry.

Sprint's acquisition of Virgin Mobile leaves it juggling three separate brands-- no easy feat in this crowded market segment. It is speculated that Sprint will target younger prepaid consumers with the Virgin Mobile brand while using its Boost prepaid service for more mature subscribers.

However, there’s still no official word from the company around its postpaid brand differentiation strategies.

About a month ago, Sprint demonstrated with its $50 plan for Boost that it will still need to be extended to Virgin Mobile if the wireless carrier is to survive in the highly competitive prepaid space.

It would appear that Sprint is pinning many hopes for its future on this acquisition. But there are still some wireless industry observers that are raising a few eyebrows nevertheless.

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Source: Sprint Nextel.