Is prepaid growth an illusion?

Despite the attention given to the prepaid market this quarter, Craig Moffett, senior analyst at Bernstein Research, takes the view that at least some of the growth in the first quarter is an illusion. He believes that the results reflect a double-counting of pre-paid subs acquired in the quarter who 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 and another 63,000 will 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 will essentially have 9% churn over time, he said. In the first quarter, this means that Sprint most likely saw its quarterly net additions fall 13% versus the 7% increase it reported.

"After adjusting for double counting andthe 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 post to prepaid. After adjusting for double counting and M2M, the prepaid mix among the top six carriers drops 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.

"From the perspective of value, the shift to pre-paid is ominous news," he said. "If the trend towards sharply increased flow share going towards prepaid continues, and the appeal of unlimited pre-paid plans that can appeal to post-paid subscribers increases, this could be highly detrimental to the industry."