iPhone gives Virgin Mobile serious weight, Sprint exec says

With Sprint Nextel aggressively pushing into the prepaid business, it's no surprise that the iPhone would eventually end up on one of its no-contract units.

At the end of June, Virgin Mobile, which is owned by Sprint, began selling the iPhone 4S and iPhone 4, representing a new avenue of distribution for Apple. Virgin's no-contract plans meant customers would have to foot the entire bill for the iPhone, with the 16GB iPhone 4S selling for $649.99.

The iPhone 4S is selling at Virgin, Chief Sales Officer Paget Alves said, though he declined to say how well it was performing, noting that it was too early to tell. Beyond new customers, he pointed to the intangible benefit of carrying the iPhone on Virgin as another advantage.

"The iPhone does a lot for the Virgin brand," Alves said in an interview with CNET today.

Sprint, more than any other national carrier, has leaned on the prepaid business for customer growth. But with fewer contract customers up for grabs, all of the carriers are starting to expand their presence in prepaid, taking advantage not only of lower end, credit-challenged customers, but signing on consumers who are fed up with contracts.

In the second quarter, Sprint added 141,000 net prepaid customers, continuing the company's pace of prepaid growth outstripping its contract business. Beyond Virgin, it also has a second prepaid arm in Boost Mobile. While the customers generate lower revenue per user, there are few expenses related to subsidies, customer service, and marketing.

"Our focus on prepaid has paid off for us," Alves said.

Its growth has come at the expense of others. Regional prepaid carrier Leap Wireless, known to consumers as Cricket Wireless, yesterday posted abysmal second-quarter results, losing 289,000 net customers and posting a wider loss than expected. Fellow regional carrier MetroPCS likewise saw subscriber losses in the period.

The weakened regional players look ready for acquisition, but there doesn't seem to be a logical fit. Sprint makes sense as a buyer, since it uses the same wireless technology, but the company isn't in the financial shape to execute such a deal. T-Mobile USA, meanwhile, has the cash and backing of a major foreign telco, but uses incompatible technology. Regulators would likely swarm over AT&T or Verizon Wireless if they attempted such a deal.

For now, the smaller prepaid companies continue to suffer.

"What is clear for now, in our view, is that the current strategy, indeed the entire current business, isn't working," said Craig Moffett, an analyst at Sanford C. Bernstein.

Alves, however, said he believes there remains a lot of room for growth in prepaid. He said that while there's room for consolidation, he couldn't say who might buy either MetroPCS or Leap, or if anyone wanted to.

While prepaid service often comes with the stigma that the phones are typically inferior, that changed when the iPhone came to Virgin, as well as to Leap.

Sprint is just getting the iPhone into the proper distribution channels at Virgin, and is only beginning to ramp up its advertising for the product.

"The awareness level is not that high yet," he said, but he reiterated that he expects the iPhone to help with the brand. "It causes people to look hard at Virgin."