In addition to strengthening its position as the nation’s third-largest wireless operator, Sprint Corp.’s planned merger with Nextel Communications Inc. will bring together the industry’s two most aggressive targeters of young subscribers.
Sprint, through its Virgin Mobile USA L.L.C. mobile virtual network operator partnership launched in mid-2002, and Nextel’s Boost Mobile USA L.L.C. operations, which was initially based on an MVNO model but was eventually acquired by Nextel, together have attracted more than 3 million prepaid customers.
Analysts noted that while they expect Sprint Nextel will have its hands full integrating operations, the two partners’ respective youth-oriented prepaid services are likely to be impacted.
“There is definitely a conflict of interest between Virgin and Boost in targeting the same general market segment,” said Nicholas McQuire, senior analyst at Pyramid Research. “I think both operations will remain the same as they are now in the short term, but expect some changes in the long term.”
Virgin Mobile USA, which was one of the first MVNOs launched to target the youth market, has used extensive agreements with a number of content-rich partners like MTV combined with off-beat advertising to attract more than 2 million customers. The service also has been a main driver of Sprint PCS’ wholesale business, with analysts recently forecasting Virgin Mobile USA will post a strong 200,000 net customer additions for fourth-quarter 2004.
Sprint, which initially was an equal partner in Virgin Mobile USA by providing $150 million of network access, said it expects to continue supporting Virgin Mobile USA following its planned merger with Nextel, which is expected to close by the end of the year.
“Those partnerships are very valuable to Sprint and we will be in discussions regarding those partnerships over the next several months,” said Sprint spokesman Scott Stoffel.
Virgin Mobile USA also said it expects little impact from the merger and that it looks forward to working with the combined Sprint Nextel.
“VMU will continue to have access to the Sprint nationwide PCS network and will vigorously pursue its business plan: providing an innovative, entertaining and well-priced pay-as-you-go wireless service to young people, the fastest-growing segment of the American wireless market,” the company explained in a statement.
Boost, on the other hand, has garnered more modest support from Nextel. Nextel initially limited Boost’s deployment to California and Nevada and has only recently expanded the offering to a handful of other markets. Despite the limited support, Nextel reported that Boost added 360,000 subscribers during the fourth quarter and ended 2004 with 1.2 million total customers.
A Nextel spokesman said that as shown by the strong growth during the fourth quarter, Boost is an “extremely important part” of the carrier’s operations, but it is too early to say how Boost might fit into long-range plans post-merger with Sprint.
Analysts have noted that while both Virgin Mobile USA and Boost are attractive to the same general demographic, they target different segments of that market, which could allow both to continue to co-exist post-merger.
“Boost has done a good job of attracting the young, extreme sport subscriber, while Virgin I think has the ability to cast a wider net in attracting subscribers,” McQuire said.
McQuire noted that Virgin Mobile USA likely will continue to push its marketing efforts around multimedia and more advanced services that can take advantage of both Sprint PCS’ wireless data network as well as its content partners. Conversely, McQuire noted that Boost probably will continue to target a more basic consumer segment interested in voice and traditional messaging applications.
Michael Grossi, principal at consulting firm Adventis Corp., said he thought that another option for Sprint Nextel would be to consolidate the prepaid offerings by “selling” its Boost subscribers to Virgin Mobile USA in exchange for an equity stake that could then be monetized as part of a long-rumored Virgin Group initial public offering.
“I think it’s definitely something that they are considering,” Grossi explained. “It would allow Sprint Nextel to get the most value out of those customers and allow Virgin and Boost to save on back-office operations.”
A potential sale of Boost customers to Virgin Mobile USA would also unwind what have traditionally been lower-value customers from Sprint Nextel’s financial results.
Grossi added that by combining their respective customer bases, Virgin Mobile USA and Boost would prove a compelling investment in the wireless industry and would position the combined customer base among the top handful in the country following the current round of merger-and-acquisition activity.
