Sprint said today that it’s agreed to buy Virgin Mobile USA, a provider of prepaid cell phone service that runs on Sprint’s EVDO network, for $483 million in stock. With this deal, Sprint will get some 5.2 million prepaid customers, though its position as the No. 3 U.S. cell company will remain unchanged. It’s taking on one of the prepaid carriers benefiting the least from the excitement surrounding the prepaid business, but since Sprint already owned 13.1 percent of Virgin Mobile USA, maybe it was a case of an unattractive suitor settling on his ugly cousin for a date to the prom.
In terms of new customers, the prepaid business has been a bright spot in the wireless industry (GigaOM Pro, subscription required) as the economy has soured, but rivalry among carriers has led to all-you-can-eat plans for around $50 per month that have lowered their annual revenue per user. Virgin Mobile hasn’t benefited as much as rivals TracFone Leap Wireless or Metro PCS when it comes to adding customers, but has still managed to boost its profits. It reported net income of $19.1 million in its fiscal 2009 first quarter compared to $4.7 million in the first quarter of 2008, a 301 percent gain. Meanwhile, Sprint’s own financial results were grim.
Sprint, which reports second-quarter results tomorrow, added 764,000 prepaid customers to its Boost Mobile subsidiary during its first quarter but saw 1.25 million post-paid subscribers — the source of the big money for any carrier — removed from the books. It posted a net loss of $594 million and blamed its continuing problems on the economy. Boost has helped Sprint’s business, but it also brings in less money for the carrier with annual revenue per user (ARPU) for prepaid subscribers at $31 vs. $56 for a postpaid subscriber. Boost also operates primarily on Sprint’s iDEN network, which it acquired when it bought Nextel in 2005.
The iDEN network has had problems keeping up with the volume of text messaging engaged in by Boost subscribers, leading to complaints that Sprint says it has since resolved. However, since Sprint recently signed a deal to outsource the day-to-day operations of its network to Ericsson, it might make sense for Sprint to shift its Boost brand over to the EVDO network and gradually shut down the iDEN network to consolidate operations and costs.
The Virgin deal may force Sprint’s hand, as it will mean the carrier has two separate prepaid brands running on different networks — a cost drain in a highly competitive business. When asked about the likelihood of consolidating networks, a Sprint spokeswoman said in an email that the two networks would remain separate. “We intend to keep Boost and Virgin Mobile USA operating as separate but complementary brands in the marketplace, each focused on a different end of the customer base,” she wrote. “Boost and Virgin Mobile USA will balance different offers and styles to appeal to different customer demographics.”
Following the close of the transaction, Sprint’s prepaid business will be led by Dan Schulman, currently Virgin Mobile USA chief executive officer, who will report directly to Dan Hesse, Sprint Nextel’s president and CEO. Schulman will be responsible for the business strategy and growth of the prepaid segment, while Matt Carter, who leads Boost Mobile, will report to Schulman.