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Tuesday, January 19, 2010


Virgin Mobile USA acquisition may not be a game changer for Sprint unless...

If you were a customer of Virgin Mobile in the US, congratulations. For you have just got owned! Soon, you will be a Sprint subscriber, without any effort to change operators. Mobile number portability has come to unprecedented levels, hasn’t it?

Not exactly. Your status change (even if unsolicited) has more to do with Sprint Nextel (third largest service provider in the US) deciding to go ahead and acquire Virgin Mobile’s operations in the country for $688 million; which will substantially enhance its market presence. But can this fix the numerous loopholes that have sprung up in Sprint over the years? Or will this prove to be another Nextel in the making?

The last year and half has been extremely challenging for this operator as it witnessed a massive churn in its subscribers. According to analysts, the reason for Sprint Nextel’s current day problem was the acquisition of Nextel in the year 2005. Post that acquisition, there have been numerous complaints in regards to its customer service as well as quality of network and that has resulted in many customers churning out of its network; most of these customers were the lucrative postpaid customers. In the last quarter about 9,91,000 postpaid customers ‘bailed out’. Additionally, Sprint had also posted a net loss to the tunes of $384 million in that quarter.

However, since the dawn of 2009, the company has been working to rebuild the lost trust. One of the breakthrough steps was entering in an exclusive tie up with Palm for their Palm Pre handset, which had recorded impressive sales in its opening weekend and continues to go strong. Dan Hesse, CEO, Sprint Nextel, said, “The widespread visibility surrounding our record-breaking June launch of the Palm Pre handset gave us the unprecedented opportunity to showcase these improvements to customers as ‘a new Sprint.” The company also had the good fortune of its 3G network being described by PC World magazine as the most reliable among competitors.

So, will this acquisition help Sprint Nextel in getting any better than its competitors, namely – AT&T and Verizon Wireless? Well for starters, Virgin Mobile USA has primarily prepaid customers and according to Sprint Nextel its acquisition is a part of the company’s effort to expand its prepaid cellphone business as it struggles to compete against its mighty rivals. Virgin Mobile USA, too, had acquired Helio last year, (another prepaid operator), so it would be the combination of two that Sprint would be picking up.

However, the addition of another 5.2 million subscribers may not take it any closer to its rivals. “What goes in the favour for Sprint Nextel is that Virgin Mobile USA is one of its customers; so this acquisition will be very easy, in fact could be invisible to the customer, which is good for the customer,” reasons Jeff Kagan, global telecom analyst. Virgin Mobile USA has been operating through a Mobile Virtual Network Operator route in the US market and has mostly focused on the youth market and has been successful in this regard. The devices it offers, too, are more basic; offering features like telephone, music and messaging in sync with their target (youth) market. They have, however, failed to gain trust and acceptance of older customers. As this UK brand was operating on Sprint’s network, the synergies would be significant. But they are playing quite a gamble by betting on the future of the prepaid market, which has not been as good a money spinner as postpaid in the US for years.

So, Sprint must ensure that it also simultaneously reduces the churn in its postpaid business through more exclusive handset deals and better services to customers. Unless that happens, the company can’t hope to sprint very far. Hurray to age old mobile number portability!

Surbhi Chawla

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Source : IIPM Editorial, 2010.

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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