Battle of the Prepaid Plans

It’s a jungle out there when it comes to prepaid. This week both MetroPCS (NYSE:PCS) and Leap Wireless (NASDAQ:LEAP) reported impressive earnings, as the two Tier 2 operators lured more budget-conscious subscribers to their networks, and Sprint (NYSE:S) announced a significant restructuring of its own prepaid business to address the increasing threat of Leap and Metro as well as attack the even lower-end pay-by-the-minute segment.

Sprint already offers a myriad of prepaid plans through its brand Boost Mobile, which primarily uses Nextel’s old iDEN network, and its former MVNO and now CDMA-prepaid arm, Virgin Mobile. On Thursday, though, Sprint said it would reconfigure its complex plan portfolio into four brands: Boost, Virgin, the Assurance Wireless brand launched last year for customers on government assistance and a mysterious, new pay-by-the-minute plan targeting subscribers who spend less than $30 a month. Sprint said it sees huge potential in that little celebrated final segment served by companies like TracFone. According to Sprint prepaid group president and former Virgin Mobile CEO Dan Schulman, about 63% of the no-contract market is made up of such pay-per-minute plans.

"There are millions of people who don't want or can't afford smartphones and expensive data plans," Schulman said in a statement. "This is the traditional no-frills prepaid customer base. For these 'basic communicators,' we are creating a fresh brand with industry-leading value and consumer-friendly offers."

Sprint said the yet unnamed service will debut this month in 16 markets initially. Meanwhile, Virgin Mobile will be reconfigured as Sprint's high-end prepaid brand and will include several unlimited messaging, e-mail and Internet options. Virgin will even offer a prepaid BlackBerry e-mail option, reflecting the movement of data services toward the prepaid and mass consumer markets. While Boost also supports a variety of data services, and Sprint has been selling CDMA 3G phones and services under the Boost brand. But Sprint seems to be segmenting the two brands by demographic, targeting young and tech-savvy subscribers with Virgin, the great demographic middle with Boost and the previously untapped low-income and super-budget-conscious with Assurance and the pay-per-minute service.

Meanwhile Leap and Metro continue to battle it out for prepaid dominance, though they are doing so in different markets because there is little overlap in their markets. Metro came out the winner in the first quarter. It added 692,000 subscribers, compared to Leap’s 445,800. Their gains appeared to be in different areas, though. Leap said 44% of its nets adds were broadband subscribers using Leap’s EV-DO 3G mobile broadband network — something Metro can’t compete on until it builds its 4G long-term evolution network later this year. Meanwhile much of Metro’s growth seems to be fueled by its Wireless For All plans. According to Bernstein senior analyst Craig Moffett, the unlimited, tax-inclusive plans were expected to drive down Metro’s average revenue per user significantly. Instead, Metro reported only a 1.5% decline quarter-over-quarter in monthly ARPU, which implies that Metro is keeping its customers on higher-value $45-plus plans.

Leap, however, introduced a new nationwide plan at the tail end of the quarter, which could heavily impact its growth in the coming quarters, Moffett said. The inevitable comparison to MetroPCS's blowout Q1 is not flattering,” Moffett said. “Still, Leap continues to execute well, maintaining its tight focus on costs while continuing to take share in prepaid and building out its presence in broadband, all against a backdrop of stabilizing prepaid pricing.”