Sprint, T-Mobile Mergers Arrive as Prepaid Hits Its Stride

By Michelle Maisto  |  Posted 2012-12-26

Sprint, T-Mobile Mergers Arrive as Prepaid Hits Its Stride

The prepaid, contract-free mobile phone market is well into a transformation that didn't go unnoticed by Deutsche Telekom, the European megacarrier that spent $1.5 billion in October to merge its T-Mobile USA brand with MetroPCS, a small, Dallas-based carrier with a no-contract focus.

T-Mobile CEO John Legere, during an Oct. 3 Webcast on the deal, said T-Mobile has been growing revenues "by 70 percent year-over-year with monthly no-contract products" and that the new company—which he referred to as NewCo—is poised to "win fast-growing monthly no-contract products."

During the second quarter of this year, the U.S. prepaid market for the first time pushed past the 100 million subscribers mark, growing 12 percent year-over-year while the postpaid market remained flat, according to a report from Chetan Sharma Consulting.

By year's end, 110.3 million people are expected to have chosen prepaid plans—more than one-third of the overall subscriber market—up from 98.7 million people in 2011, according to October research from Strategy Analytics provided to eWEEK.

While MetroPCS's spectrum and 4G Long Term Evolution (LTE) network assets helped make it attractive to DT, so, too, did its positioning. While MetroPCS has only 9.3 million subscribers—industry leader Verizon Wireless has 94.2 million—all of those are prepaid. Of the nation's four leading carriers, only Sprint has more prepaid customers. 

"The no-contract market," Legere said, "is growing at more than three times the pace of the contract market. This is a very fast-growing business. In terms of revenue, we will be the leading provider of no-contract services. This will be a great spot to be in and will be one of the ingredients fuelling NewCo's growth."

Less than two weeks later, Japanese carrier Softbank purchased a 70 percent stake in Sprint for $20.1 billion, creating effectively the world's third-largest wireless carrier and enabling Sprint to threaten exactly the niche T-Mobile and MetroPCS have focused on. 

"[Economies of scale] will allow the two companies to cut their costs for network and handset purchasing and pass on these reductions to subscribers," said an Oct. 15 report from research firm IHS iSuppli. "Such a move could make Sprint a strong competitor in the U.S. value market."

Prepaid Goes Mainstream

The New Millennium Research Council, in a July report, described the wireless market as being in "an almost perfect storm of factors that are making prepaid wireless increasingly attractive for middle-class consumers."

These factors—a sluggish economy, the "expense and rigidity" of contract-based wireless service, and the availability of low-cost, quality smartphones—is making it "increasingly difficult for any savvy consumer to justify sticking with contract-based cell phone service," wrote Sam Simon, a senior fellow at the council.

Sprint CEO Dan Hesse, speaking with reporters in August, referenced hockey great Wayne Gretzky's famous remark about not skating to where the puck is but to where it's going. "The puck," said Hesse, "is going more to prepaid."

Sprint has an entire portfolio of prepaid brands—Virgin Mobile, Boost Mobile, Assurance Wireless, and payLo by Virgin Mobile—each of which is "tailored to respond to various segments and customers," Jeff Hallock, vice president of consumer acquisition for all of Sprint's prepaid brands, told eWEEK.

Sprint, T-Mobile Mergers Arrive as Prepaid Hits Its Stride

While prepaid was once about low-end phones and scratch-off cards for adding minutes, today there's a tremendous assortment of devices on no-contract plans offering unlimited data, voice and texting. Virgin Mobile now offers the Apple iPhone 4S, and in October MetroPCS began selling the Samsung Galaxy S III across its markets.

"With consumers buying more expensive phones overall—in the past, no one would ever have expected a prepaid customer to spend $150 or more—[the old] rules have changed," said Sprint's Hallock.

Regarding Virgin Mobile's offer of an iPhone with unlimited data for as low as $30 a month but an up-front cost of $549 for the phone, Hallock adds, "these customers understand the total cost of ownership between the device and the service plan cost, and recognize the incredible savings over a two-year period."

Generous carrier subsidies, tied to two-year contracts, helped to turn $199 into a norm. But while paying $500 up-front for a device may still give some consumers sticker shock, tablets have helped ease a wider public into the prepaid mindset.

"When AT&T first introduced the iPad, it was offered as no-contract and unsubsidized," Susan Welsh de Grimaldo, director of mobile broadband opportunities for Strategy Analytics, told eWEEK. "Even on the new shared data plans, subscribers can put them on and take them off month-to-month. The tablet space is shaping up to be a nonsubsidized or lightly subsidized space."

Allure of a 'Value Brand' in a Troubled Economy

During Deutsche Telekom's Oct. 3 Webcast, Legere, who will serve as president and CEO of NewCo, said its goal is to be the "premier challenger in the U.S. wireless market, the best value for contract and no-contract service offerings."

MetroPCS Chief Financial Officer J. Braxton Carter added, "The sweet spot for growth in our industry really is in the prepaid part of the market, and taking MetroPCS and expanding on that brand into other geographical areas we think is a very positive move for the new company."

In a still-troubled economy, and with smartphones accounting for rising portions of a family's budget, the types and numbers of consumers being attracted to prepaid is changing—perhaps even more rashly than just a few months ago.

The Wall Street Journal recently reported narratives of families giving up weekend outings and restaurant dinners in order to pay for rising wireless phone bills.

"The tug-of-war is only going to get more intense," the WSJ said in the Sept. 28 report. "Wireless carriers are betting they can pull bills even higher by offering faster speeds on expensive new networks and new usage-based data plans. The effort will test the limits of consumer spending as the draw of new technology competes with cell phone owners' more rudimentary needs and desires."

Eric Costa, an analyst with Technology Business Research, told eWEEK that while the traditional prepaid user still exists, a large number of users are "switching to prepaid to save money yet still get a decent smartphone and data plan."

With these new users and their changed motivations, the prepaid market itself is shifting.

Sprint, T-Mobile Mergers Arrive as Prepaid Hits Its Stride

"Prepaid was steadily adding subscribers over the past few quarters, and a much higher rate than postpaid, until this past 2Q12 quarter," Costa told eWEEK in August. "I noted the prepaid segment added 1.4 million less subscribers compared to 1Q12. The total 322,000 net additions in 2Q12 saw Verizon's prepaid segment lead all others, as the pure-prepaid operators like Leap and MetroPCS both reported huge losses."

Costa—who covers eight U.S. operators, the four tier-ones plus MetroPCS, U.S. Cellular, Leap and Cincinnati Bell—added that one reason could have been people waiting for the iPhone to launch on some of the prepaid networks at the end of June.

Research firm NPD Group offered another explanation. With their lower prices and larger selections, Boost, Metro, Virgin and other prepaid carriers are causing declines in the prepaid sales of the tier-one carriers, the firm said in a Nov. 15 report.

"The overall penetration of prepaid smartphones rose from 39 percent in Q2 to 42 percent in Q3," the report continued. "Prepaid smartphone sales at prepaid carriers were up 23 percent over the prior quarter, while at tier-one carriers prepaid smartphone sales fell 12 percent. Consumers who were replacing their mobile phones were more likely to have switched from a tier-one carrier (80 percent) than were first-time smartphone buyers (60 percent)."

Stephen Baker, vice president of industry analysis at NPD, added, "AT&T and Verizon have introduced less expensive prepaid offerings and Verizon has expanded its prepaid smartphone lineup, but the questions remain whether it's too little, too late."

Does Mobile Share Play a Part?

This summer, Verizon Wireless and AT&T each began offering plans that share an allotment of data between multiple devices. A family or a small business can choose an amount of data that their collective devices—smartphones, feature phones, tablets and mobile hotspots—all draw from. Initially, some customers pushed back, as a Verizon spokesperson told eWEEK it had expected.

However, in many cases, connecting all of a family's devices on a shared plan is less expensive than purchasing separate plans for each one. The idea, though, is that given how simple it is to connect more devices, people will connect more than they might have otherwise and ultimately pay more.

Verizon Chief Financial Officer Fran Shammo, speaking at the Goldman Sachs Communacopia Conference Sept. 20, explained that there are two goals to its share plans. The first is to get people to share and consume more data so they buy it in bundles, and the second is to make it easier for people to attach more devices.

"When you think about the future of the car, the home, medical devices and anything else that you want to attach to a wireless network, it's very easy now to attach those devices," Shammo said, according to a transcript from Thompson Reuters, "but can I get incremental dollars for each device that's attached—that is really what drives the future revenue growth."

On prepaid plans, users can connect multiple devices through personal hotspots. Virgin Mobile, for example, offers an Overdrive Pro, which can connect up to five devices simultaneously and users only pay for it when they use it, Sprint's Hallock pointed out.

Customers concerned about their mobile bills rising, particularly at a time of belt-tightening, may have made the more drastic move of not just switching to their carriers' prepaid option, but of moving to a carrier's value-focused branding and possibly even lower prices. 

While attracting customers in the prepaid market may now require more nuance than it did a few months ago, Sprint's and T-Mobile's new alliances no doubt better equip them for the challenge.

"No doubt about it," said Strategy Analytics' Welsh de Grimaldo. "With MetroPCS able to become more of a nationwide player, T-Mobile sees that it can bring that value proposition to more of the U.S." 

Particularly with NewCo's focus on growing its Long Term Evolution (LTE) network, she added, they'll be able to attract "even the very savvy end users" as its network will be "completely on par" with the postpaid brands.

Sprint's deal with Softbank, however, may enable it to stay a step ahead of the new T-Mobile, as the reinvigorated carriers chase after the same customers. Flush with cash from its Softbank deal, Sprint has already purchased spectrum and customers from U.S. Cellular, and after gaining a majority share of partner Clearwire, it bought out the rest of the company for $2.2 billion.

"Instead of Sprint remaining at the back of the pack, falling prey to Verizon and AT&T and the T-Mobile-MetroPCS value play," Costa wrote in an Oct. 25 research note following Sprint's fiscal 2012 third-quarter report, "the result will be a reinvigorated Sprint becoming a strong third player, now with staying power in the market."

As final evidence of prepaid's allure, even Apple is expected to want a greater role in it. In Dec. 16 research note, Canaccord Genuity analysts wrote that, after speaking with suppliers, they believe Apple is building a "more mid-tiered priced competitive iPhone for prepaid oriented international markets this summer."

Follow Michelle Maisto on Twitter.


Rocket Fuel