Is Virgin Mobile a distraction for Sprint?

Squelching a potentially awkward relationship between its competing prepaid arms, Sprint Nextel (NYSE:S) announced today it would acquire its mobile virtual network operator (MVNO) Virgin Mobile USA (NYSE:VM). The $483-million deal will merge Virgin’s offerings with Sprint’s wholly owned subsidiary, Boost Mobile, but besides consolidating management, some analysts feel the deal will only distract Sprint from where it needs the most help – in postpaid.

“The acquisition nudges Sprint further along in its metamorphosis into a prepaid and wholesale operator,” Bernstein Research analyst Craig Moffett wrote in a research note. “However, this deal, and the strategy shift in general, does nothing to address the key issue that Sprint faces, namely the continuing meltdown of its much higher value postpaid business. Closing the deal and integrating Virgin may consume management's time and distract them from what should be their primary focus.”

In the bigger picture, Sprint’s acquisition of Virgin is a tentative step in the direction of rationalizing an over-crowded prepaid market by removing at least one actor, Moffett said. MVNOs have been on the out for some time, with Virgin one of the few remaining. Both Qwest and Sprint CEO Dan Hesse’s former company, Embarq, abandoned their reseller deals with Sprint last year. Virgin was the second-largest MVNO left and is number six in terms of direct prepaid subs. As of the its first quarter, Virgin had about 5.25 million subscribers with an average ARPU of approximately $20. Virgin acquired fellow prepaid provider Helio last year but has struggled to date, losing 133,300 subs in the first quarter.

According to Virgin Mobile chief administrative officer David Messenger, Virgin Mobile and Boost Mobile target complementary consumer groups across all demographics and age ranges. Both prepaid carriers have traditionally focused on the teenage market, but both have also been expanding their customer base to a growing market of price-sensitive consumers. Virgin Mobile matched Boost Mobile’s $50 unlimited plan with its own unlimited voice plan for $50 in mid-April and also last month introduced the industry’s first contract-less mobile broadband service. The new $50 industry standard was only recently passed up by Verizon Wireless MVNO Tracfone, which launched a $45 unlimited voice plan this month.  

According to a Sprint spokesperson, Virgin and Boost will continue to operate as separate brands in the marketplace, targeting their unique customer segments much like postpaid brands attract different customers. She said the two brands will benefit from scale economies from an operations standpoint.