Drumming up business in a down market is always challenging, so
is hooking up on a joint venture with British tycoon Richard Branson's Virgin Group.
The nation's No. 4 wireless carrier and Branson's Virgin Mobile USA will launch a new prepaid wireless service around midyear, targeting the credit-strapped under-30 set. Sprint PCS has agreed to pony up to $150 million, mostly in services but with some cash thrown in; Virgin plans to contribute up to $150 million in cash.
The deal looks appealing for Sprint PCS because it allows the company to fish for a much-needed new revenue source while sharing the risk with a partner. But some observers would note that the big wireless carriers have scorned the prepaid market for a reason, namely its poor economics. Sprint PCS shares lost 32 cents, or 3.1%, to $10.01.
When the wireless industry's gangbuster growth hit the skids in the fourth quarter last year, the big carriers took it as a sign to start prospecting elsewhere for opportunities. After all, with mounting debts eating away at cash flows, cost-cutting alone is not enough to keep investors happy.
So overseas Sprint has found a willing partner that's eager to expand in its own right. The deal would create Virgin's fourth regional market, following on the heels of Virgin Mobile joint venture launches in the U.K. with a unit of
, in Australia with Cable & Wireless Optus (now a division of Singapore Telecom), and in Singapore with Singapore Telecom. The company has plans to start up in Japan and Europe within a year.
That said, the prepaid market has generally gotten little respect from analysts, as churn rates -- the rate at which consumers leave -- have generally been higher and average revenue per subscriber lower. Ironically, Sprint tinkered with the conventional prepaid market about six years ago during its first year of operation, but a Sprint spokesman said those early plans were abandoned because of costs.
Sprint has since created an "account spending limit" service called Clear Pay, which requires a credit check and limits subscribers to a certain bucket of minutes each month. The amount of minutes is determined by a customer's credit eligibility. Subscribers pay their bill like regular customers, at the end of the month. The service was positioned somewhere between prepaid and regular subscriptions and continues to generate subscription growth.
This time around, Sprint PCS is trying to reach further downmarket while eliminating big cash commitments. It's unclear how revenue will be shared or whether the deal will help PCS reach its ambitious EBITDA projections.
But one thing is clear -- the tougher the business environment gets, the more creative carriers will have to be.