Is Virgin Mobile a distraction for Sprint?

Moffett contested, however, that the acquisition will not provide operational benefits. Since Virgin already rides on Sprint’s CDMA network, it is not about scale, he said. Virgin’s subs, which are currently included in Sprint’s wholesale subscriber count, will simply shift to their prepaid count. As a result, Sprint will more than double its prepaid subscriber base, which was 4.3 million at the end of Q1, and will halve its wholesale subscriber total, 9.4 million as of Q1. Sprint will report its second-quarter earnings tomorrow.

Tracfone’s move had many in the industry predicting another wave of consolidation, but a merger between regional CDMA players MetroPCS and Leap Wireless was thought to be the most likely move at the time. According to Moffett, today’s announcement isn’t likely to usher in this surge in consolidation. Despite an unwieldy market structure with too many players, there are significant barrier to further concentration, he said. Namely, Verizon and AT&T are likely sidelined by the Department of Justice, which is already investigating the wireless market for potentially anti-competitive behavior. Stifel Nicolaus analysts and Virgin’s Messenger, however, said they don’t expect Sprint’s acquisition of Virgin to raise concerns by the DOJ.

“It is the right deal at the right time,” Messenger added. “It’s always been a strategic scenario we’ve been looking at as we’ve grown the company. We launched back in 2002 and helped redefine the prepaid market in the US. That was at a time when the market was not nearly as saturated as it is today. We were able to take advantage of that and grow every rapidly. Today the market has changed, and it much more saturated. There isn’t much more penetration that anyone can achieve in the market.”

Even with the potential “distraction” of Virgin to Sprint, it is clear that the prepaid space has become one of the most competitive markets in wireless – or the only competitive market, according to Messenger. As the postpaid market has slowed down in a tough economy, tier-one operators including T-Mobile and AT&T have stepped up their focus on prepaid. Only Verizon has remained relatively hands off, although its MVNO Tracfone remains the largest prepaid provider in subscriber numbers. Still, following its acquisition of Virgin, Sprint will have to maintain a balancing act between its pre- and postpaid 3G brands, as well as its 4G business, without cannibalizing any of its current offerings.

“We view the acquisition as part of a strategy by Sprint Nextel to continue to diversify itself away from the post-pay business, in which it continues to struggle mightily against Verizon Wireless and AT&T Mobility,” Stifel analyst Christopher King wrote in a research note. “However, the prepaid market is becoming increasingly competitive from a price standpoint in the US, and we wonder whether Sprint's recent branding and marketing efforts surrounding the ‘fastest 3G network’ and its nascent 4G-Clearwire product offering will have much of an impact with its now larger-prepaid subscriber base. The lingering question of what Sprint "wants to be when it grows up" resonates more than ever with us following this transaction announcement.”