T-Mobile's quiet silver lining: Monthly 4G prepaid

Company believes it has a lot of momentum built up in prepaid and is planning more marketing and affordable phones in the coming months.

Monthly 4G figures prominently in T-Mobile's stores. T-Mobile USA

T-Mobile USA isn't a prepaid carrier, but it might as well be.

While the company's base of contract subscribers -- still a majority of its business and greatest source of revenue -- has been shrinking over the past few quarters, its prepaid business continues to sign up new customers.

In fact, it's been one of the rare bright spots at a carrier that is struggling to get back on its feet after a failed takeover attempt by AT&T. With higher-end customers looking to the other national carriers for better phones (read: iPhone) or 4G LTE service, T-Mobile has quietly carved out a nice niche, attracting prepaid customers away from lower-end rivals.

As a result, prepaid has grown increasingly vital to T-Mobile's turnaround strategy. While the company has shifted to a more aggressive stance and position around its contract, or postpaid, business, it remains to be seen whether it will make a dent against AT&T, Sprint Nextel, or Verizon Wireless.

By contrast, T-Mobile continues to drum up interest in prepaid. Later today, its prepaid president, Mike Katz, will publish a blog post highlighting some of its advantages, including higher wireless speeds, more phones to choose from, and a variety of service plans. In an interview, Katz told CNET that the combination puts T-Mobile at the forefront of the prepaid business.

"We're really favorably positioned," he said. "We've done a good job of putting ourselves in a leadership position."

Monthly 4G's rise
T-Mobile's own prepaid business didn't really ramp up until the third quarter of last year. Prior to that, T-Mobile's growth had largely come from prepaid customers signed up through wireless resellers.

Roughly a year ago, T-Mobile set out to go after prepaid customers itself. It relaunched its own fledgling prepaid service under Monthly 4G, which gave prepaid customers access to many of its plans, all of its phones, and its wireless network, which it had branded as 4G.

Monthly 4G targets prepaid providers MetroPCS and Leap Wireless, as well as the Boost Mobile and Virgin Mobile arms of Sprint, instead targeting the national postpaid carriers. More recently, Boost Mobile and Virgin Mobile said they will move to 4G WiMax , which Katz believes is a bid to stay competitive with T-Mobile.

After losing RadioShack as a distributor last year, T-Mobile worked to bulk up the availability of the service, signing partnerships with 7-Eleven and Family Dollar and expanding an existing deal with Wal-Mart. Unlike RadioShack, which traditionally signed up contract customers for its carrier partners, the new retailers had a focus on affordability and the prepaid customer.

T-Mobile's resources only ramped up in the first quarter, with Katz noting that the company ran a national campaign promoting prepaid for the first time. The first ad pushed the speed advantage of its service over other prepaid options. He added that T-Mobile will continue to push Monthly 4G in future national campaigns highlighting other features.

More importantly, T-Mobile will continue to support prepaid with a larger array of phones. The carrier yesterday launched the T-Mobile Prism from Huawei , a budget-friendly Android smartphone that cost $19.99 with a contract, and $149.99 without one.

"The roadmap through the rest of the year is to bring in handsets with strong feature sets and affordable prices," Katz said.

But is prepaid still growing?
Prepaid has seen explosive growth over the past few years as consumers hit by the economic downturn looked to options beyond the standard wireless contract. But more recently, the prepaid business has endured a pullback, with MetroPCS and Leap both reporting disappointing first-quarter results -- a period typically marked by strong customer growth.

MetroPCS's results were particularly stark, while Leap warned of "competitive and economic pressures" experienced late in the period.

The results lead some to wonder whether the prepaid trajectory is starting to head south.

"We've been bullish at times over the past year about MetroPCS and Leap," Sanford Bernstein analyst Craig Moffett said in a note. "Not so much anymore."

Likewise, Tracfone, the country's largest independent prepaid player, posted disappointing results. Only Sprint managed to buck the trend, with both of its prepaid arms doing better than expected.

It remains to be seen whether T-Mobile follows the same disappointing path during the first quarter -- Katz declined to provide any financial details ahead of its quarterly report next week. In the fourth quarter, T-Mobile lost 706,000 postpaid subscribers, offset slightly by a gain of 220,000 prepaid customers.

Postpaid remains the focus
So if growth is all in prepaid, why not focus all of its resources there? While prepaid brings the growth, the financial metrics for a prepaid customer aren't as attractive as a contract one. People are more likely to go after a high-end phone and pay more each month under a contract. They are also less likely to leave the service, since they are bound by that contract.

"Absolutely not," Katz said about the notion of turning itself into a purely prepaid carrier. "Postpaid is still the prime focus for us."

The carrier is still trying to right its postpaid business, which suffered immensely last year under the uncertainty of a potential acquisition by AT&T. But when federal regulators moved to squash the deal , AT&T waved the white flag and left T-Mobile with a $3 billion breakup fee, which is now being used for T-Mobile's network upgrade and move to 4G LTE .

T-Mobile's postpaid business is at a disadvantage because it is one of the few carriers that still does not carry the iPhone. It has tried to ameliorate that issue by offering iPhone customers from other carriers the ability to run on its network, just as it would any other compatible GSM phone.

Despite its growth, prepaid is viewed as an offer that complements the carrier's core postpaid service plans. It exists to go after both the other prepaid carriers, as well as nab customers falling off of contracts at T-Mobile and elsewhere and looking for alternatives.

"Prepaid reaches a unique customer segment," Katz said.

Below is a T-Mobile Monthly 4G ad:

 

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