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

Sprint and T-Mobile, bolstered by big deals, are going after a prepaid market that's growing to a degree that it may even surpass them.

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.