Sprint Bets On Stronger Pre-Paid As Virgin Mobile Deal Closes

Sprint Nextel Corp. (S) Chief Executive Dan Hesse often refers to "doubling down" on the pre-paid market when he talks about the company's pending purchase of Virgin Mobile USA Inc (VM).

The deal, expected to close Tuesday, remains a risky gamble because it increases the wireless carrier's exposure to the fast-growing--but increasingly competitive--segment.

The Sprint-Virgin Mobile deal tops off a year in which pre-paid wireless service hit mainstream, with budget-conscious consumers seeking lower-priced plans and shunning long-term contracts. Sprint, prompted by the success of its own pre-paid arm, Boost Mobile, decided to follow the growth. But since the deal was announced in July, things have changed. Rival low-end service providers and new entrants have continually one-upped each other with cheaper offerings and more features, making it more difficult to stand out from the pack.

Sprint, which has already suffered from consumer confusion about its brands, may suffer from the same challenges in juggling both the Boost and Virgin names, not to mention the Nextel and core Sprint lines. It's also unclear whether Virgin, which has struggled with subscriber losses, will do any better under Sprint.

"It's definitely going to be a challenge for them to manage the individual identities of the different brands," said Daniel Hays, a director at management consulting firm PRTM.

Sprint, however, believes it has learned its lesson. Hesse has said that the company wouldn't repeat the mistakes of the past, and sees Boost and Virgin going after different customers.

Atlantic-ACM analyst Fedor Smith said he expects Virgin to remain more "bubble gum" and go after younger users, with Boost becoming the more "mature brand" targeting a broader audience. Both, however, have a substantial amount beyond their typical demographics, he added.

The carrier also plans to generate merger cost savings from integrating corporate functions while using its larger scale to bargain for better phones and deals from vendors and to share distribution channels.

Hesse believes in the pre-paid opportunity so much that he was willing to bank on a deal valued at the time at $483 million.

"We see the pre-paid market continuing to grow," Hesse told Dow Jones Newswires late last month. "We think we can take a larger share of the market." Boost and Virgin combined have just under one-third of the U.S. pre-paid market.

Sprint's ability to keep tapping into the market rests on Virgin Mobile CEO Dan Schulman, who will oversee both his own business as well as Boost.

Sprint and Virgin declined to comment specifically on the deal ahead of its closing.

Early this year, Boost shook up the industry with a $50 unlimited phone and data services plan, instantly making them a major player in the pre-paid business. In the third quarter, Sprint added 801,000 pre-paid customers, although it lost the same amount of more profitable contract subscribers.

The continued growth is impressive given the pressure Boost faces. MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) have both expanded their networks, cut their prices and packed in more features such as improved coverage and better phones. AT&T Inc. (T) has cut the price of its own pre-paid service, packaged under the Go brand, Deusche Telekom AG's (DT) T-Mobile USA has removed contracts from many of its plans, while Tracfone Wireless recently expanded its Verizon Wireless-powered Straight Talk nationwide through Wal-Mart Stores Inc (WMT).

There are concerns that the market is overheating. Leap and MetroPCS posted disappointing customer growth in the third quarter. Virgin Mobile lost 176,000 customers in the same period. The company went quiet since the deal was announced but was already struggling with growth. Some critics noted that Boost's own high turnover rate was a possible indicator of things to come.

Others remain bullish on the market. Atlantic-ACM's Smith said that there remains a large opportunity to take customers away from the traditional large national carriers.

"It's more about keeping ahead of post-paid than picking each other off," Smith said.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

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