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Analysts question impact of prepaid segment on Sprint/T-Mobile merger review

The U.S. prepaid market in the wireless sector often gets overshadowed by its larger, more lucrative brother, the postpaid market, but it stands to play a major role in regulators' review of the pending merger between T-Mobile US Inc. and Sprint Corp.

One of the concessions T-Mobile is considering in order to win approval for its proposed deal with Sprint is a possible sale of the companies' prepaid businesses, Bloomberg News reported May 13. T-Mobile and Sprint representatives did not immediately respond to a request for comment on the report.

T-Mobile currently leads the prepaid market among publicly traded, facilities-based U.S. carriers with 21.2 million subscribers. If allowed to combine with Sprint, various groups have argued the resulting entity would have too much power, leading to higher prices for consumers. The companies' strength in prepaid has waned somewhat in recent quarters, however, raising questions about how T-Mobile, Sprint and regulators are thinking about the segment in relation to the merger review.

In the first three months of the year, T-Mobile added 69,000 net prepaid customers. Although T-Mobile CEO John Legere said during a conference call that the company was "pleased with our performance" in prepaid, the number of net adds was down significantly year over year from 199,000 in the first quarter of 2018 and 386,000 net additions in the first quarter of 2017.

Sprint, meanwhile, has been losing prepaid customers in recent quarters. The company lost a net 30,000 prepaid subscribers during the first three months of 2019, as compared to a net gain of 170,000 subscribers in the year-ago period. In the corresponding 2017 quarter, the company added 195,000 net prepaid subscribers.

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Jeffrey Kvaal, a communications analyst with Nomura's Instinet, noted that some of these losses were intentional, as Sprint shifted prepaid customers to postpaid services. Over the 12 months ended March 31, Sprint shifted 129,000 prepaid subscribers to postpaid, including 44,000 in the first three months of the year, Kvaal said in a research report after Sprint's earnings.

The simplest difference between prepaid and postpaid services is that consumers pay in advance for prepaid offerings, while they pay at the end of their billing period for postpaid services. But the real differences go much farther than that, concerning market size and demographics. John Fletcher, a mobile analyst with Kagan, a research group within S&P Global Market Intelligence, counted a total of 52.1 million prepaid subscribers from U.S. publicly traded carriers at the end of 2018 versus 269.8 million postpaid subscribers from the same companies.

The prepaid market is also served by a number of mobile virtual network operators such as TracFone Wireless Inc., but these services rely on leasing spectrum and other services from the publicly traded, facilities-based carriers such as T-Mobile, Sprint, AT&T Inc. and Verizon Communications Inc.

Prepaid services target low-income and price-sensitive consumers, including seniors, through a variety of low-cost plans and targeted branding strategies. Sprint, for instance, offers the Boost and Virgin prepaid brands, while T-Mobile has its Metro prepaid service.

Notably, the prepaid market consists largely of three facilities-based carriers — T-Mobile, Sprint and AT&T — rather than four. Verizon ended the first quarter with just 4.5 million prepaid wireless customers, having lost 176,000 net prepaid subscribers during the period. Public interest and consumer groups have argued that a move from three facilities-based prepaid carriers to two would give the new T-Mobile too much power to raise prices.

"T-Mobile's market dominance would make it incredibly difficult for other prepaid providers to compete or even enter the marketplace," a coalition of advocacy groups — including Common Cause and Consumers Union — said in a filing.

The research firm Mind Commerce also recently said it expects "significant upheaval" in the prepaid wireless market as a result of the Sprint and T-Mobile merger, warning of "the likelihood of substantively higher prices in the long-term."

In response, T-Mobile has committed to preserving "the same or better rate plans" for at least three years following the pending merger with Sprint. Moreover, Legere said in prepared testimony before Congress this year that "budget-conscious customers, including those on prepaid plans, will benefit the most from increased capacity and improved quality of the network."

An outright separation or sale of the prepaid business would go a step further, but New Street Research Policy Advisor Blair Levin said in a May 14 research report that "whoever buys the prepaid brand would have to rely on an MVNO with New T-Mobile (or another provider) to be able to offer a service" — a solution that may not solve regulators' ultimate concerns about competition.

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