Is prepaid growth an illusion?

The prepaid wireless market was the banner story of the first quarter. While the postpaid segment saw net subscriber additions fall by 57% — bringing overall postpaid subscriber growth to an all-time low of 3.9% over the last 12 months — the prepaid space continued its streak of strong growth. But prepaid providers' net additions of 68% — accounting for more than 80% of the overall market growth in the quarter — have some questioning whether the uptick can possibly be true.

Craig Moffett, senior analyst for Bernstein Research, believes prepaid providers' numbers are an illusion — at least in part. He said the results reflect a double-counting of prepaid subs acquired in the quarter that won't show up as churn from the carrier they left until the second quarter. For example, of the 1 million subscribers Boost Mobile acquired for its Boost Unlimited $50 plan, Bernstein estimates that approximately 450,000 are double-counted. Of those, another 389,000 will show up as incremental churn in the second quarter, with another 63,000 in the third quarter, Moffett said.

For Sprint, in particular, the Amazon Kindle was another cause of distortion. With as many as 300,000 Kindle subs counted as Sprint wholesale net additions in the first quarter, it wasn't prepaid drawing them in. These Kindle subs essentially will have 9% churn over time, Moffett said. In the first quarter, this means Sprint most likely saw its quarterly net additions fall 13% versus the 7% increase it reported.

“After adjusting for double counting and the distortions from [machine-to-machine] devices, the underlying growth rate of the market was likely meaningfully slower than the reported figures,” Moffett wrote in a research note. “By our estimate, overall industry subscriber growth over the past year slows from 5.9% to 5.3%.”

Despite the padding prepaid got in the first quarter, Moffett admitted that there has been an unmistakable shift from postpaid to prepaid. After adjusting for double-counting and M2M, the prepaid mix among the top six carriers dropped from 81% to only 63% — still by far the highest prepaid share to date. It's good news for the prepaid carriers; however, Moffett said it could prove to be a problem for the postpaid carriers if the trend continues once the economy picks back up.