Time is ripe for prepaid M&A

The prepaid wireless market has appeared to be unstoppable this year. Prices keep coming down, competition keeps heating up, and postpaid carriers have taken notice. The unprecedented pace of this growth also raises the question of how long it can last. When the recession starts to ease up, will prepaid still be going strong? It most likely will from a consumer perspective, but — from a carrier perspective — the market could look very different than it does today.

Second-quarter earnings showed that prepaid competition is putting the squeeze on all the carriers, including typically successful regional players like MetroPCS. The CDMA operator added only 206,000 customers in Q2, compared to the 684,000 it added in Q1. The loss came despite the fact that Metro was active in Boston and New York City for the first full quarter, representing a 53% gain in footprint, according to Bernstein Research. Leap Wireless added 203,000 customers in Q2, fewer than half as many of the 493,000 customers it added in Q1 and down 19% year-on-year. T-Mobile also added fewer customers during its Q2 earnings, announced today, although the majority of new subs signed up for prepaid.

Craig Moffett, analyst with Bernstein Research, has been vocal on the prepaid space, criticizing it for having too many competitors that are ultimately driving instability. Now that the prepaid carriers are gaining subscribers at one another’s expense, rather than from the usual cord-cutters or Tier 1 operators, it would seem fair to assume that consolidation could be the end result. The wireless market is rather quickly approaching saturation, and prepaid providers are becoming attractive targets for acquisition. Following the lead of Sprint in buying up its mobile virtual network operator, Virgin Mobile, AT&T and Verizon could be the next to follow suit. Given the anticipated regulatory concerns in letting the Big Two gain more spectrum, however, prepaid providers would be wise to first find strength in numbers.

Especially following a successful quarter from Boost Mobile, it makes more sense than ever for Leap and MetroPCS in particular to revisit a merger. The carriers also share a similar target — densely populated urban areas — and they don’t overlap in coverage except in a few markets such as Las Vegas and Philadelphia. Metro reaches the big Northeastern markets and much of the West Coast, while Leap covers many of the markets in between, both large and small.

If Leap and Metro aren’t interested in merging — and let’s face it, they have stood their ground on this for some time — the excitement around prepaid could attract other potential suitors. It is not a stretch to imagine cablecos following Cox into the wireless voice business. Comcast is a likely candidate, given its overlap with Leap in Chicago and several other markets as well as its multi-tiered relationship with its customers. More of a stretch, but not out of the realm of possibility, is that Sprint makes its Virgin purchase the start of a buying spree. As a CDMA provider, it could be eyeing its CDMA competitors to better compete against bigger, and more successful, AT&T and Verizon.

Nothing is necessarily off the table right now, but if prepaid continues to steal the spotlight from an increasingly saturated wireless market, M&A might not only make sense — it could be necessary for the sustainability of the industry.