Tech Rumor of the Day: Sprint Buys Virgin Mobile in Prepaid Power Play - TheStreet

Tech Rumor of the Day: Sprint Buys Virgin Mobile in Prepaid Power Play

Sprint is doubling down on subprime as wireless runs out of growing room.
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NEW YORK (

TheStreet

) --

Sprint

(S) - Get Report

is doubling down on subprime as wireless runs out of growing room.

The No. 3 mobile telco, which already owned 13.1% of

Virgin Mobile

(VM)

, agreed to buy the remaining stake for a deal with a total value of $483 million.

Virgin Mobile, which raised $415 million in its 2007 IPO, is similar to Sprint's Boost unit and targets the youth market with pre-paid or pay-as-you-go plans and monthly subscriptions.

With about four out of every five people in the U.S. owning cellphones, observers view the prepaid market as an untapped source of sales growth, and alternately as a trove of unreliable customers. Prepaid phone plans attract people who don't want contracts or have subprime credit quality or in many cases people under age 18.

While it is a growing market amid a slowing wireless industry, the number of deadbeats and defectors has always been a problem for telcos. Virgin Mobile's monthly churn rates are around 5%, compared with the low 1% range of so-called postpaid customers.

Sprint, which lost 1 million subscribers last year, and continues to lose thousands every month, has embraced prepaid with mixed results.

The largest prepaid shop is

TracFone

, a unit of Mexico City-based

America Movil

(AMX) - Get Report

. TracFone has about 12 million customers nationwide and sells phones through retailers like

Wal-Mart

(WMT) - Get Report

and

7-Eleven

.

Should speculation heat up around more acquisitions in the pre-paid market, you can pretty much exclude TracFone from the list of candidates.

Unlike Virgin Mobile, which uses Sprint's network, TracFone uses phone services from multiple carriers including

AT&T

(T) - Get Report

,

Verizon

(VZ) - Get Report

and

T-Mobile

, a unit of

Deutsche Telekom

(DT) - Get Report

. While a takeover can't be ruled out, it might not be worth for one telco to take apart all those service agreements.

Virgin Mobile IPO in Limbo

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And, as we've seen in the recent mortgage meltdown, pursuing a subprime customer base as an target for growth, hasn't really been all that rewarding.

--Reported by Scott Moritz in New York