T-Mobile, MetroPCS look to eat Sprint's prepaid lunch

A combining of T-Mobile USA and MetroPCS could make for a potent player in the rough-and-tumble prepaid business.

T-Mobile has over the past few years expanded its no-contract options for consumers, giving it a badly needed source of customer growth. MetroPCS, meanwhile, has long been an aggressive -- albeit small -- provider of prepaid services with experience in running a low-cost business.

Together, the companies could present a challenge to Sprint Nextel, long the biggest champion of no-contract services with multiple prepaid brands under its umbrella. T-Mobile and MetroPCS today touted the establishment of the "leading value-focused wireless carrier" with their deal, and are poised to shake up the low end of the wireless industry.

"It's about how to become a better value player," said Roger Entner, an analyst at Recon Analytics.

The deal is illustrative of the broader shifts in the industry, where Verizon Wireless and AT&T continue to grow at the high end, forcing smaller national carriers Sprint and T-Mobile to look toward scooping up more bargain customers on the low end. But with the more lucrative contract business starting to slow, every carrier is starting to take a more serious look at prepaid.

Ultimately, the deal represents a chance for prepaid customers to see better network service and smartphone options. Once the deal closes, MetroPCS customers will get a chance to access T-Mobile's products and network, which offers wider coverage and higher speeds. T-Mobile CEO John Legere talked about the multiple options available to both customer bases, and specifically touted unlimited as a key tool to attracting customers.

"This deal will allow us to win in no-contract services," Legere said during a press conference today, adding that the combined company will be the leader in prepaid services by revenue.

That's bad news for Sprint, which has a number of prepaid arms in Boost Mobile, Virgin Mobile, and Assurance Wireless. Sprint was reportedly close to buying MetroPCS, but its board nixed the deal amid concerns that the company's financial resources were already tied up with its own network upgrade and the costs associated with carrying the iPhone.

"It makes life more difficult for Sprint," Entner said. "It forces them to up their game."

The deal could motivate Sprint to make an acquisition play itself, but the company continues to be hamstrung by financial limitations. Leap Wireless, another regional provider that offers services under the Cricket brand, is a potential target, though analysts are skeptical about whether any deals will be struck in the near future.

A Sprint representative declined to comment on the deal to CNET.

Sprint, however, will likely be up for the fight. And the carrier could pick off prepaid customers if T-Mobile and MetroPCS dawdle with the integration efforts.

Still, T-Mobile narrows the gap between it and Sprint with the deal. The combined companies boast a customer base of nearly 43 million, compared with Sprint's base of 56 million customers as of the end of the second quarter.

Legere demonstrated some of the new swagger T-Mobile will be displaying under the new CEO, taking a jab at Sprint and saying the deal wouldn't "smash two different networks together" like the botched merger between Sprint and Nextel.

"I actually love the Sprint-Nextel analogy," he said. "It's a great opportunity to explain what this is not."

If there was any doubt that the prepaid business would be a focus, Rene Obermann, CEO of T-Mobile parent Deutsche Telekom, obliterated them with his comments today.

"I like to be in prepaid because it's the fastest growing part of the industry," he said. "It's a great business."

Indeed, the prepaid part of wireless is growing three times faster than the contract segment, largely because so many people are already signed up. Prepaid previously had a stigma attached to it that it was largely a service for poor people, but in recent years it's gone mainstream. The economic crisis forced more people than ever to look at prepaid options, which don't require arduous credit checks, while the improvement of handset options -- including the iPhone -- caused consumers to give them a harder second look.

MetroPCS was at the forefront of bringing low-cost smartphones to its customers, and it's likely the company will bring its culture of moving quickly to T-Mobile. MetroPCS wasn't a serious competitive threat to Sprint because it was a regional carrier that operated in select markets. But with a national footprint and roughly 70,000 points of distribution thanks to T-Mobile, MetroPCS will be a major player.

T-Mobile and MetroPCS will operate as separate brands under the newly combined T-Mobile when the deal is completed, expected to be by the end of the year.

T-Mobile and MetroPCS each also recently unveiled their own unlimited data plans, and Legere said unlimited would be a key selling point.

That's a direct shot not just at Sprint's prepaid businesses, but Sprint itself, which has long been defined as the simple, unlimited carrier.

It's just the first of many shots as the battle heats up in the prepaid world.