Sprint’s Boost a Model for Prepaid Success

The race to lure cost-conscious users with cut-rate prepaid plans is on. And Sprint is demonstrating how Tier 1 operators can compete without turning their brands into the mobile equivalent of Wal-Mart.

The struggling operator this week underlined the renewed luster of the prepaid business with its latest earnings report, adding 764,000 customers in just eight weeks with its new, $50-a-month plan from Boost Mobile that includes unlimited messaging and Web browsing. The adds contrasted starkly with Boost’s fourth-quarter in 2008 — which saw the subsidiary bleed 314,000 users — and partially offset Sprint’s disappointing loss of 1.25 million postpaid subs. Analysts say Boost’s momentum is likely to continue, potentially drawing 1 million new subscribers during the second quarter and — perhaps — helping Sprint address a churn rate that has exceeded 2 percent for the last three years.

That surge is no aberration. Boost’s success mirrored fellow prepaid service providers MetroPCS and Leap Wireless, which each claimed hundreds of thousands of new customers in their quarterly earnings statements. Virgin Mobile USA jumped into the fray last month, as well, cutting the price of its unlimited plan (which doesn’t include data) to $50.

Any growth is good growth in this economy, of course, but the prepaid segment is covered in dangerously thin ice for established carriers. Prepaid users spend less than their postpaid counterparts ($31 a month vs. $56 a month for Sprint during the most recent quarter), they reportedly use more network resources, and they’re free to switch providers on a whim. Leap, for instance, saw its ARPU drop more than 6 percent to $42.21 year-over-year, and reported a net quarterly loss of $47.4 million. MetroPCS saw its ARPU fall to $40.40 as churn jumped to 5 percent. What’s more, margins from prepaid use are sure to slim as the cutthroat competition heats up.

There is money to be made in prepaid, though, as MetroPCS’s $44 million net quarterly profit demonstrates. That’s money Sprint can’t afford to leave on the table, and the Boost brand provides a way to minimize the cannibalization factor while serving the growing prepaid sector. The short-term lift from prepaid is surely especially welcome as Sprint prepares to launch Palm’s Pre — a platform whose success may ultimately decide Sprint’s fate.

Wireless is nearing the saturation point in the U.S., and consumers are looking to cut costs anywhere they can. Sprint’s strategy is a twist on the old mobile virtual network operator (MVNO) model, but this time the virtual operator is a subsidiary of the true network operator. The move is a shrewd one: Sprint can position itself as the entrenched, familiar player with traditional plans as it attracts penny-pinching users via a separate brand in Boost. Verizon and AT&T each have branded prepaid services, but neither makes an effort to position the offerings as stand-alone businesses.

Prepaid users aren’t exactly the belles of the ball when it comes to mobile consumers, but they represent a market carriers can’t afford to ignore — especially if they can be converted to postpaid subscribers as the economy recovers. Following Sprint’s lead and creating a business like Boost Mobile may be the best way for the other Tier 1s to tap the fastest-growing segment in wireless and minimize losses in the lucrative postpaid space.

Question of the week

Should Tier 1 carriers launch MVNO-style services to capture prepaid users?