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 pre-paid space continued its streak of strong growth. Prepaid providers’ net additions of 68%, accounting for more than 80% of the overall market growth in the quarter, have some questioning whether prepaid will be the new wireless paradigm.

According to Chetan Sharma, president of Chetan Sharma Consulting, the move to prepaid was expected given the down economy. He said it is still not clear if the return of good times will bring back prepaid subscribers to the postpaid realm or if, like consumers who cancel their landlines to go mobile, these subscribers will get used to the savings and the prepaid lifestyle.

"It is quite likely that 50% to 60% of such consumers don’t go back to postpaid, thus permanently lowering the [average revenue per user (ARPU)] base for such customers, and carriers who have experienced more postpaid to prepaid shift will have to make up for the lost revenues someplace else," Sharma said in a research note.

Out of all the operators, Sprint felt the shift most acutely. The carrier added 764,000 customers to its value arm, Boost Mobile, primarily attracted to its $50 unlimited offering. This offset the 719,000 Nextel post-paid customers Sprint also lost from its iDEN network. Sprint’s other prepaid arm, Virgin Mobile, (NYSE: VM) saw its first-quarter earnings more than double, led by revenue growth in its flat-rate, contract-free wireless business. Customer additions to Virgin’s hybrid plans accounted for 55% of its overall increase in the quarter. Last month, the carrier cut its unlimited plan from $80 to the new market standard of $50, as well as introduced the ‘Pink Slip Protection’ program, in which Virgin would pay a customer’s cell-phone bill for up to three months after being laid off.

Regional CDMA players MetroPCS and Leap Wireless (NASDAQ: LEAP) also had solid first quarters. Leap added 493,000 customers, more than doubling its additions this time last year, but falling short of MetroPCS, which added 684,000 customers in the quarter. Leap is sticking to its forecast of more than 1.5 million new subs in 2009, up from its existing customer base of 4.3 million.

The success of the prepaid players has tier-one carriers responding too, with AT&T this week introducing a $3 per day flat-rate plan. In the new GoPhone plan, consumers can go online, pay $3 and receive unlimited local and long-distance calls for the duration of the day. This move comes a few months after Verizon revamped its prepaid day plans to include a $4 daily option for unlimited calling or a 25 cents per minute calling option, plus 20 cents per text message sent and received.