Summary
Sprint-Nextel's acquisition of Virgin Mobile goes beyond marketing or economics. Prepaid wireless customers are an increasing part of Sprint's wireless customer base and represent a crucial revenue stream while other Sprint initiatives come into fruition. Acquiring Virgin Mobile doubles the number of prepaid wireless customers Sprint, particularly in competing for unlimited plan customers.
Analysis
The answer to the question "Is Sprint buying Virgin Mobile USA for significant marketing advantages or is the buyout basically carrier economics?" is yes to both but....
Certainly Sprint wants to take advantage of the familiar Virgin Mobile name brand. And the article also suggests potential gains in management depth. On the economics side, the article suggests that this might rationalize the prepaid market and somehow give Sprint more control over it's retail pricing. These things may be true but are not enough in my opinion to justify a $700M deal.
What I believe is going on is an attempt to shore up the increasingly important prepaid customer base. Wireless customers pre-merger represented about 10% of Sprint's wireless customer base. This merger effectively doubles the number of prepaid customers that Sprint has. More importantly, this part of the subscriber base is growing.
According to Sprint's 2nd Quarter 2009 results, the number of postpaid wireless customers declined by 991,000. However, the company gained 938,000 prepaid customers in the same period. On the revenue side, average revenue per user for postpaid customers has remained flat while ARPU for prepaid customers showed gains, particularly in unlimited plans. These seem to me an indication that the prepaid customer base is a growth area that Sprint must exploit. They are still trying to get rid of the customer dissatisfaction and resultant image problems from the merger with Nextel. The revenue growth from additional services sold over their 3G and 4G networks is still in the future. Sprint needs to shore up this portion of the customer base to help with subscriber stability as they move ahead.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
